Page 1 of 9
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 March 31, 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 March 31, 1998, the number of shares of each class of
the registrant's common stock outstanding is as follows:
Common stock - 2,998,950 shares
Class A common stock - 12,249,380 shares
FORM 10-Q Page 2 of 9
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 and nine months ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ending June
30, 1998.
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 Nine Months Ended
March 31, March 31,
1998 1997 1998 1997
Basic EPS 15,248 15,136 15,245 14,763
Effect of Options 367 416 352 418
Diluted EPS 15,615 15,552 15,597 15,181
No adjustments to net income available to common shareholders were
required during the periods presented.
FORM 10-Q Page 3 of 9
DOVER DOWNS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF EARNINGS
Dollars in Thousands, Except Per Share Amounts
Quarter Ended Nine Months Ended
March 31, March 31,
1998 1997 1998 1997
Revenues:
Motorsports $ 949 $ 43 $12,194 $ 9,515
Gaming (including win) (1) 30,786 21,641 84,324 56,641
31,735 21,684 96,518 66,156
Expenses:
Operating 24,380 16,595 68,370 46,649
Depreciation and amortization 706 542 1,962 1,500
General and administrative 1,178 740 3,239 2,217
26,264 17,877 73,571 50,366
Operating earnings 5,471 3,807 22,947 15,790
Interest income 161 131 490 102
Earnings before income taxes 5,632 3,938 23,437 15,892
Income taxes 2,337 1,616 9,791 6,620
Net earnings $ 3,295 $ 2,322 $13,646 $ 9,272
Earnings per common share
- Basic $ .22 $ .15 $ .90 $ .63
- Diluted $ .21 $ .15 $ .87 $ .61
Average shares outstanding (000)
- Basic 15,248 15,136 15,245 14,763
- Diluted 15,615 15,552 15,597 15,181
Dividends paid per common share $ .08 $ .08 $ .24 $ .08
(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.
<PAGE>
FORM 10-Q Page 4 of 9
DOVER DOWNS ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEET
Dollars in Thousands
March 31, June 30,
1998 1997
ASSETS
Current assets:
Cash and cash equivalents $13,263 $15,503
Accounts receivable 3,085 1,613
Due from State of Delaware 2,161 1,983
Inventories 305 402
Prepaid expenses 1,241 775
Deferred income taxes 315 124
Total current assets 20,370 20,400
Property, plant and equipment, net 53,935 50,861
Investments 10,540 -
Goodwill, net 2,931 -
Total assets $87,776 $71,261
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,425 $ 1,860
Purses due horsemen 996 1,387
Accrued liabilities 3,553 2,280
Income taxes payable 14 2,507
Current portion of long-term debt 19 19
Deferred revenue 14,983 7,542
Total current liabilities 21,990 15,595
Long-term debt 746 760
Deferred income taxes 721 606
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;
35,000,000 shares authorized; issued
and outstanding: March - 2,998,950;
June - 2,939,000 300 294
Class A common stock, $.10 par value;
30,000,000 shares authorized; issued
and outstanding: March - 12,249,380;
June - 12,286,830 1,225 1,229
Additional paid-in capital 21,109 21,081
Retained earnings 41,685 31,696
Total shareholders' equity 64,319 54,300
Total liabilities and shareholders' equity $87,776 $71,261
FORM 10-Q Page 5 of 9
DOVER DOWNS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Dollars in Thousands
Nine Months Ended
March 31,
1998 1997
Cash flows from operating activities:
Net earnings $13,646 $ 9,272
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 1,962 1,500
(Increase) decrease in assets:
Accounts receivable (1,447) (949)
Due from State of Delaware (178) (310)
Inventories 97 (84)
Prepaid expenses (461) 72
Increase (decrease) in liabilities:
Accounts payable 417 680
Purses due horsemen (391) (805)
Accrued liabilities 1,266 (454)
Current and deferred income taxes (2,569) (2,204)
Deferred revenue 7,441 4,871
Net cash provided by operating activities 19,783 11,589
Cash flows from investing activities:
Capital expenditures (4,952) (11,869)
Investment in Grand Prix Association
of Long Beach (10,540) -
Acquisition of business, net of
cash acquired (2,889) -
Net cash used in investing activities (18,381) (11,869)
Cash flows from financing activities:
Repayments of short-term borrowing - (3,500)
Dividends paid (3,658) (1,210)
Repayment of long-term debt (14) (5)
Proceeds of stock options exercised 30 62
Net proceeds from initial public offering - 16,362
Net cash (used in) provided by
financing activities (3,642) 11,709
Net (decrease) increase in cash and
cash equivalents (2,240) 11,429
Cash and cash equivalents, beginning of period 15,503 3,140
Cash and cash equivalents, end of period $13,263 $14,569
Supplemental information:
Interest paid $ 46 $ 148
Income taxes paid $12,360 $ 8,824
FORM 10-Q Page 6 of 9
Item 2.Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations: Nine Months Ended March 31, 1998 vs. Nine Months
Ended March 31, 1997
Revenues increased by $30,362,000 to $96,518,000 primarily as a
result of expanding the casino facility and increasing the number of
video lottery (slot) machines from an average of 825 in the first nine
months of fiscal 1997 to 1,000 machines during the entire first nine
months of fiscal 1998. Motorsports revenues increased by $2,679,000 or
28.2%. Approximately $812,000 of the total motorsports revenue
increase resulted from increased attendance, $150,000 from increased
ticket prices and $792,000 related to sponsorship, concession and
broadcast revenues at Dover Downs International Speedway. The
remainder of the increase resulted from the acquisition, on January 2,
1998, of Nashville Speedway USA.
Operating expenses increased by $21,721,000 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 $12,235,000 in
the first nine months of fiscal 1998. Amounts allocated from the video
lottery operation for harness horse racing purses were $9,308,000 in
the first nine months of fiscal 1998 compared with $6,407,000 in the
first nine months of fiscal 1997. Advertising, promotional and
customer complimentary cost increases of $1,655,000 were the other
significant operating cost increases.
Motorsports operating expenses increased primarily due to a $220,000
increase in purse obligation expenses and related sanction fees and the
inclusion of the results of operations of Nashville Speedway USA.
Depreciation and amortization increased by $462,000 or 30.8% due to
capital expenditures related to the Company's video lottery casino and
motorsports facilities expansion and amortization of goodwill.
General and administrative expenses increased by $1,022,000 to
$3,239,000 from $2,217,000 in the first nine months of 1997 primarily
as a result of increased wages and benefits related to the video
lottery operations and the general growth in the Company's business.
The Company's effective income tax rates for the nine-month period
ended March 31, 1998 and 1997 were 41.8% and 41.7%, respectively.
Net earnings increased by $4,374,000 as a result of increased
promotional and marketing efforts that led to increased play in the
casino, which was expanded in the second quarter of fiscal 1997, and
higher attendance and related revenues at the Company's NASCAR-
sanctioned events in September 1997 as compared with September 1996.
FORM 10-Q Page 7 of 9
Results of Operations: Quarter Ended March 31, 1998 vs. Quarter Ended
March 31, 1997
Revenues increased by $10,051,000 to $31,735,000 primarily as a
result of increased marketing and promotional efforts in the third
quarter of fiscal 1998. Harness horse racing revenues increased by
$527,000 as a result of a 113.0% increase in average handle from
exporting live harness horse races to other tracks and off-track
betting facilities and the addition of 19 days of live harness racing
as compared with the same quarter in 1997.
Operating expenses increased by $7,785,000 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 $3,953,000 in the
third quarter of fiscal 1998. Amounts allocated from the video lottery
operation for harness horse racing purses were $3,293,000 in the third
quarter of fiscal 1998 compared with $2,380,000 in the third quarter of
fiscal 1997. Advertising, promotional and customer complimentary cost
increases of $500,000 were the other significant operating cost
increases.
Depreciation and amortization increased by $164,000 or 30.3% as a
result of the Company's video lottery casino and motorsports facilities
expansion and amortization of goodwill.
General and administrative expenses increased by $438,000 to
$1,178,000 from $740,000 in the third quarter of 1997 primarily as a
result of increased wages and benefits related to the video lottery
operations and the general growth in the Company's business.
The Company's effective income tax rates for the third quarter of
fiscal 1998 and fiscal 1997 were 41.5% and 41.0%, respectively.
Net earnings increased by $973,000 primarily as a result of the
increased promotional and marketing efforts that led to increased play
in the casino during the third quarter of fiscal 1998.
Liquidity and Capital Resources
Cash flows from operations for the nine months ended March 31, 1998
and 1997 were $19,783,000 and $11,589,000, respectively. The reason
for the increase in operating cash flows was primarily the increased
net earnings and increased deferred revenue, which resulted from cash
received for advance ticket sales for NASCAR-sanctioned events.
Capital expenditures for the first nine months of fiscal 1998 were
$4,952,000 and related primarily to the expansion of and improvements
to the auto racing facility.
Effective January 2, 1998, the Company acquired all of the
outstanding common stock of Nashville Speedway USA, Inc. for $3
million.
FORM 10-Q Page 8 of 9
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 will become a wholly owned subsidiary of
the Company.
The merger is structured as a tax-free exchange and contemplates
that each shareholder of Grand Prix will receive .63 shares of common
stock of Dover Downs Entertainment, Inc. ("Dover") for each share of
common stock of Grand Prix owned by such shareholder, subject to
certain adjustments if the fifteen-day average price of common stock of
Dover prior to closing is greater than $32.00 or less than $21.00 per
share, provided that the exchange ratio shall not be greater than .6963
nor less than .5929.
Certain shareholders of Grand Prix, representing approximately 38
percent of the outstanding common stock of Grand Prix on a fully
diluted basis, have entered into support agreements with Dover pursuant
to which they have granted to Dover a proxy to vote their shares in
favor of the merger and an option to Dover to purchase their shares
upon the happening of certain events. Combined with 680,000 shares of
common stock of Grand Prix purchased by Dover from two non-management
shareholders in March of 1998 for $10,540,000, over 50% of the
outstanding common stock of Grand Prix on a fully diluted basis is
committed to consummating the merger. Certain holders of the capital
stock of Dover, representing more than a majority of its voting rights,
have similarly agreed to vote their shares in favor of the merger.
The merger is expected to close in June 1998 and is subject to
approval of the shareholders of both Dover and Grand Prix and certain
other customary conditions.
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 March
31, 1998.
On October 3, 1996, the Company issued 1,075,000 shares of common
stock at $17.00 per share. The Company used the proceeds to pay down
the Company's revolving credit facility and to finance capital
expenditures.
Management believes that cash flows from operations and funds
available under its bank credit facility will satisfy the Company's
cash requirements for fiscal 1998.
Forward-Looking Statements
The Company may make forward-looking statements relating to
anticipated financial performance, business prospects, acquisitions or
divestitures, 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
FORM 10-Q Page 9 of 9
typically contain words such 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 operations,
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: the
weather, the Company's relationship with NASCAR, the motorsports
sanctioning body, changes in state and local laws and regulations, the
ability to keep purses at a competitive level and the ability to
increase on-track and simulcast handle as well as the risks,
uncertainties and other factors described from time to time in the
Company's SEC filings and reports.
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 4 - Amendment to Rights Agreement
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: April 27, 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)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 13,263
<SECURITIES> 0
<RECEIVABLES> 5,246
<ALLOWANCES> 0
<INVENTORY> 305
<CURRENT-ASSETS> 20,370
<PP&E> 71,687
<DEPRECIATION> 17,752
<TOTAL-ASSETS> 87,776
<CURRENT-LIABILITIES> 21,990
<BONDS> 746
0
0
<COMMON> 1,525
<OTHER-SE> 62,794
<TOTAL-LIABILITY-AND-EQUITY> 87,776
<SALES> 96,518
<TOTAL-REVENUES> 96,518
<CGS> 0
<TOTAL-COSTS> 70,332
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (490)
<INCOME-PRETAX> 23,437
<INCOME-TAX> 9,791
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,646
<EPS-PRIMARY> .90
<EPS-DILUTED> .87
</TABLE>
AMENDMENT NO. 1
TO
RIGHTS AGREEMENT WITH RESPECT TO COMMON STOCK
BETWEEN
DOVER DOWNS ENTERTAINMENT, INC.
AND
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
This Amendment No. 1 dated as of the 27th day of February, 1998
amending that certain Rights Agreement With Respect to Common Stock
(the "Rights Agreement") dated as of June 14, 1996 between Dover Downs
Entertainment, Inc. (the "Company") and ChaseMellon Shareholder
Services, L.L.C. (the "Rights Agent").
WHEREAS, Section 26 to the Rights Agreement provides that as long
as the Rights defined in and created by the Rights Agreement (the
"Rights") are redeemable, the Company may in its sole and absolute
discretion, and the Rights Agent shall if the Company so directs,
supplement or amend any provision of the Rights Agreement without the
approval of any holders of the Rights or the Common Stock of the
Company (the "Common Stock"), provided that no such supplement or
amendment shall be made which changes the Redemption Price (as defined
in the Rights Agreement), the Final Expiration Date (as defined in the
Rights Agreement) or the number of shares of Common Stock for which a
Right is exercisable; and
WHEREAS, the Company wishes to provide the Board of Directors with
discretion in redeeming the Rights; and
WHEREAS, the Company and the Rights Agent wish to amend the
Agreement to reflect the foregoing desire:
NOW, THEREFORE, in consideration of the premises and for other
good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto hereby agree as follows:
1. Definitions. Unless otherwise defined herein, terms used
herein which are defined in the Agreement shall have the meanings given
them in the Agreement.
2. Amendments.
(a) Section 1 of the Agreement is hereby amended by
inserting a new clause -(mm),- reading as follows:
-Exempt Transaction- shall mean a
share exchange, consolidation, merger or
other transaction in respect of which
the Board of Directors has waived the
application of either Section 13 or
Section 11 (a) (ii), whichever is
applicable, pursuant to the provisions
of Section 23 (c).-
(b) Section 1(cc) of the Agreement is hereby amended by
inserting the following language after the word -hereof-:
-, provided however that a Section 11
(a) (ii) Event shall not include an
Exempt Transaction.-
(c) Section 1 (ee) of the Agreement is hereby amended by
inserting the following language after the word -hereof-:
-, provided however that a Section 13
Event shall not include an Exempt
Transaction.-
(d) Section 23 of the Agreement is hereby amended by adding
a new clause (c) to the end of the Section, reading as follows:
-The Board of Directors may, until
a Triggering Event shall have occurred,
upon written notice (including notice by
telecopy) to the Rights Agent, determine
to waive the application of either
Section 13 or Section 11 (a) (ii),
whichever is applicable, to a Triggering
Event.-
3. Representations and Warranties of the Company.
The Company represents and warrants to the Rights Agent that
(i) this Amendment No. 1 is permitted under the terms of the Rights
Agreement, and (ii) this Amendment No. 1 does not change the Redemption
Price, the Final Execution Date or the number of shares of Common Stock
for which a Right is exercisable under the Rights Agreement.
4. Effect. Except as expressly modified hereby, all terms and
provisions of the Agreement remain unamended and in full force and
effect.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
No. 1 to the Rights Agreement to be duly executed, all as of the day
and year first above written.
Dover Downs Entertainment, Inc.
By: /s/ Denis McGlynn
President and CEO
ChaseMellon Shareholder Services, L.L.C.
By: /s/ Robert G. Scott, Jr.
Assistant Vice President
