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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1998 or
/___/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 of Incorporation) (I.R.S. Employer Identification Number)
1131 North DuPont Highway, Dover, Delaware 19901
(Address of principal executive offices)
Registrant's telephone number including area code (302) 674-4600
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of exchange on which registered
Common Stock, $.10 Par Value NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. /___/
The aggregate market value of the voting stock held by non-
affiliates of the registrant was $162,220,350.00 as of July 31, 1998.
As of July 31, 1998, the number of shares of each class of the
Registrant's common stock outstanding is as follows:
Common Stock - 5,517,179 shares
Class A Common Stock - 12,249,380 shares
The following documents are incorporated by reference:
Document Part of this form
into which incorporated
Proxy Statement in connection with
Annual Meeting of Shareholders to be
held October 30, 1998 III
ITEM 1. BUSINESS
Dover Downs Entertainment, Inc. (Dover Downs or the Company) owns and
operates Dover Downs International Speedway, Dover Downs Raceway and a
video lottery casino at a multi-purpose gaming and entertainment
complex. The facility is located in close proximity to the major
metropolitan areas of Philadelphia, Baltimore and Washington, D.C. on
approximately 825 acres of land owned by the Company in Dover,
Delaware.
Dover Downs International Speedway offers a modern, state-of-the-art,
concrete superspeedway for top-rated NASCAR- and IRL-sanctioned auto
racing events. Dover Downs Raceway offers traditional pari-mutuel
harness horse racing and year-round satellite-linked pari-mutuel
wagering on simulcast harness and thoroughbred horse racing from
regional and national tracks. The Company also simulcasts live races
at Dover Downs to tracks and other off-track betting locations across
North America. The Company expanded into video lottery (slot) machine
gaming in December of 1995. The video lottery operations are managed
by Caesars World Gaming Development Corporation (Caesars).
Dover Downs offers a unique gaming and entertainment experience at its
Dover, Delaware facility. Management believes it to be the only
facility in the country that combines in one location NASCAR Winston
Cup/Busch Series stock car racing, Indy car racing, harness horse
racing, pari-mutuel wagering on both live and simulcast horse races,
and video lottery (slot) machine gaming.
The Company also operates Nashville Speedway USA, the motorsports
facility at the Tennessee State Fairgrounds in Nashville, Tennessee.
Effective July 1, 1998, the Company also operates the Toyota Grand Prix
of Long Beach, the second largest Indy race in the country, run in the
streets of Long Beach, California, and owns and operates permanent
motorsports facilities in Madison, Illinois (near St. Louis) and
Millington, Tennessee (near Memphis). NASCAR-sanctioned events, as
well as events from many other sanctioning bodies (including CART and
NHRA), are held at these facilities.
(a) General Development of Business
Effective January 2, 1998, the Company acquired all of the outstanding
common stock of Nashville Speedway USA, Inc. for $3,000,000. Nashville
Speedway USA, Inc. operates and promotes several NASCAR-sanctioned
events at the motorsports facility at the Tennessee State Fairgrounds
in Nashville, Tennessee.
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 of common
stock of Dover Downs Entertainment, Inc. 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.
On March 26, 1998, legislation permitting a maximum of 2,000 video
lottery (slot) machines at any of the currently licensed facilities and
eliminating the sunset provision for the video lottery operation was
passed by the Delaware Senate and subsequently signed into law by the
Governor.
(b) Financial Information About Industry Segments.
The Company's principal operations are grouped into two segments:
motorsports and gaming. Financial information concerning these
businesses is included on pages 8 through 12 and page 30 of this 1998
Annual Report on Form 10-K.
(c) Narrative Description of Business
Motorsports
Dover Downs has presented NASCAR-sanctioned racing events for 30
consecutive years. The Company currently conducts four major NASCAR-
sanctioned events annually at Dover Downs International Speedway. 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 racing circuit.
Each of the Busch Series events at the Company's tracks 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 also
conducts 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. Current seating capacity at Dover Downs is
approximately 109,000 seats. Unlike some speedways, substantially all
grandstand seats at Dover Downs, including indoor, air-conditioned
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.
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 to a nationwide
audience and broadcast nationally to a network of over 450 radio
stations affiliated with the Motor Racing Network (over 250 stations
for Busch Series events).
Nashville Speedway USA, which was acquired by the Company on January 2,
1998, currently conducts a NASCAR Busch Series event, a NASCAR
Craftsman Truck Series event, a NASCAR Slim Jim All-Pro Series event
and weekly shows in the NASCAR Winston Racing Series. The Company
plans to build a new racing facility at a site to be determined in the
greater Nashville metropolitan area.
Gaming
Dover Downs has presented pari-mutuel harness racing events for 30
consecutive years. On December 29, 1995, the Company introduced video
lottery (slot) machines to its entertainment mix.
Under an agreement with 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.
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 payout in excess of 95%.
Since inception of its operations on December 29, 1995, Dover Downs has
maintained an average payout of 90.1%.
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 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 normal 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 1998, were transmitted to more than 330 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 recent expansion of its simulcasting operations, pari-mutuel
wagering is now on a year-round basis. For the fiscal years ended June
30, 1996, 1997, and 1998, the Company had 201, 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, such as CART (Championship Auto Racing
Teams), IRL (Indy Racing League) and the NHRA (National Hot Rod
Association), and with other sports and other recreational events
scheduled on the same dates. Racing events sanctioned by different
organizations are often held on the same dates at separate tracks, in
competition with the NASCAR-sanctioned event dates. In addition,
motorsports facilities compete with one another for the patronage of
motor racing spectators, and with other sports and entertainment
businesses. The quality of the competition, type of racing event,
caliber of the events, 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,
NASCAR Craftsman Truck and CART races. Based on historical data,
management does not believe that any of these facilities significantly
impact operations at Dover Downs International Speedway. In recent
years, the Company's NASCAR-sanctioned Winston Cup events have all sold
out well in advance of the 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 hosts two Winston Cup races, two Busch Series
races and one IRL race. Talladega Superspeedway hosts two Winston Cup
races and one Busch Series race. Based on historical data, management
does not believe that any of these facilities significantly impacts
operations at the Nashville Speedway, 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.
Delaware Park and Harrington Raceway presently have in operation 1,000
and 702 machines, respectively. 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 should be expected.
Casinos in Atlantic City offer a full range of gaming products. Dover
Downs does not expect to compete directly with Atlantic City because of
the Company's inability to offer a full range of casino gaming
products, but it does expect to capture 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 in June and September. 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.
At June 30, 1998, the Company had a total of 401 full-time employees
and 134 part-time employees. The Company hires temporary employees to
assist during its auto racing events and its live harness racing
season.
ITEM 2. PROPERTIES
The Company maintains its headquarters, motorsports superspeedway,
harness racetrack, and video lottery casino all on approximately 825
acres of land owned by the Company in Dover, Delaware. The Nashville
racing facility is located on approximately 12 acres and is leased from
the Metropolitan Board of Fair Commissioners. Subsequent to the
completion of the merger with Grand Prix Association of Long Beach, the
Company owns permanent motorsports facilities in Madison, Illinois
(near St. Louis, Missouri) and in Millington, Tennessee (near Memphis,
Tennessee). The racing facility in Madison, Illinois is located on 269
acres owned by the Company. The Company also leases 145 acres of land
surrounding the speedway. The Millington, Tennessee racing facility is
located on 375 acres of land owned by the Company.
ITEM 3. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A Special Meeting of Shareholders of Dover Downs Entertainment, Inc.
was held on June 30, 1998. The purpose of the meeting was to consider
and vote upon the following:
(i) the Merger with Grand Prix Association of Long Beach, (ii) the
issuance of up to an aggregate of 2,793,946 shares of Dover Common
Stock in order to effect the Merger, (iii) the assumption by Dover of
the Grand Prix Options outstanding immediately prior to the effective
date of the Merger, (iv) the amendment of the Dover Certificate of
Incorporation to (a) increase the number of directors serving on the
Board of Directors to ten (10) consisting of three (3) classes of
directors each with three (3) year staggered terms, Class I to have
four (4) members, Class II to have three (3) members and Class III to
have three (3) members, (b) increase the number of shares of Dover
Common Stock authorized for issuance from 35,000,000 shares to
75,000,000 shares and (c) increase the number of shares of Dover Class
A Common Stock authorized for issuance from 30,000,000 shares to
55,000,000 shares and (v) election of one (1) additional Class I
Director to the Dover Board of Directors for the remainder of a three-
year term expiring in 2000.
The results of the votes of security holders are as follows:
Votes Cast Broker
For Against Abstentions Non-Votes
i) 12,837,942 8,921 1,953 683,704
ii) 12,831,802 10,998 6,016 683,704
iii) 12,814,487 18,353 15,976 683,704
iv) 12,895,865 628,945 7,710 -
v) 13,507,714 14,790 10,017 -
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, 1998, there were 5,517,179 shares of Common Stock and
12,249,380 shares of Class A Common Stock outstanding. There were 636
record holders of Common Stock and 13 record holders of Class A Common
Stock at July 31, 1998.
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, 1998 and 1997 are as follows:
Prices Dividends
1998 1997 1998 1997
High Low High Low
Fiscal Quarter
First ...... $21 1/8 $16 3/4 $ - $ - $.08 $ -
Second ..... 23 9/16 19 7/16 26 7/8 17 1/4 .08 -
Third ...... 30 21 3/8 20 1/2 16 5/8 .08 .08
Fourth ..... 33 5/8 28 3/8 19 7/8 16 1/8 .08 .08
ITEM 6. SELECTED FINANCIAL DATA
Five Year Selected Financial Data
(Dollars in Thousands, Except Per Share Data)
Year Ended June 30, 1998 1997 1996 1995 1994
Revenues:
Motorsports $ 25,874 $ 20,516 $18,110 $16,282 $13,561
Gaming (1) 115,071 81,162 31,980 1,250 796
140,945 101,678 50,090 17,532 14,357
Earnings before
income taxes 37,655 28,239 15,593 7,239 5,791
Net earnings 21,913 16,472 9,196 4,284 3,562
Earnings per
common share-basic 1.44 1.11 .67 .31 .26
-diluted 1.40 1.08 .63 .30 .26
Dividends per
common share .32 .16 - - -
At June 30,
Total assets $ 95,777 $ 71,261 $42,311 $25,422 $19,776
Long-term debt, less
current portion 741 760 766 698 776
Shareholders' equity $ 71,365 $ 54,300 $23,715 $14,225 $ 9,923
(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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
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 the 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 video lottery (slot)
machine operations 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 and increased marketing efforts in the
casino. The net earnings increase is also due to higher attendance and
related revenues at the Company's NASCAR-sanctioned events in September
1997 and June 1998.
Fiscal Year 1997 Compared With Fiscal Year 1996
Revenues increased by $51,588,000 to $101,678,000 from $50,090,000 in
the prior year. The significant increase in revenues was principally
due to the introduction of video lottery (slot) machines which were in
operation for the entire fiscal year 1997 compared with six months in
fiscal 1996. Video lottery revenues also increased as a result of
expanding the casino facility and increasing the number of video
lottery (slot) machines from 572 to 1,000 in October of 1996.
Motorsports revenues increased by $2,406,000 or 13.3%. Approximately
$999,000 of the total motorsports revenue increase resulted from
increased attendance and $663,000 resulted from increased ticket
prices. The remainder of the revenue increase of $744,000 was
principally due to increased marketing and sponsorship revenues.
Operating expenses increased by $37,860,000 of which $34,695,000 was
due to the video lottery (slot) machines in operation for the entire
fiscal year 1997 compared with six months in fiscal 1996. Payments to
the State of Delaware, fees to the manager who operates the video
lottery (slot) machine operation, and payments to the vendors who
provide the video lottery (slot) machines were $32,674,000 in fiscal
1997 and $12,188,000 in fiscal 1996. Amounts allocated from the video
lottery operation for harness horse racing purses were $9,157,000 in
fiscal 1997 and $3,550,000 in fiscal 1996. Wages and benefits for
employees of the video lottery (slot) machine operation were $4,035,000
in fiscal 1997 and $2,277,000 in fiscal 1996. Advertising, promotional
and customer complimentary costs of $4,251,000 and costs associated
with casino food and beverage sales of $1,923,000 were the other
significant operating costs of the video lottery (slot) machine
operation.
For the horse racing and simulcasting operations, wage and benefit cost
increases of $467,000, simulcasting cost increases of $537,000 and
purse increases of $155,000 (exclusive of the $9,157,000 of harness
horse racing purses allocated from video lottery operations in fiscal
1997) accounted for the most significant operating cost increases. The
cost increases were primarily the result of increasing the number of
live harness racing days to 97 from 67 in 1996 and from increasing the
number of simulcasting days to 363 from 201 in 1996.
Motorsports' operating expenses increased principally due to a $394,000
increase in purse obligation expenses. Sanction fees increased by
$80,000 and advertising increased by $145,000 during the 1997 fiscal
year.
Depreciation increased by $615,000 or 41.9% to $2,084,000 from
$1,469,000 as a result of a full year of depreciation expense related
to the Company's video lottery casino being recognized in 1997 compared
with six months of depreciation in 1996. Capital expenditures for the
expansion of the Company's motorsports facilities also contributed to
the increase in depreciation.
General and administrative expenses increased by $992,000 to $3,065,000
from $2,073,000. Wage and benefit costs increased by $363,000 and
contracted services increased by $205,000, principally due to the
Company's expansion of video lottery (slot) machine and simulcasting
operations.
The Company's effective income tax rates for fiscal 1997 and fiscal
1996 were 41.7% and 41.0%, respectively.
Net earnings increased by $7,276,000 due to the inclusion of video
lottery (slot) machine operations for the entire fiscal year 1997
compared with six months in fiscal 1996 and also due to higher
attendance and related revenues at the Company's NASCAR-sanctioned
events in September 1996 and June 1997.
Liquidity and Capital Resources
Cash flow from operations for the three years ended June 30, 1998,
1997, and 1996 was $28,991,000, $18,600,000, and $15,317,000
respectively. The significant increase in fiscal 1998 reflected the
Company's higher net earnings and increased non-cash charges.
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 to expansion of the administrative facilities.
The 1998 expenditures were less than in 1997 and 1996 as the Company
was constructing or expanding the casino facility in those years.
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.
Capital expenditures for the year ended June 30, 1996 of $18,936,000
related to the construction of the casino facility for $1,790,000, the
acquisition and improvement of land and construction of additional
permanent motorsports grandstand seating and luxury skyboxes, as well
as a resurfacing of the raceway.
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 Association of Long Beach, Inc. ("Grand
Prix") entered into an Agreement and Plan of Merger on March 26, 1998,
pursuant to which Grand Prix would become 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 of common stock of Dover Downs Entertainment, Inc. ("Dover")
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 an annually renewable, $20,000,000 committed revolving
line of credit from a bank to provide seasonal funding needs and to
finance capital improvements. The Company was in compliance with all
terms of the facility and there were no amounts outstanding at June 30,
1998.
Impact of Recent Accounting Pronouncements
In June 1997, The Financial Accounting Standards Board (FASB)issued
SFAS No. 130, Reporting Comprehensive Income. This statement requires
that comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The
Company plans to adopt this standard on July 1, 1998, as required. The
adoption of this standard will not impact results of operations or
financial condition.
In June 1997, the FASB issued SFAS No. 131, Disclosures About Segments
of an Enterprise and Related Information. This statement established
standards for reporting information about operating segments and
related disclosures about products and services, geographic areas and
major customers. The Company plans to adopt this standard on July 1,
1998, as required. The adoption of this standard will not impact
results of operations or financial condition.
In February 1998, the FASB issued SFAS No. 132, Employer's Disclosures
about Pensions and Other Postretirement Benefits, which is effective
for financial statements issued for periods beginning after December
15, 1997. This statement standardizes the disclosure requirements of
previous standards. The adoption of this standard will not impact
results of operations or financial condition.
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 Dover 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.
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. 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 the Consolidated Financial Statements on page 18.
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
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 30, 1998.
Executive Officers of the Registrant. As of June 30, 1998, the
Executive Officers of the registrant were:
Name Position Age Term of Office
Robert M. Comollo Treasurer 50 11/81 to date
Timothy R. Horne Vice President-Finance 32 11/96 to date
Michael B. Kinnard Vice President- 40 6/94 to date
General Counsel and
Secretary
Denis McGlynn President and 52 11/79 to date
Chief Executive Officer
John W. Rollins, Sr. Chairman of the Board 82 10/96 to date
Eugene W. Weaver Senior Vice President- 65 10/96 to date
Administration
Vice President-Finance 1970 to 10/96
Robert M. Comollo has been employed by the Company for 18 years, of
which 17 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 Peat Marwick 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).
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 30,
1998.
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 30, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During the year ended June 30, 1998, 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 12.1% and 11.4% of the
outstanding shares of common stock of Rollins Truck Leasing Corp. and
Matlack Systems, Inc., respectively, at June 30, 1998. The description
of transactions between the Company and Rollins Truck Leasing Corp.
appears under the caption "Related Party Transactions" on page 33 of
this 1998 Annual Report on Form 10-K.
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 16.
(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. incorporated by reference to the Annual Report on Form
10-K for the year ended June 30, 1997.
3.3 Amendment to Certificate of Incorporation of Dover Downs
Entertainment, Inc. dated June 30, 1998.
3.4 Amendment to Bylaws of Dover Downs Entertainment, Inc.
dated June 30, 1998.
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 between PNC Bank and Dover Downs
Entertainment, Inc. dated January 31, 1997 incorporated by
reference to the Annual Report on Form 10-K for the year
ended June 30, 1997.
10.2 Dover Downs Entertainment, Inc. $20 Million Dollar
Committed Line of Credit Note in favor of PNC Bank dated
January 31, 1997 incorporated by reference to the Annual
Report on Form 10-K for the year ended June 30, 1997.
10.5 Guaranty and Suretyship Agreement dated January 30, 1998
in favor of PNC Bank.
10.6 Amendment to Loan Documents dated January 30, 1998.
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, 1998
27.1 Restated Financial Data Schedule for Quarter ended
September 30, 1997
27.2 Restated Financial Data Schedule for Fiscal Year ended June
30, 1997
27.3 Restated Financial Data Schedule for Quarter ended April
30, 1997
27.4 Restated Financial Data Schedule for Quarter ended January
31, 1997
27.5 Restated Financial Data Schedule for Quarter ended October
31, 1996
(b) Reports on Form 8-K
A Form 8-K was filed by Dover Downs Entertainment, Inc. on April 13,
1998 to disclose that the Company, FOG Acquisition Corporation and
Grand Prix Association of Long Beach, Inc. entered into an agreement
and Plan of Merger dated March 26, 1998. Also disclosed was the
passage of legislation permitting an additional 1,000 slot machines at
any of the currently licensed facilities in the State of Delaware and
eliminating the existing sunset provision for the state's video lottery
operations.
A Form 8-K was filed by Dover Downs Entertainment, Inc. on July 15,
1998 to disclose that the Company had completed its acquisition of
Grand Prix Association of Long Beach.
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: August 31, 1998 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 August 31, 1998
Timothy R. Horne
/s/ John W. Rollins Chairman of the Board August 31, 1998
John W. Rollins
/s/ Henry B. Tippie Vice Chairman of the Board August 31, 1998
Henry B. Tippie
/s/ Eugene W. Weaver Senior Vice President- August 31, 1998
Eugene W. Weaver Administration
and Director
/s/ John W. Rollins, Jr. Director August 31, 1998
John W. Rollins, Jr.
/s/ Patrick J. Bagley Director August 31, 1998
Patrick J. Bagley
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page(s)
Independent Auditors' Reports on Financial Statements 19
Consolidated Statement of Earnings for the years
ended June 30, 1998, 1997 and 1996 20
Consolidated Balance Sheet at June 30, 1998 and 1997 21
Consolidated Statement of Cash Flows for the years
ended June 30, 1998, 1997 and 1996 22
Notes to Consolidated Financial Statements 23-30
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, 1998 and
1997, and the related consolidated statements of earnings and of cash
flows for each of the years in the three year period ended June 30,
1998. 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, 1998
and 1997, and the results of their operations and their cash flows for
each of the years in the three-year period ended June 30, 1998, in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
July 17, 1998
CONSOLIDATED STATEMENT OF EARNINGS
Year ended June 30,
1998 1997 1996
Revenues:
Motorsports $ 25,874,000 $ 20,516,000 $18,110,000
Gaming 115,071,000 81,162,000 31,980,000
Total revenues 140,945,000 101,678,000 50,090,000
Expenses:
Operating 96,875,000 68,559,000 30,699,000
Depreciation 2,707,000 2,084,000 1,469,000
General and
administrative 4,410,000 3,065,000 2,073,000
103,992,000 73,708,000 34,241,000
Operating earnings 36,953,000 27,970,000 15,849,000
Interest (income) expense (702,000) (269,000) 256,000
Earnings before
income taxes 37,655,000 28,239,000 15,593,000
Income taxes 15,742,000 11,767,000 6,397,000
Net earnings $ 21,913,000 $ 16,472,000 $ 9,196,000
Earnings per common share:
Basic $ 1.44 $ 1.11 $ .67
Diluted $ 1.40 $ 1.08 $ .63
Average shares
outstanding (000):
Basic 15,246 14,856 13,723
Diluted 15,603 15,275 14,511
The Notes to the Consolidated Financial Statements are an integral part
of these statements.
CONSOLIDATED BALANCE SHEET
June 30
1998 1997
ASSETS
Current assets:
Cash and cash equivalents $ 18,694,000 $ 15,503,000
Accounts receivable 2,818,000 1,613,000
Due from State of Delaware 2,099,000 1,983,000
Inventories 310,000 402,000
Prepaid expenses 2,319,000 775,000
Deferred income taxes 328,000 124,000
Total current assets 26,568,000 20,400,000
Property, plant and equipment, at cost
Land 10,563,000 10,563,000
Casino facility 11,548,000 11,566,000
Racing facilities 44,877,000 38,546,000
Machinery and equipment 5,785,000 5,357,000
Furniture and fixtures 659,000 573,000
Construction in progress 799,000 83,000
74,231,000 66,688,000
Less accumulated depreciation (18,456,000) (15,827,000)
55,775,000 50,861,000
Investments 10,540,000 -
Goodwill, net 2,894,000 -
Total assets $ 95,777,000 $ 71,261,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,343,000 $ 1,860,000
Purses due horsemen 1,885,000 1,387,000
Accrued liabilities 5,006,000 2,280,000
Income taxes payable 3,951,000 2,507,000
Current portion of long-term debt 19,000 19,000
Deferred revenue 9,755,000 7,542,000
Total current liabilities 22,959,000 15,595,000
Long-term debt 741,000 760,000
Deferred income taxes 712,000 606,000
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:
1998-2,998,950; 1997-2,939,000 300,000 294,000
Class A common stock, $.10 par value;
55,000,000 shares authorized;
issued and outstanding:
1998-12,249,380 shares;
1997-12,286,830 shares 1,225,000 1,229,000
Additional paid-in capital 21,109,000 21,081,000
Retained earnings 48,731,000 31,696,000
Total shareholders' equity 71,365,000 54,300,000
Total liabilities and
shareholders' equity $ 95,777,000 $ 71,261,000
The Notes to the Consolidated Financial Statements are an integral part
of these statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended June 30,
1998 1997 1996
Cash flows from operating activities:
Net earnings $21,913,000 $16,472,000 $ 9,196,000
Adjustments to reconcile
net earnings to net cash
provided by operating
activities:
Depreciation 2,707,000 2,084,000 1,469,000
Loss on disposition of
property 3,000 - -
(Increase) decrease in assets:
Accounts receivable (1,180,000) (392,000) 48,000
Due from affiliate - - 333,000
Due from State of Delaware (116,000) (1,082,000) (901,000)
Inventories 92,000 (46,000) (250,000)
Prepaid expenses (1,539,000) (242,000) (39,000)
Increase (decrease)
in liabilities:
Accounts payable 335,000 671,000 152,000
Purses due horsemen 498,000 (49,000) 1,436,000
Accrued liabilities 2,719,000 (88,000) 1,497,000
Current and deferred
income taxes 1,346,000 (267,000) 1,927,000
Deferred revenue 2,213,000 1,539,000 449,000
Net cash provided by
operating activities 28,991,000 18,600,000 15,317,000
Cash flows from investing
activities:
Sale of short-term
investments - - 3,200,000
Investment in Grand Prix
Association of Long Beach (10,540,000) - -
Acquisition of business,
net of cash acquired (2,889,000) - -
Capital expenditures (7,504,000) (16,841,000) (18,936,000)
Net cash used in investing
activities (20,933,000) (16,841,000) (15,736,000)
Cash flows from financing
activities:
Short-term borrowings
(repayments) - (3,500,000) 3,500,000
Repayment of long-term
debt (19,000) (9,000) (786,000)
Repayment to shareholder - - (200,000)
Net proceeds from initial
public offering - 16,360,000 -
Dividends paid (4,878,000) (2,429,000) -
Proceeds from stock options
exercised, including related
tax benefit 30,000 182,000 294,000
Net cash (used in)
provided by financing
activities (4,867,000) 10,604,000 2,808,000
Net increase in cash and
cash equivalents 3,191,000 12,363,000 2,389,000
Cash and cash equivalents,
beginning of year 15,503,000 3,140,000 751,000
Cash and cash equivalents,
end of year $18,694,000 $15,503,000 $ 3,140,000
Supplemental disclosures of
cash flow information:
Interest paid $ 61,000 $ 168,000 $ 373,000
Income taxes paid $14,395,000 $12,034,000 $ 4,413,000
Non-cash investing and
financing activities:
Land acquired $ - $ - $ 1,300,000
Cash paid $ - $ - $ (500,000)
Mortgage incurred $ - $ - $ 800,000
The Notes to the Consolidated Financial Statements are an integral part
of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-Business Operations
Dover Downs Entertainment, Inc. (the Company or Dover Downs) owns and
operates the Dover Downs International Speedway and the Dover Downs
Raceway at a multi-purpose gaming and entertainment complex located on
approximately 825 acres owned by the Company in Dover, Delaware. The
Company hosts a variety of NASCAR and Indy Racing League (IRL)
sanctioned events and harness horse racing events throughout the year.
With expanded facilities completed at the end of 1995, the Company is
now open 363 days per year both for video lottery (slot) machine gaming
and for pari-mutuel wagering on simulcast harness and thoroughbred
horse races across the country. Video lottery (slot) machine gaming
began on December 29, 1995 pursuant to video lottery legislation
enacted in the State of Delaware.
Dover Downs also operates the historic NASCAR racing facility at the
Tennessee State Fairgrounds in Nashville, Tennessee ("Nashville
Speedway"). Nashville Speedway's current racing schedule includes
events in several NASCAR Series.
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.
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.
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-Reorganization
On June 14, 1996, Dover Downs Entertainment, Inc. effected a tax-free
restructuring pursuant to which all former shareholders of Dover Downs,
Inc. exchanged each share of common stock held in Dover Downs, Inc. for
4,500 shares of Class A Common Stock of the Company. As a result of
this share exchange, Dover Downs, Inc. became a wholly-owned subsidiary
of the Company and the former shareholders of Dover Downs, Inc.
acquired an equal percentage of the equity of the Company. As part of
the restructuring, the Company acquired by dividend from Dover Downs,
Inc. all of the outstanding capital stock of Dover Downs International
Speedway, Inc. (which was not operational), and the motorsports
operation of Dover Downs, Inc. was transferred to Dover Downs
International Speedway, Inc. Additionally, in June 1996, the Company
formed Dover Downs Properties, Inc. for the initial purpose of holding
some or all of the real estate of the Company. This reorganization has
been accounted for on an as if pooled basis.
All common share and per share amounts have been restated to give
effect to the reorganization assuming the transaction had occurred on
June 30, 1995. Results of operations for all prior years were not
affected by the reorganization.
On July 14, 1997, the Company changed its fiscal year-end from July 31
to June 30 and has accordingly presented restated results for the two
years ended June 30, 1997. Certain amounts in the 1996 consolidated
financial statements have been reclassified to conform to the 1997
presentation. The change in year-end did not have a significant effect
upon previously reported earnings.
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 and commissions from pari-mutuel wagering. Payments to
the State of Delaware pursuant to the lottery legislation are reported
in operating expenses.
Advertising costs-Subsequent to the opening of the Company's casino
facility in December of 1995, all advertising costs are expensed as
incurred.
Earnings per share-The number of weighted average shares used in
computing basic and diluted earnings per share (EPS) are as follows:
1998 1997 1996
Basic EPS 15,246 14,856 13,723
Effect of options 357 419 788
Diluted EPS 15,603 15,275 14,511
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
Machinery and equipment 5 - 10 years
Furniture and fixtures 5 years
Goodwill-Goodwill represents the excess of the purchase price over the
fair value of net assets acquired and is being amortized over a period
of 40 years.
Income taxes-Deferred income taxes are provided in accordance with the
provisions of Statement of Financial Accounting Standards No. 109 (SFAS
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 Values of Financial Instruments-The carrying amount reported in
the balance sheet for current assets and current liabilities
approximates their fair value at June 30, 1998.
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 Opinion, No.
25, Accounting for Stock Issued to Employees. The Company has elected
to continue to use the intrinsic value method.
NOTE 4-Indebtedness
The Company has an annually renewable, $20,000,000 committed revolving
line of credit from a bank to satisfy seasonal funding needs and to
finance capital improvements. The Company must pay an annual commitment
fee of 7.5 basis points on the average unused portion of the commitment
and interest monthly on amounts outstanding at the bank's prime minus
three-quarters of one percent. There were no amounts outstanding at
June 30, 1998 or 1997.
Long-term debt consists of an 8% mortgage note payable in quarterly
principal and interest installments through January 2006, and
collateralized by land with a carrying value of $1,300,000. The
mortgage note matures as follows: 1999-$19,000; 2000-$22,000;
2001-$24,000; 2002-$26,000; 2003-28,000 and thereafter $641,000.
NOTE 5-Income Taxes
The current and deferred income tax provisions (benefit) are as
follows:
Years ended June 30,
1998 1997 1996
Current:
Federal $12,544,000 $ 9,207,000 $ 4,971,000
State 3,296,000 2,498,000 1,329,000
15,840,000 11,705,000 6,300,000
Deferred:
Federal (78,000) 49,000 81,000
State (20,000) 13,000 16,000
(98,000) 62,000 97,000
Total income taxes $15,742,000 $11,767,000 $ 6,397,000
Deferred income taxes relate to the temporary differences between
financial accounting income and taxable income and are primarily
attributable to depreciation using different methods for tax purposes.
A reconciliation of the effective income tax rate with the applicable
statutory federal income tax rate is as follows:
Years ended June 30,
1998 1997 1996
Federal tax at statutory rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 5.7% 5.7% 5.7%
Other 1.1% 1.0% .3%
Effective income tax rate 41.8% 41.7% 41.0%
NOTE 6-Pension Plan
Prior to August 1, 1996, the Company participated in a multiple
employer defined-benefit pension plan covering substantially all
full-time employees. On August 1, 1996, the Dover Downs Entertainment,
Inc. Pension Plan was established and the related assets were
transferred from the multiple employer pension plan to the new Dover
Downs Entertainment, Inc. Trust.
The provisions of the Dover Downs Entertainment, Inc. Pension Plan are
identical to those of the aforementioned multiple employer
defined-benefit pension plan. Plan benefits 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 at June 30,
1998:
Actuarial present value of accumulated benefit obligation:
Vested $413,216
Non-vested 139,693
$552,909
Projected benefit obligation $924,846
Plan assets at market value 687,431
Funded status (237,415)
Unrecognized net loss 110,925
Unrecognized prior service cost 173,476
Prepaid pension cost $ 46,986
At June 30, 1998, the assets of the plan were invested 60% in equity
funds, 39% in intermediate bond funds and the balance in other
short-term interest-bearing accounts. The discount rate in 1998 and
1997, was 7.5% and 8%, respectively. The assumed rate of compensation
increase was 5% in both years. The expected long-term rate of return on
assets was 9% for 1998 and 1997.
The components of net periodic pension cost for 1998 are
as follows:
Service cost $131,829
Interest cost 52,864
Return on plan assets (104,185)
Net amortization 32,775
Deferral of net gain 62,893
$176,176
Net periodic pension costs for 1997 and 1996 were $77,007 and $24,000,
respectively.
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:
$.10 Par
$.10 Par Value
Value Class A Additional
Common Common Paid-in Retained
Stock Stock Capital Earnings
Balance at June 30, 1995 $ - $1,372,000 $ 4,396,000 $ 8,457,000
Net earnings 9,196,000
Exercise of stock options 21,000 171,000
Tax benefit related to stock
option plans 102,000
Balance at June 30, 1996 - 1,393,000 4,669,000 17,653,000
Net earnings 16,472,000
Issuance of common stock, net 288,000 (180,000) 16,252,000
Dividends on common stock,
$.16 per share (2,429,000)
Exercise of stock options 22,000 160,000
Conversion of Class A shares 6,000 (6,000)
Balance at June 30, 1997 294,000 1,229,000 21,081,000 31,696,000
Net earnings 21,913,000
Dividends on common stock,
$.32 per share (4,878,000)
Exercise of stock options 2,000 28,000
Conversion of Class A shares 6,000 (6,000)
Balance at June 30, 1998 $ 300,000 $1,225,000 $21,109,000 $48,731,000
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 October 3, 1996, the Company completed its initial public offering.
The Company issued 1,075,000 shares 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 - .46%, risk-free interest rate - 5.3%, an
expected life of six years and volatility of 26%. 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 $.03 and $.01 per share in 1998 and 1997
respectively.
Option activity was as follows:
June 30
1998 1997 1996
Number of options:
Outstanding at beginning of year 472,764 585,000 787,500
Granted 67,500 112,764 -
Exercised (22,500) (225,000) (202,500)
Outstanding at June 30 517,764 472,764 585,000
At June 30:
Options available for grant 569,736 637,236 750,000
Options exercisable 131,000 22,500 90,000
Weighted Average
Exercise Price
Options granted $ 23.16 $ 17.13 -
Options exercised $ 1.33 $ .81 $ .95
Options outstanding $ 6.75 $ 5.10 $ 1.13
Options exercisable $ 3.56 $ 1.33 $ .46
NOTE 8-Related Party Transactions
In prior years, management services were provided to a company
principally-owned by the majority shareholder. Management fees for the
year ended June 30, 1996 were $122,000. In June 1996, the Company
acquired for cash several tracts of undeveloped land comprising a total
of 206 acres for $6,200,000 from a company wholly-owned by the majority
shareholder. The purchase price was determined on the basis of an
independent appraisal performed in 1996. During the years ended June
30, 1998, 1997 and 1996, the Company purchased certain paving, site
work and construction services involving total payments of $374,971,
$584,000 and $586,000 from a company wholly-owned by an
employee/director. The Company purchased administrative services from
Rollins Truck Leasing Corp. and affiliated companies in 1998, 1997 and
1996. The total cost of these services, which have been included in
general and administrative expenses in the Consolidated Statement of
Earnings, was $283,000, $178,000 and $36,000 in 1998, 1997 and 1996,
respectively.
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's operations are in motorsports and gaming. Revenues,
operating earnings, identifiable assets, capital expenditures and
depreciation pertaining to these business segments are presented below:
Motorsports Gaming Consolidated
Year ended June 30, 1998
Revenue $25,874,000 $115,071,000 $140,945,000
Operating earnings 12,506,000 24,447,000 36,953,000
Identifiable assets
at year-end 57,739,000 38,038,000 95,777,000
Capital expenditures 6,085,000 1,419,000 7,504,000
Depreciation $ 1,237,000 $ 1,470,000 $ 2,707,000
Year ended June 30, 1997
Revenue $20,516,000 $ 81,162,000 $101,678,000
Operating earnings 11,079,000 16,891,000 27,970,000
Identifiable assets
at year-end 34,801,000 36,460,000 71,261,000
Capital expenditures 9,496,000 7,345,000 16,841,000
Depreciation $ 981,000 $ 1,103,000 $ 2,084,000
Year ended June 30, 1996
Revenue $18,110,000 $ 31,980,000 $ 50,090,000
Operating earnings 10,040,000 5,809,000 15,849,000
Identifiable assets
at year-end 26,489,000 15,822,000 42,311,000
Capital expenditures 10,119,000 8,817,000 18,936,000
Depreciation $ 952,000 $ 517,000 $ 1,469,000
NOTE 10-Commitments
The Company leases the racetrack at the Tennessee State Fairgrounds
pursuant to a lease expiring in 2007. Total rental expense charged to
the Company is a function of the profitability of the Nashville
operation and was $66,000 for the six months ended June 30, 1998.
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
expires in December 1998 and Caesars has 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 fee for such
services was $7,093,882 in fiscal 1998, $5,184,908 in fiscal 1997 and
$2,260,909 in fiscal 1996. Amounts due to Caesars at June 30, 1998 and
1997 totaled $1,246,064 and $431,464, respectively and are included in
accrued liabilities.
The Company has entered into several sanctioning agreements to conduct
various motorsports events at Dover Downs International Speedway and
Nashville Speedway, as well as newly acquired venues in Long Beach,
California; Madison, Illinois and Millington, Tennessee. The Company
has held NASCAR-sanctioned events for 30 consecutive years. Nonrenewal
of a NASCAR event license would have a material adverse effect on the
Company's financial condition and results of operations.
NOTE 11-Subsequent Events - Grand Prix Association of Long Beach
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 2,510,700 shares 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.
NOTE 12-Quarterly Results (unaudited)
September 30 December 31 March 31 June 30
1998
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) $ .50 $ .16 $ .21 $ .53
1997
Revenues $27,226 $17,246 $21,684 $35,522
Gross profit 10,624 2,836 4,548 13,027
Net earnings 5,659 1,291 2,322 7,200
Earnings per
common share (diluted) $ .39 $ .08 $ .15 $ .46
Exhibit 21.1
DOVER DOWNS ENTERTAINMENT, INC.
Subsidiaries of Registrant at June 30, 1998
Dover Downs, Inc.
Dover Downs International Speedway, Inc.
Dover Downs Properties, Inc.
Nashville Speedway USA, Inc.
Exhibit 23
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-3 of Dover Downs Entertainment, Inc.
of our report dated July 17, 1998 relating to the consolidated balance
sheets of Dover Downs Entertainment, Inc. and subsidiaries as of June
30, 1998 and 1997, and the related consolidated statements of earnings
and cash flows for each of the years in the three-year period ended
June 30, 1998, which report appears in the June 30, 1998 annual report
on Form 10-K of Dover Downs Entertainment, Inc.
KPMG Peat Marwick LLP
Philadelphia, Pennsylvania
August 28, 1998