ITEM 1. BUSINESS.
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, promoting 15 major events annually in the four 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's major event markets reach 32 of the top 50 dominant market areas in the country.
Dover Downs also owns and operates the Dover Downs Raceway harness racing track and a 65,000 square foot video lottery (slot) casino at a multi-purpose gaming and entertainment complex in Dover, Delaware. The facility is located in close proximity to the major metropolitan areas of Philadelphia, Baltimore and Washington, D.C.
(a) Recent Developments The Company and Grand Prix Association of Long Beach, Inc. ("Grand Prix") entered into an Agreement and Plan of Merger on March 26, 1998, pursuant to which Grand Prix became a wholly owned subsidiary of the Company as of July 1, 1998. The merger was structured as a tax-free exchange and was accounted for using the purchase method of accounting for business combinations whereby each shareholder of Grand Prix received .63 shares (1.26 shares after the stock split) of common stock of Dover Downs for each share of common stock of Grand Prix owned by such shareholder.
During fiscal 1999, 15,000 grandstand seats were added at Dover Downs International Speedway, increasing the total seating capacity to more than 122,000. Gateway International Raceway added more than 18,000 permanent seats to bring the total capacity at that facility to approximately 70,000.
The Company expanded its casino gaming facility by 24,000 square feet in fiscal 1999, increasing the number of slot machines installed at year-end to 1,555. Also included in the expansion was a bus loading and unloading area and an expansion of the Garden Cafe.
In December 1998, the Wilson County (Tennessee) Commission approved the necessary zoning revisions for the construction of the Company's planned Nashville Superspeedway complex. At June 30, 1999, the Company had acquired approximately 1,390 acres of land for the project in Wilson and Rutherford counties.
On March 31, 1999, the Company entered into a $50,000,000 long-term, unsecured, revolving credit agreement with certain financial institutions. 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 agreement, which expires in March 2002, is for seasonal funding needs, capital improvements and other general corporate purposes. The agreement contains certain restrictive covenants and requires the Company to maintain certain financial ratios. At June 30, 1999, $15,500,000 was outstanding under this line of credit.
(b) Financial Information About Operating Segments. The Company's principal operations are grouped into two segments: motorsports and gaming. Financial information concerning these businesses is included on pages 9 through 13 and page 31 of this 1999 Annual Report on Form 10-K.
(c) Narrative Description of Business
Motorsports Dover Downs International Speedway Dover Downs has presented NASCAR-sanctioned racing events for 31 consecutive years at Dover Downs International Speedway and currently conducts four major NASCAR-sanctioned events annually at the facility. Two races are associated with the Winston Cup professional stock car racing circuit and two races are associated with the Busch Series, Grand National Division (Busch Series) racing circuit. The Company also hosted an Indy Racing League event at Dover Downs International Speedway in August 1999 and July 1998. Approximately 91% of motorsports revenues at Dover Downs International Speedway are derived from admissions, skybox rentals, sponsorships, concession and novelty sales and broadcast rights at NASCAR-sanctioned events.
Each of the Busch Series events at Dover Downs is conducted on the day before a Winston Cup event. Dover Downs is one of only six speedways in the country that presents two Winston Cup events and two Busch Series events each year. The June and September dates have historically allowed Dover Downs to hold the first and last Winston Cup events in the Maryland to Maine region each year.
The auto racing track is a high-banked, one-mile long, concrete superspeedway with a current seating capacity of approximately 122,000. 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- sanctioned events.
Grand Prix Association of Long Beach For the past 25 years, the Grand Prix Association of Long Beach, Inc. has been organizing and promoting the Grand Prix of Long Beach, an annual temporary circuit professional motorsports event in Long Beach, California. The Grand Prix of Long Beach has the second highest paid attendance of any Indy car race, second only to the Indianapolis 500. The Grand Prix of Long Beach weekend has attracted in excess of 200,000 spectators in each of the past six years, and is currently broadcast to more than 125 countries throughout the world.
Gateway International Raceway Gateway International Raceway (Gateway), which was acquired in the Grand Prix Association of Long Beach acquisition, has conducted NASCAR- CART- and NHRA-sanctioned events since its opening in May 1997. The auto racing facility includes a 1.25-mile oval track and road course with current seating capacity of 70,000 and a national caliber drag strip capable of seating approximately 30,000 people. The facility, which was lighted for nighttime racing this year, is located on approximately 416 acres of land in Madison, Illinois, 5 miles from the St. Louis Arch.
Nashville Speedway USA The Company acquired Nashville Speedway USA on January 2, 1998. The Nashville facility hosted its first automotive race in 1904, making it one of the oldest tracks in the country. The facility currently hosts events in three of NASCAR's top national series - the Busch Series, the Craftsman Truck Series and the Slim Jim All Pro Series. Based on attendance, the track's Saturday night NASCAR Winston Racing Series is regarded as one of the most successful weekly programs in the country.
To accommodate the demand for major motorsports in the Nashville area, the Company plans to build a new superspeedway and motorsports complex in Wilson County, Tennessee. The proposed 1.33-mile superspeedway initially will have 50,000 grandstand seats with an infrastructure in place to expand to 150,000 seats should demand require it.
Memphis Motorsports Park Memphis Motorsports Park, also acquired in the Grand Prix Association of Long Beach acquisition, has hosted NASCAR- and NHRA-sanctioned events since its opening in June 1998. The tri-oval track is currently undergoing an expansion that will bring its seating capacity (using available portable seating) to approximately 25,000 seats and add luxury suites for the inaugural Busch Series event in October 1999. The drag strip also hosts an NHRA national event and has a seating capacity in excess of 25,000.
Other In recent years, television coverage and corporate sponsorship have increased for NASCAR-sanctioned events. The Company's NASCAR- sanctioned events are currently televised live by TNN, ABC and the ESPN networks to a nationwide audience and broadcast nationally to a network of radio stations affiliated with the Motor Racing Network.
In February 1999, NASCAR announced that they would retain the television, audio and other electronic media rights for Winston Cup and Busch Series events beginning with the 2000 race season, though the current fee distribution formula is not expected to change. The packaging of all media rights is expected to generate an increase in revenues and increase NASCAR's presence on television.
Gaming Dover Downs has presented pari-mutuel harness racing events for 31 consecutive years. On December 29, 1995, the Company introduced video lottery (slot) machines to its entertainment mix.
Under an agreement with Caesars World Gaming Development Corporation (Caesars), a leader in the gaming industry, Caesars supervises, manages, markets and operates the Company's video lottery operations. The Las Vegas-style, air-conditioned "video lottery casino" housing the gaming operations was designed and built using expertise from Caesars.
On June 16, 1998, the Dover Planning Commission approved the Company's plans for expansion of the casino gaming facility and improvements to the Company's Garden Cafe and simulcasting parlor. In March 1999, the 24,000-square foot expansion of the casino facility was completed.
Additionally, the Garden Cafe was doubled in size and various improvements were completed in the simulcasting parlor.
Dover Downs is a "Licensed Agent" authorized to conduct video lottery operations under the Delaware State Lottery Code. Pursuant to Delaware's Horse Racing Redevelopment Act enacted in 1994, the Delaware State Lottery Office administers and controls the operation of the video lottery operations. Dover Downs is permitted by law to set its payout to customers between 87% and 95%. Prior approval from the Director of the Delaware State Lottery Office would be required for any deviation from the aforementioned payout rates. Since inception of its slot operations on December 29, 1995, Dover Downs has maintained an average payout of approximately 91%.
By law, video lottery operations in Delaware are limited to the three locations in the State where thoroughbred horse racing or harness horse racing was held in 1993. In addition to the Dover Downs complex in Dover, Delaware, there are only two other locations permitted by law: Delaware Park, a northern Delaware thoroughbred track; and Harrington Raceway, a south central Delaware fairgrounds harness horse racing track.
The harness horse racing track is a five-eighths mile track and is lighted for nighttime operations. The track is located inside the one- mile auto racing superspeedway. The configuration offers turns with a wider than normal turning radius and 6 degree banking. This allows trotting and pacing horses to remain in full stride through the turns. The result has been higher than average speeds attained by horses in competition. With the start of the race season beginning November 1996, live harness races conducted at Dover Downs were simulcast to tracks and other off-track betting locations across North America, and during 1999, were transmitted to more than 400 tracks and off-track betting locations nationwide.
The Company has facilities for pari-mutuel wagering on both live harness horse racing and on simulcast thoroughbred and harness horse racing received from numerous tracks across North America. Within the main grandstand is the simulcast parlor where patrons can wager on harness and thoroughbred races received by satellite into Dover Downs. Television monitors throughout the parlor area provide views of all races simultaneously and the parlor's betting windows are tied into a central computer allowing bets to be received on all races from all tracks.
With the expansion of its simulcasting operations, pari-mutuel wagering is now on a year-round basis. For the fiscal years ended June 30, 1999, 1998, and 1997, the Company had 361, 363 and 363 simulcast racing dates, respectively.
Harness racing in the State of Delaware is governed by the Delaware Harness Racing Commission. The Company holds a license from the Commission by which it is authorized to hold harness race meetings on its premises and to make, conduct and sell pools by the use of pari- mutuel machines or totalizators. Pari-mutuel wagering refers to pooled betting or wagering on harness horse racing by means of a totalizator. Through pooled betting, the wagering public, not the track, determines the odds and the payoff. The track retains a percentage of the amount wagered. Simulcasting refers to the transmission of live horse racing by television, cable or satellite signal from one race track to another with pari-mutuel wagering being conducted at the sending and receiving track and a portion of the handle being shared by the sending and receiving tracks.
Competition Motorsports 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.
The two speedways closest to Dover Downs International Speedway that currently sponsor Winston Cup races are in Richmond, Virginia (approximately four hours to the South) and Pocono International Raceway in Long Pond, Pennsylvania (approximately three and a half hours to the North). Nazareth Speedway in Nazareth, Pennsylvania (approximately two hours to the North) currently conducts Busch Series, Craftsman Truck Series and CART races.
The speedway closest to Gateway International Raceway is Indianapolis Motor Speedway (approximately four hours to the east), which currently conducts one Winston Cup race and one IRL race.
The speedways closest to the Nashville Speedway are the Atlanta Motor Speedway (approximately three hours to the southeast) and Talladega Superspeedway (approximately three and one-half hours to the south). Atlanta Motor Speedway currently hosts two Winston Cup races, one Busch Series race and one IRL race. Talladega Superspeedway currently hosts two Winston Cup races and one Busch Series race.
The speedway closest to Memphis Motorsports Park is Talladega Superspeedway (approximately five and one-half hours to the southeast), which currently hosts two Winston Cup races and one Busch Series race annually.
Based on historical data, management does not believe that any of the aforementioned facilities significantly impact the Company's operations, although they may impact the Company's ability to secure additional events in the future.
Gaming The legalization of additional casino and other gaming venues in states close to Delaware, particularly Maryland, Pennsylvania and New Jersey, may have a material adverse effect on the Company's business. From time to time, legislation has been introduced in these states that would further expand gambling opportunities, including video lottery (slot) machines at horse-tracks.
At present, video lottery (slot) machines are only permitted at two other locations in Delaware: Delaware Park and Harrington Raceway. The neighboring states of Pennsylvania and Maryland do not presently permit video lottery operations. Pennsylvania, Maryland and New Jersey all have state-run lotteries.
Atlantic City, New Jersey is located approximately 100 miles from Dover Downs and a certain amount of market overlap exists. Casinos in Atlantic City offer a full range of gaming products. Dover Downs does not compete directly with Atlantic City because of the Company's inability to offer a full range of casino gaming products, but it does believe that it captures a portion of the existing Atlantic City slot market in the Dover area, due to the facility's proximity, convenience and multiple attractions.
The Company also competes for attendance with a wide range of other entertainment and recreational activities available in the region, including professional and collegiate sporting events.
Competition in horse racing is varied since race tracks in the surrounding area differ in many respects. Some tracks only offer thoroughbred or harness horse racing; others have both. Tracks have live racing seasons that may or may not overlap with neighboring tracks. Depending on the purse structure, tracks that are farther apart may compete with each other more for quality horses than for patrons.
Live harness racing also competes with simulcasts of thoroughbred and harness racing. All race tracks in the region are involved with simulcasting. In addition, a number of off-track betting parlors compete with track simulcasting activities. With respect to the Company simulcasting its live harness races to tracks and other locations, its simulcast signals are in direct competition with live races at the receiving track and other races being simulcast to the receiving location.
Within the State of Delaware, Dover Downs faces little direct live competition from the State's other two tracks. Harrington Raceway, a south central Delaware fairgrounds track, conducts harness horse racing periodically between May and November. There is no overlap presently with Dover Downs' live race season. Delaware Park, a northern Delaware track, conducts thoroughbred horse racing from April through mid- November. Its race season only overlaps with Dover Downs for approximately five to six weeks each year.
The neighboring states of Pennsylvania, Maryland and New Jersey all have harness and thoroughbred racing and simulcasting. Dover Downs competes with Rosecroft Raceway in Maryland, Philadelphia Park in Pennsylvania, Garden State Park and The Meadowlands in New Jersey and a number of other race tracks in the surrounding area. The Company also receives simulcast harness and thoroughbred races from approximately 30 race tracks, including the tracks noted above.
Seasonality The Company derives a substantial portion of its total revenues from admissions and event-related revenue attributable to its motorsports events which are currently held from April through October. As a result, the Company's business has been, and is expected to remain, highly seasonal. The seasonality was offset to some degree by the year-round video lottery (slot) machine gaming operations and year- round simulcasting.
Number of Employees At June 30, 1999, the Company had a total of 566 full-time employees and 219 part-time employees. The Company hires temporary employees to assist during its auto racing events and its live harness racing season.
ITEM 2.
ITEM 2. PROPERTIES.
Dover Properties The Company maintains its headquarters, motorsports superspeedway (Dover Downs International Speedway), harness racing track, and video lottery casino all on approximately 825 acres of land owned by the Company in Dover, Delaware.
Long Beach Properties The Company 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. The Company leases a 750-square foot ticket office in downtown Long Beach for the sale of Grand Prix tickets and souvenirs and 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, 2026 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.
Nashville Speedway USA Property The Nashville racing facility is located on 12 acres of land in Nashville, Tennessee and is leased from the Metropolitan Board of Fair Commissioners through 2008. Additionally, the Company has acquired 1,390 acres of land in Wilson and Rutherford counties, Tennessee to be used as the site for a new racing facility.
Memphis Motorsports Park Property Memphis Motorsports Park is located on 374 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 to secure its obligation to SWIDA.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
A group purportedly made up of Wilson County and Rutherford County, Tennessee residents has filed a complaint in the Chancery Court for Wilson County, Tennessee contesting the rezoning of the land upon which the Nashville Superspeedway complex will be situated. The litigation, if successful, would prevent, or at least significantly postpone, the development of the facility. The Company believes the rezoning was done properly. It is vigorously contesting the litigation and, based on the advice of counsel, believes that it is unlikely to succeed on its merits.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Common Stock of Dover Downs Entertainment, Inc. has traded on the New York Stock Exchange under the symbol "DVD" since the Company's initial public offering on October 3, 1996. There is no established public trading market for the Company's Class A Common Stock. As of July 31, 1999, there were 11,405,184 shares of Common Stock and 24,261,010 shares of Class A Common Stock outstanding. There were 978 record holders of Common Stock and 21 record holders of Class A Common Stock at July 31, 1999.
The range of share prices for the Common Stock on the New York Stock Exchange and per share dividends paid on Common Stock for the fiscal years ended June 30, 1999 and 1998 are as follows:
Prices Dividends 1999 1998 1999 1998 High Low High Low Fiscal Quarter (1) First ........... $16 9/16 $12 7/16 $10 9/16 $ 8 3/8 $.04 $.04 Second .......... 13 7/8 10 3/16 11 3/4 9 11/16 .045 .04 Third ........... 15 1/2 12 1/4 15 10 11/16 .045 .04 Fourth .......... 19 7/16 14 7/8 16 13/16 14 3/16 .045 .04
(1) Prior year amounts have been adjusted to give retroactive effect to a two-for-one stock split distributed on September 15, 1998.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Five Year Selected Financial Data (Dollars in Thousands, Except Per Share Data)
Year Ended June 30, 1999 1998 1997 1996 1995 Revenues: Motorsports $ 68,683 $ 25,874 $ 20,516 $ 18,110 $ 16,282 Gaming (1) 139,249 115,071 81,162 31,980 1,250 207,932 140,945 101,678 50,090 17,532 Earnings before income taxes 45,771 37,655 28,239 15,593 7,239 Net earnings 26,891 21,913 16,472 9,196 4,284 Earnings per common share(2) - basic .76 .72 .55 .34 .16 - diluted .74 .70 .54 .32 .15 Dividends per common share(2) $ .18 $ .16 $ .08 $ - $ - At June 30, Total assets $255,212 $ 95,777 $ 71,261 $ 42,311 $ 25,422 Long-term debt, less current portion 36,725 741 760 766 698 Shareholders' equity $172,658 $ 71,365 $ 54,300 $ 23,715 $ 14,225
(1) Gaming revenues from the Company's video lottery (slot) machine gaming operations include the total win from such operations. The Delaware State Lottery Office collects the win and remits a portion thereof to the Company as its commission for acting as a Licensed Agent. The difference between total win and the amount remitted to the Company is reflected in operating expenses.
(2) Prior year per share amounts have been adjusted to give retroactive effect to a two-for-one stock split distributed on September 15, 1998.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Results of Operations Fiscal Year 1999 Compared With Fiscal Year 1998 Revenues increased by $66,987,000 to $207,932,000 as a result of growth in the historical business of the Company and the acquisition of Grand Prix Association of Long Beach, Inc. on July 1, 1998.
Gaming revenues increased by $24,178,000 or 21.0% to $139,249,000, the result of having an average of 1,191 machines in fiscal 1999 compared with an average of 1,000 machines in fiscal 1998, and expanded marketing and promotional activities related to the Company's video lottery casino.
Motorsports revenues increased by $42,809,000 or 165.5% to $68,683,000. Approximately $2,432,000 of the revenue increase resulted from increased attendance, $637,000 from increased ticket prices and $1,598,000 from adding an IRL event at Dover Downs International Speedway. Approximately $2,309,000 of the increase resulted from the inclusion of the operating results of Nashville Speedway USA in the
consolidated results of Dover Downs Entertainment, Inc. for twelve months in fiscal 1999 as compared to six months in fiscal 1998, and $32,837,000 from the acquisition of Grand Prix Association of Long Beach. The remainder of the increase was from increased sponsorship, concessions and marketing-related revenues at Dover Downs International Speedway.
Operating expenses increased by $45,623,000 reflecting the higher revenues. Amounts retained by the State of Delaware, including amounts collected for payment to the vendors under contract with the State who provide the video lottery machines and associated computer systems and fees to the manager who operates the video lottery (slot) machine operation, increased by $9,004,000 in fiscal 1999. Amounts allocated from the video lottery operation for harness horse racing purses were $15,173,000 in fiscal 1999 compared with $12,721,000 in fiscal 1998. Additional advertising, promotional and customer complimentary costs of $2,557,000 were the other significant gaming-related operating cost increases.
Motorsports operating expenses increased principally due to a $1,139,000 increase in purse and sanction fee expenses and $1,666,000 from adding an IRL event at Dover Downs International Speedway, and $1,533,000 from the inclusion of the operating results of Nashville Speedway USA in the consolidated results of Dover Downs Entertainment, Inc. for twelve months in fiscal 1999 as compared to six months in fiscal 1998. The remainder of the increase is primarily the result of the acquisition of Grand Prix Association of Long Beach.
Depreciation and amortization increased by $4,391,000 due to capital expenditures related to the Company's motorsports facilities and casino expansion and the depreciation of facilities and amortization of goodwill related to the acquisition of Grand Prix Association of Long Beach.
General and administrative expenses increased by $6,803,000 to $11,213,000 from $4,410,000, $6,341,000 of which is the result of the acquisition of Grand Prix Association of Long Beach.
Interest expense was $1,352,000 in fiscal 1999 as compared to $702,000 of interest income in fiscal 1998. The interest expense resulted from increased borrowings on the revolving credit agreement and interest payments made relating to the SWIDA loan.
The Company's effective income tax rates for the fiscal years ended June 30, 1999 and 1998 were 41.2% and 41.8%, respectively.
Net earnings increased by $4,978,000 due to the expansion of the video lottery (slot) machine operations, increased marketing efforts in the casino, higher attendance and the growth in the number of motorsports events presented by the Company, offset by increased interest and amortization expense from the Grand Prix Association of Long Beach acquisition.
Fiscal Year 1998 Compared With Fiscal Year 1997 Revenues increased by $39,267,000 to $140,945,000 primarily as a result of expanding the casino facility and increasing the number of video lottery (slot) machines from an average of 869 in fiscal 1997 to 1,000 machines during the entire fiscal year ended June 30, 1998. More significant marketing efforts also led to the increase in revenue in fiscal 1998. Motorsports revenues increased by $5,358,000 or 26.1% to $25,874,000. Approximately $1,791,000 of the revenue increase resulted from increased attendance, $295,000 from increased ticket prices, and $1,692,000 from the inclusion of the operating results of Nashville Speedway USA in the consolidated results of Dover Downs Entertainment, Inc. for six months in fiscal 1998. The remainder of the increase was from increased sponsorship, concessions and marketing related revenues.
Operating expenses increased by $28,316,000 reflecting the higher revenues. Amounts retained by the State of Delaware, fees to the manager who operates the video lottery (slot) machine operation, and the amount collected by the State of Delaware for payment to the vendors under contract with the State who provide the video lottery machines and associated computer systems increased by $14,902,000 in 1998. Amounts allocated from the video lottery operation for harness horse racing purses were $12,721,000 in 1998 compared with $9,157,000 in 1997. Advertising, promotional and customer complimentary cost increases of $2,534,000 were the other significant cost increases.
Motorsports operating expenses increased principally due to a $358,000 increase in purse and sanction fee expenses and increased advertising costs of $626,000 as a result of the addition of motorsports events during the 1998 fiscal year. The inclusion of the operating results of Nashville Speedway USA in the consolidated results of Dover Downs Entertainment, Inc. for six months in fiscal 1998 is the other significant operating cost increase.
Depreciation increased by $623,000 or 29.9% to $2,707,000 from $2,084,000 as a result of a full year of depreciation expense related to the Company's video lottery casino expansion being recognized in 1998 compared with eight months in 1997. Capital expenditures for the expansion of the Company's motorsports facilities also contributed to the increase in depreciation.
General and administrative expenses increased by $1,345,000 to $4,410,000 from $3,065,000. Wage and benefit costs increased by $469,000 and consulting and professional services increased by $223,000 principally due to the Company's expansion of the video lottery (slot) machine operation and the acquisition of Nashville Speedway USA.
The Company's effective income tax rates for fiscal 1998 and fiscal 1997 were 41.8% and 41.7%, respectively.
Net earnings increased by $5,441,000 due to the expansion of the video lottery (slot) machine operation, increased marketing efforts in the casino and higher attendance and related revenues at the Company's NASCAR-sanctioned events in September 1997 and June 1998.
Liquidity and Capital Resources Cash flow from operations for the three years ended June 30, 1999, 1998, and 1997 was $34,808,000, $28,991,000 and $18,600,000, respectively. The increase in fiscal 1999 reflected the Company's higher net earnings before depreciation and amortization.
Capital expenditures for the year ended June 30, 1999 were $50,707,000. Approximately $17,600,000 related to the expansion of and improvements to the Dover Downs and Gateway racing facilities, approximately $14,500,000 to the expansion of the casino facility in Dover, Delaware and approximately $10,800,000 for the acquisition of land in Nashville for the construction of the proposed Nashville Superspeedway complex. The remainder of the expenditures were for land and other improvements at the Dover and Memphis facilities.
Capital expenditures for the year ended June 30, 1998 were $7,504,000 and related primarily to the expansion of and improvements to the racing facility as well as expansion of the administrative facilities. The 1998 expenditures were less than in 1997 as the Company was also constructing and expanding the casino facilities in 1997.
Capital expenditures for the year ended June 30, 1997 of $16,841,000 related primarily to the purchase of land for $1,060,000, the expansion of the casino for $5,124,000, and the construction of additional permanent motorsports seating for $8,061,000. The capital expenditures were primarily funded with the proceeds from the Company's initial public stock offering.
The Company has filed an application with the Dover City Planning Department to build a 10-story, 520-room hotel in Dover, Delaware. The current construction plans consist of two phases of 260 rooms each, and include a multi-purpose ballroom/concert hall and a fine-dining restaurant. The Company has not entered into any commitments related to the project as of June 30, 1999. The cost of the first phase of the project is estimated to be approximately $35,000,000.
On August 26, 1999, the Company began construction of the new Nashville Superspeedway complex in Wilson County, Tennessee. The proposed complex will include a 1.33-mile oval track and may include a paved short track, a dirt track and a drag strip in future phases. The aggregate cost of acquiring the land and developing Phase I of the complex is estimated to be approximately $95,000,000. Of the total, the State of Tennessee will fund approximately $18,400,000 for the construction of an interchange and an access road near the proposed complex. The Sports Authority of the County of Wilson and Nashville Speedway USA, Inc., a subsidiary of the Company, have entered into an agreement whereby the Sports Authority will issue its revenue bonds and use the proceeds therefrom to acquire, construct and install certain local infrastructure improvements that would be beneficial to the operation of the superspeedway, the cost of which is estimated at $20,700,000. The terms of the revenue bonds have not yet been finalized, though the Company expects to provide some form of credit enhancement. The Company has invested approximately $11,700,000 in the project as of June 30, 1999, primarily for the purchase of land.
Effective January 2, 1998, the Company acquired all of the outstanding common stock of Nashville Speedway USA, Inc. for $3,000,000 in cash from available funds.
The Company and Grand Prix entered into an Agreement and Plan of Merger pursuant to which Grand Prix became a wholly owned subsidiary of the Company. The merger, which closed on July 1, 1998, was structured as a tax-free exchange whereby each shareholder of Grand Prix received .63 shares (1.26 shares after the stock split) of common stock of Dover Downs for each share of common stock of Grand Prix owned by such shareholder.
The Company purchased 680,000 shares of common stock of Grand Prix from two non-management shareholders in March of 1998 for $10,540,000.
The Company has a $50,000,000 long-term, unsecured revolving line of credit from certain financial institutions to provide seasonal funding needs, to finance capital improvements and other general corporate purposes. The Company was in compliance with all terms of the facility and there was $15,500,000 outstanding at June 30, 1999.
Year 2000 Issues The Company is aware of the issues related to the approach of the year 2000 and has assessed and investigated what steps must be taken to ensure that its critical systems and equipment will function appropriately after the turn of the century. The assessments include a review of what systems and equipment need to be changed or replaced in order to function correctly. The Company believes its accounting and ticketing hardware and software are year 2000 compliant and no corrections will be needed to those systems as a result of the year 2000. The Delaware State Lottery has advised the Company that the systems employed in its lottery operations will be made year 2000 compliant. The Company does not place substantial reliance on any other systems, and no systems have been found to need substantial correction.
The Company believes that issues related to the year 2000 will not have a material effect on its results of operations or financial condition.
Forward-Looking Statements The Company may make forward-looking statements relating to anticipated financial performance, business prospects, acquisitions or divestitures, new products, market forces, commitments and other matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. Forward-looking statements typically contain such words as "anticipates", "believes", "estimates", "expects", "forecasts", "predicts", or "projects", or variations of these words, suggesting that future outcomes are uncertain.
Various risks and uncertainties may affect the operation, performance, development and results of the Company's business and could cause future outcomes to differ materially from those set forth in forward-looking statements, including the following factors: general economic conditions, the Company's ability to finance its future business requirements through outside sources or internally generated funds, the availability of adequate levels of insurance, success or timing of completion of ongoing or anticipated capital or maintenance projects, the ability to successfully integrate recently acquired companies, management retention and development, changes in Federal, State, and local laws and regulations, including environmental regulations, weather, relationships with sponsors, broadcast media and sanctioning bodies as well as the risks, uncertainties and other factors described from time to time in the Company's SEC filings and reports.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of the Company and the Independent Auditors' Report included in this report are shown on the Index to Consolidated Financial Statements on page 18.
ITEM 9.
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 10.
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 from the Company's Proxy Statement to be filed pursuant to Regulation 14A for the Annual Meeting of Shareholders to be held on October 29, 1999.
Executive Officers of the Registrant. As of June 30, 1999, the Executive Officers of the registrant were:
Name Position Age Term of Office
Robert M. Comollo Treasurer 51 11/81 to date
Timothy R. Horne Vice President-Finance 33 11/96 to date
Michael B. Kinnard Vice President-General 41 6/94 to date Counsel and Secretary
Denis McGlynn President and 53 11/79 to date Chief Executive Officer
John W. Rollins, Sr. Chairman of the Board 83 10/96 to date
Edward J. Sutor Executive Vice President 49 3/99 to date
Robert M. Comollo has been employed by the Company for 19 years, of which 18 years have been in the capacity of Treasurer.
Timothy R. Horne became Vice President-Finance in November of 1996. From 1988 until 1996, Mr. Horne was employed by KPMG LLP, where he most recently served as an assurance senior manager.
Michael B. Kinnard has been Vice President-General Counsel to the Company since 1994. Mr. Kinnard also serves as Vice President-General Counsel and Secretary to Matlack Systems, Inc. and Vice President- General Counsel and Secretary to Rollins Truck Leasing Corp. Prior to 1995, Mr. Kinnard was a partner in the law firm of Baker, Worthington, Crossley, Stansberry & Woolf (now known as Baker, Donelson, Bearman & Caldwell).
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 Caesers Atlantic City.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by this Item 11 is incorporated by reference from the Company's Proxy Statement to be filed pursuant to Regulation 14A for the Annual Meeting of Shareholders to be held on October 29, 1999.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information called for by this Item 12 is incorporated by reference from the Company's Proxy Statement filed pursuant to Regulation 14A for the Annual Meeting of Shareholders to be held on October 29, 1999.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the year ended June 30, 1999, the following officers and/or directors of the Company were also officers and/or directors of Rollins Truck Leasing Corp.; Patrick J. Bagley, Michael B. Kinnard, John W. Rollins, John W. Rollins, Jr. and Henry B. Tippie. The following officers and/or directors of the Company were also officers and/or directors of Matlack Systems, Inc.; Patrick J. Bagley, Michael B. Kinnard, John W. Rollins, John W. Rollins, Jr. and Henry B. Tippie. John W. Rollins owns directly and of record 12.5% and 11.4% of the outstanding shares of common stock of Rollins Truck Leasing Corp. and Matlack Systems, Inc., respectively, at June 30, 1999. The description of transactions between the Company and Rollins Truck Leasing Corp. appears under the caption "Related Party Transactions" on page 31 of this 1999 Annual Report on Form 10-K.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits
(1) Financial Statements - See accompanying Index to Consolidated Financial Statements on page 18.
(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.
3.1 Certificate of Incorporation of Dover Downs Entertainment, Inc., amended June 14, 1996, and further amended on June 28, 1996 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.
3.2 Amended and Restated Bylaws of Dover Downs Entertainment, Inc. as filed with the Company's Annual Report on Form 10-K for the year ended June 30, 1997, is incorporated herein by reference.
3.3 Amendment to Certificate of Incorporation of Dover Downs Entertainment, Inc. dated as of June 30, 1998, as filed with the Company's Annual Report on Form 10-K for the year ended June 30, 1998, is incorporated herein by reference.
3.4 Amendment to Bylaws of Dover Downs Entertainment, Inc. dated June 30, 1998, as filed with the Company's Annual Report on Form 10-K for the year ended June 30, 1998, is incorporated herein by reference.
4.2 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 Credit Agreement among PNC Bank and First Union National Bank and Dover Downs Entertainment, Inc. dated as of March 31, 1999.
10.2 Guaranty and Suretyship Agreement dated March 31, 1999 in favor of PNC Bank and First Union National Bank.
10.7 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.
10.9 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.
10.10 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.
21.1 Subsidiaries
23.1 Consent of Independent Accountants
27 Financial Data Schedule for current Fiscal Year ended June 30, 1999
(b) Reports on Form 8-K
None. 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.
DATED: September 9, 1999 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 September 9, 1999 Timothy R. Horne
/s/ John W. Rollins Chairman of the Board September 9, 1999 John W. Rollins
/s/ Henry B. Tippie Vice Chairman of the Board September 9, 1999 Henry B. Tippie
/s/ John W. Rollins, Jr. Director September 9, 1999 John W. Rollins, Jr.
/s/ Patrick J. Bagley Director September 9, 1999 Patrick J. Bagley
/s/ Jeffrey W. Rollins Director September 9, 1999 Jeffrey W. Rollins
/s/ Melvin Joseph Director September 9, 1999 Melvin Joseph
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page(s) Independent Auditors' Report on Consolidated Financial Statements 19
Consolidated Statement of Earnings for the years ended June 30, 1999, 1998 and 1997 20
Consolidated Balance Sheet at June 30, 1999 and 1998 21
Consolidated Statement of Cash Flows for the years ended June 30, 1999, 1998 and 1997 22
Notes to the Consolidated Financial Statements 23-33
Independent Auditors' Report
The Shareholders 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 June 30, 1999 and 1998, and the related consolidated statements of earnings and cash flows for each of the years in the three-year period ended June 30, 1999. 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 generally accepted auditing standards. 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 financial position of Dover Downs Entertainment, Inc. and subsidiaries as of June 30, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended June 30, 1999, in conformity with generally accepted accounting principles.
KPMG LLP
Philadelphia, Pennsylvania July 23, 1999
CONSOLIDATED STATEMENT OF EARNINGS (Dollars in thousands, except per share data)
Year ended June 30, 1999 1998 1997 Revenues: Motorsports $ 68,683 $ 25,874 $ 20,516 Gaming 139,249 115,071 81,162 207,932 140,945 101,678 Expenses: Operating 142,498 96,875 68,559 Depreciation and amortization 7,098 2,707 2,084 General and administrative 11,213 4,410 3,065 160,809 103,992 73,708 Operating earnings 47,123 36,953 27,970 Interest expense (income) 1,352 (702) (269) Earnings before income taxes 45,771 37,655 28,239 Income taxes 18,880 15,742 11,767 Net earnings $ 26,891 $ 21,913 $ 16,472 Earnings per common share: Basic $ .76 $ .72 $ .55 Diluted $ .74 $ .70 $ .54 Average shares outstanding (000): Basic 35,566 30,492 29,712 Diluted 36,585 31,206 30,550
The Notes to the Consolidated Financial Statements are an integral part of these statements.
CONSOLIDATED BALANCE SHEET (Dollars in thousands) June 30, 1999 1998 ASSETS Current assets: Cash and cash equivalents $ 10,847 $ 18,694 Accounts receivable 6,706 2,818 Due from State of Delaware 2,932 2,099 Inventories 581 310 Prepaid expenses and other 4,456 2,319 Deferred income taxes 327 328 Total current assets 25,849 26,568 Property, plant and equipment, at cost: Land 29,519 10,563 Casino facility 22,921 11,548 Racing facilities 113,202 44,877 Furniture, fixtures and equipment 24,390 6,444 Construction in progress 7,902 799 197,934 74,231 Less accumulated depreciation (24,021) (18,456) 173,913 55,775 Other assets, net 1,453 10,540 Goodwill, net 53,997 2,894 Total assets $255,212 $ 95,777
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,629 $ 2,343 Purses due horsemen 3,147 1,885 Accrued liabilities 9,407 5,006 Income taxes payable 2,726 3,951 Current portion of long-term debt 235 19 Deferred revenue 15,906 9,755 Total current liabilities 36,050 22,959 Long-term debt 36,725 741 Other liabilities 172 - Deferred income taxes 9,607 712 Commitments (see Notes to the Consolidated Financial Statements) Shareholders' 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: 1999-11,403,684; 1998-5,997,900 1,140 300 Class A common stock, $.10 par value; 55,000,000 shares authorized; issued and outstanding: 1999-24,262,510 shares; 1998-24,498,760 shares 2,426 1,225 Additional paid-in capital 99,683 21,109 Retained earnings 69,409 48,731 Total shareholders' equity 172,658 71,365 Total liabilities and shareholders' equity $255,212 $ 95,777
The Notes to the Consolidated Financial Statements are an integral part of these statements.
CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands) Years ended June 30, 1999 1998 1997 Cash flows from operating activities: Net earnings $ 26,891 $ 21,913 $ 16,472 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 7,098 2,707 2,084 Loss on disposition of property - 3 - (Increase) decrease in assets, net of effect of acquisition: Accounts receivable (1,645) (1,180) (392) Due from State of Delaware (833) (116) (1,082) Inventories (22) 92 (46) Prepaid expenses (2,044) (1,539) (242) Other assets (155) - - Increase (decrease) in liabilities, net of effect of acquisition: Accounts payable (450) 335 671 Purses due horsemen 1,262 498 (49) Accrued liabilities 464 2,719 (88) Current and deferred income taxes 1,387 1,346 (267) Deferred revenue 2,855 2,213 1,539 Net cash provided by operating activities 34,808 28,991 18,600 Cash flows from investing activities: Investment in Grand Prix Association of Long Beach - (10,540) - Acquisition of business, net of cash acquired - (2,889) - Capital expenditures (50,707) (7,504) (16,841) Cash acquired in business acquisition 1,490 - - Net cash used in investing activities (49,217) (20,933) (16,841) Cash flows from financing activities: Borrowings (repayments) on revolving debt 13,161 - (3,500) Repayment of long-term debt (760) (19) (9) Loan repayments 207 - - Net proceeds from initial public offering - - 16,360 Dividends paid (6,213) (4,878) (2,429) Proceeds from stock options exercised, including related tax benefit 167 30 182 Net cash provided by (used in) financing activities 6,562 (4,867) 10,604 Net (decrease) increase in cash and cash equivalents (7,847) 3,191 12,363 Cash and cash equivalents, beginning of year 18,694 15,503 3,140 Cash and cash equivalents, end of year $ 10,847 $ 18,694 $ 15,503 Supplemental information: Interest paid $ 2,474 $ 61 $ 168 Income taxes paid $ 18,231 $ 14,395 $ 12,034 Non-cash investing and financing activities: Land acquired $ 4,707 $ - $ - Cash paid (3,054) - - Land traded $ 1,653 $ - $ -
Stock issued in connection with acquisition $ 80,241 $ - $ -
The Notes to the Consolidated Financial Statements are an integral part of these statements.
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, promoting 15 major events annually in the four 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).
Dover Downs also owns and operates the Dover Downs Raceway harness racing track and a 65,000 square foot video lottery (slot) casino at a multi-purpose gaming and entertainment complex in Dover, Delaware. The facility is located in close proximity to the major metropolitan areas of Philadelphia, Baltimore and Washington, D.C.
Dover Downs, Inc. is authorized to conduct video lottery operations as a "Licensed Agent" under the Delaware State Lottery Code. Pursuant to Delaware's Horse Racing Redevelopment Act, enacted in 1994, the Delaware State Lottery Office administers and controls the operation of the video lottery.
The Company's license from the Delaware Harness Racing Commission must be renewed on an annual basis. In order to maintain its license to conduct video lottery operations, the Company is required to maintain its harness horse racing license.
Due to the nature of the Company's business activities, it is subject to various federal, state and local regulations.
NOTE 2 - Acquisition On July 1, 1998, the Company completed its acquisition of Grand Prix Association of Long Beach (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. Grand Prix developed and operates the Grand Prix of Long Beach, an annual temporary circuit event which has been run in the streets of Long Beach, California for 25 years, and owns permanent motorsports facilities in Madison, Illinois (near St. Louis, Missouri) and in Millington, Tennessee (near Memphis, Tennessee). The purchase price was comprised of the conversion of the outstanding Grand Prix common stock into 2,518,229 shares (5,036,458 shares after the stock split) of the Company's stock and assumption by the Company of the outstanding stock options of Grand Prix. On March 27, 1998, the Company acquired 680,000 shares of Grand Prix common stock at $15.50 per share in cash pursuant to two separate stock purchase agreements, at which time the Company owned approximately 14.6 % of the outstanding Grand Prix common stock. The cost of these purchases was recorded as a long-term investment at June 30, 1998. 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 of $52,551,000 is being amortized on a straight-line basis over 40 years.
The following summarized unaudited pro-forma statement of earnings information gives effect to the Grand Prix transaction as though it had occurred on July 1, 1997, after giving effect to certain adjustments, primarily the amortization of goodwill and additional depreciation expense. The pro-forma financial information, which is for informational purposes only, is based upon certain assumptions and estimates and does not necessarily reflect the results that would have occurred had the transaction taken place at the beginning of the period presented, nor are they necessarily indicative of future consolidated results. For the year ended June 30, 1998 Revenues $170,972,000 Net earnings $ 19,974,000 Earnings per diluted share $ .55
NOTE 3 - Summary of Significant Accounting Policies Consolidation-The consolidated financial statements include the accounts of all subsidiaries. Intercompany transactions and balances among these subsidiaries have been eliminated.
Revenue and expense recognition-Tickets to motorsports races are sold and certain expenses are incurred in advance of the race date. Such advance sales and corresponding expenses are recorded as deferred revenue and prepaid expenses, respectively, until the race is held. Gaming revenues represent the net win from video lottery (slot) machine wins and losses, commissions from pari-mutuel wagering and other miscellaneous gaming-related income. Payments to the State of Delaware pursuant to the lottery legislation are reported in operating expenses.
For the video lottery operations, the difference between the amount wagered by bettors and the amount paid out to bettors is referred to as the win. The win is included in the amount recorded in the Company's financial statements as gaming revenue. The Delaware State Lottery Office sweeps the winnings from the video lottery operations, collects the State's share of the winnings and the amount due to the vendors under contract with the State who provide the video lottery machines and associated computer systems, collects the amount allocable to purses for harness horse racing, and remits the remainder to the Company as its commission for acting as a Licensed Agent. Operating expenses include the amounts collected by the State (i) for the State's share of the winnings, (ii) for remittance to the providers of the video lottery machines and associated computer systems, and (iii) for harness horse racing purses.
Advertising costs-The costs of advertising, promotion and marketing programs are charged to operations as incurred.
Earnings per share-The number of weighted average shares used in computing basic and diluted earnings per share (EPS) are as follows (in thousands):
1999 1998 1997 Basic EPS 35,566 30,492 29,712 Effect of options 1,019 714 838 Diluted EPS 36,585 31,206 30,550
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, primarily food, beverage and novelty items, are stated at the lower of cost or market with cost being determined on the first-in, first-out (FIFO) basis.
Property, plant and equipment-Property, plant and equipment is stated at cost. Depreciation is computed on a straight-line basis over the following estimated useful lives:
Racing and casino facilities 10 - 40 years Furniture, fixtures and equipment 5 - 10 years
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. In 1999, $682,000 of interest cost was capitalized. No interest was capitalized in 1998 or 1997.
Goodwill-Goodwill represents the excess of the purchase price over the fair value of net assets acquired and is being amortized using the straight-line method over a period of 40 years.
Income taxes-Deferred income taxes are provided in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) 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.
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, and 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 June 30, 1999 approximates its fair value based on interest rates available on similar borrowings.
Accounting for stock options-The Company adopted the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation", on July 1, 1996. SFAS 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.
Recent accounting pronouncements-The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on its results of operations, financial position or cash flows.
NOTE 4 - Indebtedness Long-term debt is as follows: June 30, 1999 1998 Note payable to bank $ 15,500,000 $ - SWIDA loan for Gateway redevelopment 21,460,000 - Note payable - 760,000 36,960,000 760,000 Less: current portion (235,000) (19,000) $ 36,725,000 $ 741,000
On March 31, 1999, the Company entered into a $50,000,000 long-term, unsecured, revolving credit agreement with certain financial institutions. 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 agreement, which expires in March 2002, is for seasonal funding needs, capital improvements and other general corporate purposes. The agreement contains certain restrictive covenants and requires the Company to maintain certain financial ratios. At June 30, 1999, $15,500,000 was outstanding under this line of credit at a weighted average interest rate of 6.05%.
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 June 30, 1999, $548,000 of the Company's cash balance is restricted by the SWIDA loan. A standby letter of credit for $2,502,000 also was obtained to secure debt service. 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.
The scheduled maturities of long-term debt outstanding at June 30, 1999 are as follows: 2000-$235,000; 2001-$685,000; 2002-$16,135,000; 2003- $685,000; 2004-$745,000; and thereafter-$18,475,000.
NOTE 5 - Income Taxes The current and deferred income tax provisions (benefit) are as follows:
Years ended June 30, 1999 1998 1997 Current: Federal $13,277,000 $12,544,000 $ 9,207,000 State 3,929,000 3,296,000 2,498,000 17,206,000 15,840,000 11,705,000 Deferred: Federal 1,599,000 (78,000) 49,000 State 75,000 (20,000) 13,000 1,674,000 (98,000) 62,000 Total income taxes $18,880,000 $15,742,000 $11,767,000
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, plant and equipment and net operating loss carryforwards. 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:
Years ended June 30, 1999 1998 1997 Federal tax at statutory rate 35.0% 35.0% 35.0% State taxes, net of federal benefit 5.7% 5.7% 5.7% Other .5% 1.1% 1.0% Effective income tax rate 41.2% 41.8% 41.7%
NOTE 6 - 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 following table sets forth the plan's funded status and amounts recognized in the Company's consolidated balance sheet:
June 30, 1999 1998 Change in benefit obligation: Benefit obligation at beginning of year $ 925,000 $ 531,000 Service cost 306,000 132,000 Interest cost 79,000 53,000 Amendments 122,000 - Actuarial loss 26,000 211,000 Benefits paid (33,000) (2,000) Benefit obligation at end of year 1,425,000 925,000
Change in plan assets: Fair value of plan assets at beginning of year 688,000 464,000 Actual return on plan assets 273,000 104,000 Employer contribution 386,000 122,000 Benefits paid (33,000) (2,000) Fair value of plan assets at end of year 1,314,000 688,000
Funded status (111,000) (237,000) Unrecognized net (gain)/loss (74,000) 111,000 Unrecognized prior service cost 277,000 173,000 Prepaid pension cost $ 92,000 $ 47,000
At June 30, 1999, the assets of the plan were invested 68% in equity funds, 24% in intermediate bond funds and the balance in other short-term interest-bearing accounts. The discount rate in 1999 and 1998 was 8.0% and 7.5%, respectively. The assumed rate of compensation increase was 5% in both years. The expected long-term rate of return on assets was 9% for 1999 and 1998.
The components of net periodic pension cost are as follows:
Years ended June 30, 1999 1998 1997
Service cost $ 306,000 $ 132,000 $ 61,000 Interest cost 79,000 53,000 32,000 Return on plan assets (273,000) (104,000) (68,000) Net amortization 13,000 32,000 16,000 Deferral of net gain 201,000 63,000 36,000 $ 326,000 $ 176,000 $ 77,000
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.
The Company also maintains a defined contribution 401(k) plan which permits participation by substantially all employees.
NOTE 7 - Shareholders' Equity Changes in the components of shareholder's equity are as follows (dollars in thousands, except per share data):
$.10 Par $.10 Par Value Value Class A Additional Common Common Paid-in Retained Stock Stock Capital Earnings
Balance at June 30, 1996 $ $1,393 $ 4,669 $17,653 Net earnings 16,472 Issuance of common stock, net 288 (180) 16,252 Dividends on common stock, $.08 per share (2,429) Exercise of stock options 22 160 Conversion of Class A shares 6 (6) Balance at June 30, 1997 294 1,229 21,081 31,696 Net earnings 21,913 Dividends on common stock, $.16 per share (4,878) Exercise of stock options 2 28 Conversion of Class A shares 6 (6) Balance at June 30, 1998 300 1,225 21,109 48,731 Net earnings 26,891 Dividends on common stock, $.18 per share (6,213) Exercise of stock options 4 8 155 Grand Prix acquisition 252 80,196 Two-for-one split 556 1,221 (1,777) Conversion of Class A shares 28 (28) Balance at June 30, 1999 $1,140 $2,426 $99,683 $69,409
Holders of Common Stock have one vote per share and holders of Class A Common Stock have ten votes per share. 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.
The Company has adopted Rights Plans with respect to its Common Stock and Class A Common Stock which include 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 one cent.
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.
On October 3, 1996, the Company completed its initial public offering. The Company issued 1,075,000 shares (2,150,000 shares after the stock split) of the Company's Common Stock and received proceeds of approximately $16,360,000, net of issuance costs of approximately $1,913,000.
The Company has two stock option plans 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. Options granted under the 1991 Stock Option Plan are exercisable for Class A Common Stock while options granted under the 1996 Stock Option Plan are exercisable for Common Stock. The 1991 Stock Option Plan has been amended so that no additional options may be granted thereunder. The 1991 and 1996 stock options have 7 and 8 year terms, respectively, and generally vest equally over a period of 5 and 6 years from the date of grant, respectively. In all other material respects, the 1991 Stock Option Plan is structured the same as the 1996 Stock Option Plan. 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: expected dividend yield - 1.02%, risk-free interest rate - 6%, an expected life of six and one-half years and volatility of 25%. 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 less than $.01 per share in 1999 and 1998.
Option activity was as follows: June 30, 1999 1998 1997 Number of options: Outstanding at beginning of year 1,035,528 945,528 1,170,000 Granted 734,562 135,000 225,528 Exercised (127,684) (45,000) (450,000) Outstanding at June 30 1,642,406 1,035,528 945,528
At June 30: Options available for grant 404,910 1,139,472 1,274,472 Options exercisable 932,545 262,000 45,000 Weighted Average Exercise Price: Options granted $ 4.66 $ 11.58 $ 8.57 Options exercised $ 1.32 $ .67 $ .41 Options outstanding $ 4.38 $ 3.38 $ 2.55 Options exercisable $ 1.59 $ 1.78 $ .67
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 8 - Related Party Transactions During the years ended June 30, 1999, 1998 and 1997, the Company purchased certain paving, site work and construction services involving total payments of $432,000, $375,000 and $584,000 from a company wholly-owned by an employee/director. The Company purchased administrative services from Rollins Truck Leasing Corp. and affiliated companies in 1999, 1998 and 1997. The total cost of these services, which have been included in general and administrative expenses in the Consolidated Statement of Earnings, was $380,000, $283,000 and $178,000 in 1999, 1998 and 1997, respectively.
In connection with the development of a new racing facility in Wilson County, Tennessee, a subsidiary of the Company purchased options to acquire certain properties being considered as possible locations for the facility. During 1999, a development site was chosen and it was determined that some of the properties under option would not be needed. Prior to the options expiring, an officer/director of the Company expressed an interest in purchasing several of the properties that were not needed for development. The Company assigned its options to the officer/director who subsequently purchased the property. At June 30, 1999, $219,000 was due from this officer/director to reimburse the Company for the cost of the options and certain surveying, engineering and legal costs incurred by the Company. This amount was repaid in July 1999.
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 June 30, 1999, $92,000 was outstanding and is due December 1, 1999 from a current director of the Company.
In the opinion of management of the Company, the foregoing transactions were effected at rates which approximate those which the Company would have realized or incurred had such transactions been effected with independent third parties.
NOTE 9 - Business Segment Information The Company has two reportable segments, motorsports and gaming. The business is operated and defined based on the products and services provided by these segments. Certain operations within the motorsports segment have been aggregated for purposes of the following disclosures (dollars in thousands, except per share data):
Motorsports Gaming Consolidated Year ended June 30, 1999 Revenue $ 68,683 $139,249 $207,932 Operating earnings 17,197 29,926 47,123 Identifiable assets at year-end 209,540 45,672 255,212 Capital expenditures 36,209 14,498 50,707 Depreciation and amortization 5,829 1,269 7,098 Interest expense $ 1,267 $ 85 $ 1,352
Year ended June 30, 1998 Revenue $ 25,874 $115,071 $140,945 Operating earnings 12,506 24,447 36,953 Identifiable assets at year-end 57,739 38,038 95,777 Capital expenditures 6,085 1,419 7,504 Depreciation and amortization $ 1,237 $ 1,470 $ 2,707
Year ended June 30, 1997 Revenue $ 20,516 $ 81,162 $101,678 Operating earnings 11,079 16,891 27,970 Identifiable assets at year-end 34,801 36,460 71,261 Capital expenditures 9,496 7,345 16,841 Depreciation and amortization $ 981 $ 1,103 $ 2,084
NOTE 10 - Commitments The Company leases the racetrack at the Tennessee State Fairgrounds pursuant to a lease expiring in 2008. Total rental expense charged to the Company is a function of the profitability of the Nashville operation and was $210,000 for the year ended June 30, 1999 and $66,000 for the six months ended June 30, 1998.
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 $222,000 for the year ended June 30, 1999. The minimum lease payments due under these leases are as follows:
2000 $ 237,000 2001 227,000 2002 214,000 2003 214,000 2004 214,000 Thereafter 4,510,000
In May 1995, Dover Downs, Inc., a subsidiary of the Company, entered into a long-term management agreement with Caesars World Gaming Development Corporation (Caesars). The initial term of the agreement expired in December 1998 and Caesars exercised the first of two additional three-year renewal options which Dover Downs may void if certain financial results are not achieved. Caesars acts as the exclusive agent to supervise, market, manage and operate the Company's video lottery operations. Caesars has been properly licensed by the Delaware State Lottery Office to perform these functions. Caesars' performance-based fees for such services were $6,983,000 in fiscal 1999, $7,094,000 in fiscal 1998 and $5,185,000 in fiscal 1997. Amounts owed to Caesars at June 30, 1999 and 1998 totaled $1,147,000 and $1,246,000, respectively and are included in accrued liabilities. The Company also has expensed and accrued additional amounts which Caesars claims are due as a result of the recent casino expansions, but which the Company does not believe are owed to Caesars.
The Company has entered into several sanctioning agreements to conduct various motorsports events at Dover Downs International Speedway and the Nashville Speedway, as well as at newly acquired venues in Long Beach, California; Madison, Illinois and Millington, Tennessee. The Company has held NASCAR-sanctioned events for 31 consecutive years and its subsidiary, Grand Prix Association of Long Beach, has operated the Grand Prix of Long Beach for 25 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.
NOTE 11 - Quarterly Results - in thousands, except per share data (unaudited)
September 30 December 31 March 31 June 30 Revenues $54,654 $37,651 $36,676 $78,951 Gross profit 17,520 7,188 6,851 26,777 Net earnings 8,278 2,513 2,207 13,893 Earnings per common share (diluted) $ .23 $ .07 $ .06 $ .38
Revenues $38,821 $25,962 $31,735 $44,427 Gross profit 14,301 5,236 6,649 15,177 Net earnings 7,833 2,518 3,295 8,267 Earnings per common share (diluted) $ .25 $ .08 $ .11 $ .26
Exhibit 21.1
DOVER DOWNS ENTERTAINMENT, INC.
Subsidiaries of Registrant at June 30, 1999
Dover Downs, Inc.
Dover Downs International Speedway, Inc.
Dover Downs Properties, Inc.
Nashville Speedway USA, Inc.
Grand Prix Association of Long Beach, Inc.
Gateway International Motorsports Corporation, Inc.
Gateway International Services Corporation, Inc.
Memphis International Motorsports Corporation, Inc.
Motorsports Services Corporation of Memphis, Inc.
Exhibit 23.1
The Board of Directors and Shareholders Dover Downs Entertainment, Inc.
We consent to the incorporation by reference in the registration statement (No. 333-8147) on Form S-8 of Dover Downs Entertainment, Inc. of our report dated July 23, 1999 relating to the consolidated balance sheets of Dover Downs Entertainment, Inc. and subsidiaries as of June 30, 1999 and 1998, and the related consolidated statements of earnings and cash flows for each of the years in the three-year period ended June 30, 1999, which report appears in the June 30, 1999 annual report on Form 10-K of Dover Downs Entertainment, Inc.
KPMG LLP
Philadelphia, Pennsylvania September 8, 1999