Page 1 of 11
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
/___/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-11929
DOVER DOWNS ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0357525
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1131 North DuPont Highway, Dover, Delaware 19901
(Address of principal executive offices) (Zip Code)
(302) 674-4600
(Registrant's telephone number, including area code)
(Former name of registrant)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Sections 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
As of September 30, 1998, the number of shares of each class
of the registrant's common stock outstanding is as follows:
Common stock - 11,124,974 shares
Class A common stock - 24,415,260 shares
FORM 10-Q Page 2 of 11
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
A. Basis of Preparation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with the instructions to
Form 10-Q and do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the
quarter ended September 30, 1998 are not necessarily indicative of the
results that may be expected for the year ending June 30, 1999.
B. Business Operations
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.
C. Earnings Per Share
Pursuant to the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," the number of weighted average
shares used in computing basic and diluted earnings per share (EPS) are
as follows (in thousands):
Three Months Ended
September 30,
1998 1997
Basic EPS 35,538 30,475
Effect of Options 1,082 671
Diluted EPS 36,620 31,146
No adjustments to net income available to common shareholders were
required during the periods presented.
D. Pro-Forma Financial Information
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
FORM 10-Q Page 3 of 11
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 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 and, accordingly, the operating results of Grand Prix have
been included in the Company's consolidated financial statements since
the date of acquisition.
The purchase price has been allocated to the assets acquired and
liabilities assumed based on estimated fair values at July 1, 1998.
The Company does not believe that the final purchase price allocation
will differ significantly from the purchase price allocation recorded
at July 1, 1998. The fair value of assets acquired and liabilities
assumed is summarized as follows (in thousands):
Current assets $ 6,415
Property and equipment 74,308
Goodwill 51,990
Current liabilities (9,582)
Deferred income taxes (7,654)
Notes and bonds payable (23,970)
Purchase price $ 91,507
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.
Dover Downs Entertainment, Inc.
Pro-Forma Information
Quarter Ended September 30, 1997
(In thousands, except per share data)
Revenue $ 44,444
Net earnings $ 6,868
Earnings per diluted share $ .19
FORM 10-Q Page 4 of 11
E. Notes and Loans Payable
Notes and loans payable as of September 30, 1998 are as follows:
SWIDA loan from Gateway redevelopment, net
of $40,000 original issue discount
(see below) $ 21,460,000
First trust deed on Long Beach office note
payable to bank; bearing interest at a
variable rate of prime plus 2% per annum
(10.25% at September 30, 1998); payable in
fixed monthly installments of principal and
interest of $7,000 through May 2002; final
payment of principal and interest totaling
$739,000 due June 2002 767,000
Second trust deed on Long Beach office note
payable to bank; bearing interest at 7.519%
per annum; payable in monthly installments
of principal and interest of $6,000 through
December 2012. 632,000
Mortgage note payable; bearing interest at a
fixed rate of 8%; payable in fixed quarterly
principal and interest installments through
January 2006 755,000
Other 1,044,000
24,658,000
Less: current portion (1,504,000)
$ 23,154,000
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 are irrevocably committed
to complete all planned 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 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.
FORM 10-Q Page 5 of 11
DOVER DOWNS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF EARNINGS
Dollars in Thousands, Except Per Share Amounts
Quarter Ended
September 30,
1998 1997
Revenues:
Motorsports $ 21,155 $ 11,198
Gaming (including win) (1) 33,499 27,623
54,654 38,821
Expenses:
Operating 35,338 23,903
Depreciation and amortization 1,796 617
General and administrative 3,054 1,067
40,188 25,587
Operating earnings 14,466 13,234
Interest expense (income) 389 (156)
Earnings before income taxes 14,077 13,390
Income taxes 5,799 5,557
Net earnings $ 8,278 $ 7,833
Earnings per common share (2)
- Basic $ .23 $ .26
- Diluted $ .23 $ .25
Average shares outstanding (000) (2)
- Basic 35,538 30,475
- Diluted 36,620 31,146
Dividends paid per common share $ .04 $ .04
(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) 1997 amounts have been adjusted for a 2-for-1 stock split
distributed on September 15, 1998.
FORM 10-Q Page 6 of 11
DOVER DOWNS ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEET
Dollars in Thousands
September 30, June 30,
1998 1998
ASSETS
Current assets:
Cash and cash equivalents $ 21,101 $ 18,694
Accounts receivable 4,805 2,818
Due from State of Delaware 5,818 2,099
Inventories 456 310
Prepaid expenses 3,962 2,319
Deferred income taxes 338 328
Total current assets 36,480 26,568
Property, plant and equipment, net 131,926 55,775
Investments - 10,540
Goodwill, net 54,522 2,894
Total assets $222,928 $ 95,777
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,556 $ 2,343
Purses due horsemen 5,691 1,885
Accrued liabilities 6,537 5,006
Income taxes payable 6,274 3,951
Current portion of long-term debt 1,504 19
Deferred revenue 7,848 9,755
Total current liabilities 33,410 22,959
Long-term debt 23,154 741
Deferred income taxes 7,888 712
Commitments and contingent liabilities
See Part II Legal Proceedings
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: September - 11,124,974
June - 5,997,900 1,113 300
Class A common stock, $.10 par value;
55,000,000 shares authorized; issued
and outstanding: September - 24,415,260;
June - 24,498,760 2,442 1,225
Additional paid-in capital 99,324 21,109
Retained earnings 55,597 48,731
Total shareholders' equity 158,476 71,365
Total liabilities and shareholders' equity $222,928 $ 95,777
FORM 10-Q Page 7 of 11
DOVER DOWNS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Dollars in Thousands
Three Months Ended
September 30,
1998 1997
Cash flows from operating activities:
Net earnings $ 8,278 $ 7,833
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 1,796 617
(Increase) decrease in assets:
Accounts receivable 258 (1,133)
Due from State of Delaware (3,719) (3,183)
Inventories 103 23
Prepaid expenses (181) 14
Increase (decrease) in liabilities:
Accounts payable 478 801
Purses due horsemen 3,806 3,228
Accrued liabilities (1,978) 1,711
Current and deferred income taxes 3,339 1,658
Deferred revenue (5,204) (4,475)
Net cash provided by operating activities 6,976 7,094
Cash flows from investing activities:
Capital expenditures (4,574) (703)
Cash acquired in Grand Prix transaction 1,490 -
Net cash used in investing activities (3,084) (703)
Cash flows from financing activities:
Dividends paid (1,413) (1,217)
Repayment of long-term debt (72) (5)
Proceeds of stock options exercised - 30
Net cash used in financing activities (1,485) (1,192)
Net increase in cash and cash equivalents 2,407 5,199
Cash and cash equivalents, beginning of period 18,694 15,503
Cash and cash equivalents, end of period $21,101 $20,702
Supplemental information:
Cash paid for:
Interest paid $ 1,048 $ 16
Income taxes paid $ 2,460 $ 3,899
Non-cash investing activities:
Stock issued for business acquisition 91,507 _
FORM 10-Q Page 8 of 11
Item 2.Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations: Three Months Ended September 30, 1998 vs. Three
Months Ended September 30, 1997
Revenues increased by $15,833,000 to $54,654,000 as a result of
growth in the historical business of the Company and the acquisitions
of Nashville Speedway USA, Inc. on January 2, 1998 and Grand Prix
Association of Long Beach, Inc. on July 1, 1998. Gaming revenues
increased by $5,876,000 or 21.3% to $33,499,000, primarily the result
of expanded marketing and promotional activities related to the
Company's video lottery casino. Motorsports revenues increased by
$9,957,000 or 88.9%. $6,528,000 or 65.6% of the motorsports revenue
growth resulted from the aforementioned acquisitions. Of the remainder
of the increase, $824,000 resulted from increased attendance, $533,000
from increased ticket prices, and $486,000 from increased sponsorship,
concession and broadcast revenues for the Company's Fall NASCAR weekend
at Dover Downs International Speedway. The remainder of the revenue
increase at Dover Downs International Speedway was from the addition of
an Indy Racing League event in July of 1998.
Operating expenses increased by $11,435,000 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 $2,087,000 in the
first quarter of fiscal 1999. Amounts allocated from the video lottery
operation for harness horse racing purses were $3,725,000 in the first
quarter of fiscal 1999 compared with $3,133,000 in the first quarter of
fiscal 1998. Additional advertising, promotional and customer
complimentary costs of $1,476,000 were the other significant operating
cost increases.
Motorsports operating expenses increased primarily due to $1,148,000
in purse obligation expenses related to the Indy Racing League event in
July 1998 and the inclusion of the results of operations of Nashville
Speedway USA, Inc. and Grand Prix Association of Long Beach, Inc. in
the first quarter of fiscal 1999.
Depreciation and amortization increased by $1,179,000 due to capital
expenditures related to the Company's motorsports facilities expansion
and depreciation of facilities and amortization of goodwill related to
the acquisitions of Nashville Speedway USA and Grand Prix Association
of Long Beach.
General and administrative expenses increased by $1,987,000 to
$3,054,000 from $1,067,000 in the quarter of 1998 primarily as a result
of the acquisition of Grand Prix Association of Long Beach.
The Company's effective income tax rates for the three-month period
ended September 30, 1998 and 1997 were 41.2% and 41.5%, respectively.
FORM 10-Q Page 9 of 11
Net earnings increased by $445,000 as a result of increased play in
the casino, higher attendance and related revenues at the Company's
NASCAR-sanctioned events in September 1998 as compared with September
1997, offset by the net effect of the Grand Prix Association of Long
Beach acquisition in the first quarter of fiscal 1999.
Liquidity and Capital Resources
Cash flows from operations for the three months ended September,
1998 and 1997 were $6,976,000 and $7,094,000, respectively.
Capital expenditures for the first quarter of fiscal 1999 were
$4,574,000 and related primarily to the expansion of and improvements
to the auto racing facilities in Dover, Delaware, Millington, Tennessee
(near Memphis, Tennessee) and Madison, Illinois (near St. Louis,
Missouri).
The Company has a $20,000,000 committed revolving line of credit to
provide seasonal funding needs and to finance capital improvements.
There were no amounts outstanding under the credit facility at
September 30, 1998.
Management believes that cash flows from operations and funds
expected to be available under its bank credit facility will satisfy
the Company's cash requirements for fiscal 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 Dover's 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.
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.
FORM 10-Q Page 10 of 11
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.
FORM 10-Q Page 11 of 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Neither the Company nor any of its subsidiaries is a party to any
material legal proceedings. The Company and its subsidiaries are
engaged in ordinary routine litigation incidental to the business.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
DATE: November 2, 1998 Dover Downs Entertainment, Inc.
(Registrant)
/s/ Denis McGlynn
Denis McGlynn
President and Chief Executive Officer
/s/ Timothy R. Horne
Timothy R. Horne
Vice President-Finance
(Principal Financial and Accounting Officer)
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<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
<CASH> 21,101
<SECURITIES> 0
<RECEIVABLES> 10,623
<ALLOWANCES> 0
<INVENTORY> 456
<CURRENT-ASSETS> 36,480
<PP&E> 158,675
<DEPRECIATION> 26,749
<TOTAL-ASSETS> 222,928
<CURRENT-LIABILITIES> 33,410
<BONDS> 23,154
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<COMMON> 3,555
<OTHER-SE> 154,921
<TOTAL-LIABILITY-AND-EQUITY> 222,928
<SALES> 54,654
<TOTAL-REVENUES> 54,654
<CGS> 0
<TOTAL-COSTS> 37,134
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 389
<INCOME-PRETAX> 14,077
<INCOME-TAX> 5,799
<INCOME-CONTINUING> 0
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<NET-INCOME> 8,278
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