-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FRE38XWzD6FVloNUvQnshown9s+UM8oFiDpZs+EYOPrQJPQKQkOm+j8FEUy0mFUa y/P6pEKPkBBcz/yTKEuKRQ== 0001021408-02-010228.txt : 20020807 0001021408-02-010228.hdr.sgml : 20020807 20020807160316 ACCESSION NUMBER: 0001021408-02-010228 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020807 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOVER MOTORSPORTS INC CENTRAL INDEX KEY: 0001017673 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-AMUSEMENT & RECREATION SERVICES [7900] IRS NUMBER: 510357525 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11929 FILM NUMBER: 02721824 BUSINESS ADDRESS: STREET 1: 1131 N DUPONT HIGHWAY CITY: DOVER STATE: DE ZIP: 19901 BUSINESS PHONE: 3027644600 MAIL ADDRESS: STREET 1: 2200 CONCORD PIKE STREET 2: P O BOX 843 CITY: WILMINGTON STATE: DE ZIP: 19803 FORMER COMPANY: FORMER CONFORMED NAME: DOVER DOWNS ENTERTAINMENT INC DATE OF NAME CHANGE: 19960627 10-Q 1 d10q.txt FORM 10-Q ________________________________________________________________________________ United States Securities and Exchange Commission Washington, D.C. 20549 ________________________________________________________________________________ Form 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 2002 Commission file number 1-11929 ------------------------------ Dover Motorsports, Inc. (Exact name of registrant as specified in its charter) Delaware 51-0357525 (State or Other Jurisdiction (I.R.S. Employer of Incorporation) Identification Number) 1131 North DuPont Highway, Dover, Delaware 19901 (Address of principal executive offices) (302) 674-4600 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) 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 [_] As of July 31, 2002, the number of shares of each class of the Registrant's common stock outstanding is as follows: Common Stock - 14,448,252 shares Class A Common Stock - 23,615,085 shares 1 Part I - Financial Information Item 1. Financial Statements DOVER MOTORSPORTS, INC. CONSOLIDATED STATEMENT OF EARNINGS In Thousands, Except Per Share Amounts (Unaudited)
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Revenues ............................................................ $ 48,641 $ 46,506 $ 49,637 $ 47,582 Expenses: Operating ....................................................... 28,346 24,934 30,539 26,920 Depreciation and amortization ................................... 2,372 2,600 4,729 4,642 General and administrative ...................................... 3,886 2,671 7,397 5,378 -------- -------- -------- -------- 34,604 30,205 42,665 36,940 -------- -------- -------- -------- Operating earnings .................................................. 14,037 16,301 6,972 10,642 Interest income ..................................................... 25 -- 38 128 Interest expense, net ............................................... (1,138) (864) (2,035) (864) -------- -------- -------- -------- Earnings from continuing operations before income taxes and cumulative effect of accounting change .......................... 12,924 15,437 4,975 9,906 Income taxes ........................................................ 5,542 6,483 1,956 4,299 -------- -------- -------- -------- Earnings from continuing operations before cumulative effect of accounting change ......................................... 7,382 8,954 3,019 5,607 Earnings from discontinued operation, net of income taxes of $3,712 for the three months ended June 30, 2001, and $3,542 and $7,639 for the six months ended June 30, 2002 and 2001, respectively ......................................... -- 5,414 5,168 11,143 Direct costs of spin-off, net of income tax benefit of $90 .......... -- -- (691) -- -------- -------- -------- -------- Earnings before cumulative effect of accounting change .............. 7,382 14,368 7,496 16,750 Cumulative effect of accounting change for goodwill impairment .......................................................... -- -- (28,606) -- -------- -------- -------- -------- Net earnings (loss) ................................................. $ 7,382 $ 14,368 $(21,110) $ 16,750 ======== ======== ======== ======== Earnings (loss) per common share - basic: Continuing operations before accounting change .................. $ 0.19 $ 0.24 $ 0.08 $ 0.15 Discontinued operation .......................................... -- 0.14 0.12 0.29 Accounting change ............................................... -- -- (0.75) -- -------- -------- -------- -------- Net earnings (loss) ............................................. $ 0.19 $ 0.38 $ (0.55) $ 0.44 ======== ======== ======== ======== Earnings (loss) per common share - diluted: Continuing operations before accounting change .................. $ 0.19 $ 0.24 $ 0.08 $ 0.15 Discontinued operation .......................................... -- 0.14 0.12 0.29 Accounting change ............................................... -- -- (0.75) -- -------- -------- -------- -------- Net earnings (loss) ............................................. $ 0.19 $ 0.38 $ (0.55) $ 0.44 ======== ======== ======== ========
The Notes to the Consolidated Financial Statements are an integral part of these statements. 2 DOVER MOTORSPORTS, INC. CONSOLIDATED BALANCE SHEET In Thousands, Except Share and Per Share Amounts
(Unaudited) ASSETS June 30, December 31, Current assets: 2002 2001 ---- ---- Cash and cash equivalents .............................. $ 707 $ 2,948 Accounts receivable .................................... 14,247 4,170 Inventories ............................................ 492 423 Prepaid expenses and other ............................. 4,668 3,127 Income taxes receivable ................................ 4,037 3,819 Deferred income taxes .................................. 114 120 --------- --------- Total current assets .............................. 24,265 14,607 Property and equipment, net ................................. 243,335 245,143 Restricted cash ............................................. 1,522 3,161 Other assets, net ........................................... 1,462 1,503 Goodwill, net ............................................... 21,883 50,489 Net assets of discontinued operation ........................ -- 102,653 --------- --------- Total assets ...................................... $ 292,467 $ 417,556 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ....................................... $ 935 $ 1,024 Accrued liabilities .................................... 6,151 3,394 Current portion of long-term debt ...................... 685 635 Notes payable to banks (Note 5) ........................ -- 110,610 Deferred revenue ....................................... 21,108 12,912 --------- --------- Total current liabilities ......................... 28,879 128,575 Notes payable to banks (Note 5) ............................. 59,688 -- Long-term debt .............................................. 19,220 19,905 Other liabilities ........................................... 123 131 Deferred income taxes ....................................... 28,048 24,426 Commitments and contingencies (see Notes to the Consolidated Financial Statements) Stockholders' equity: Preferred stock, $.10 par value; 1,000,000 shares authorized; issued and outstanding: none ................................ Common stock, $.10 par value; 75,000,000 shares authorized; issued and outstanding: June-14,448,252 shares; December-14,284,252 shares .................................. 1,444 1,428 Class A common stock, $.10 par value; 55,000,000 shares authorized; issued and outstanding: June-23,615,085 shares; December-23,769,085 shares .................................. 2,361 2,376 Additional paid-in capital .................................. 120,204 120,080 Retained earnings ........................................... 32,500 128,425 --------- --------- 156,509 252,309 Receivable from Dover Downs Gaming & Entertainment, Inc. .... -- (7,790) --------- --------- Total stockholders' equity ........................ 156,509 244,519 --------- --------- Total liabilities and stockholders' equity ........ $ 292,467 $ 417,556 ========= =========
The Notes to the Consolidated Financial Statements are an integral part of these statements. 3 DOVER MOTORSPORTS, INC. CONSOLIDATED STATEMENT OF CASH FLOWS In Thousands (Unaudited)
Six Months Ended June 30, ------------------------- Cash flows from operating activities: 2002 2001 --------- --------- Net (loss) earnings .......................................... $ (21,110) $ 16,750 Adjustments to reconcile net (loss) earnings to net cash provided by operating activities: Depreciation and amortization .............................. 4,729 4,642 Earnings from discontinued operation, net .................. (5,168) (11,143) Cumulative effect of accounting change ..................... 28,606 -- (Increase) decrease in assets: Accounts receivable ..................................... (10,077) (8,042) Inventories ............................................. (69) (162) Prepaid expenses and other .............................. (1,901) (349) Increase (decrease) in liabilities: Accounts payable ........................................ (89) (3,261) Accrued liabilities ..................................... 2,757 2,268 Current and deferred income taxes ....................... 3,410 2,194 Deferred revenue ........................................ 8,196 6,613 --------- --------- Net cash provided by continuing operations ...................... 9,284 9,510 --------- --------- Cash flows from investing activities: Capital expenditures ......................................... (2,520) (23,538) Restricted cash .............................................. 1,639 903 Other assets ................................................. -- (95) --------- --------- Net cash used in investing activities of continuing operations .. (881) (22,730) --------- --------- Cash flows from financing activities: Borrowings from revolving debt .............................. 96,699 176,250 Repayments of revolving debt ................................ (147,621) (151,900) Debt paid down by Dover Downs Gaming & Entertainment, Inc. .. 45,000 -- Repayments of long-term debt ................................ (635) (585) Repayment of shareholder loan ............................... 92 -- Proceeds from stock options exercised ....................... 33 89 Other assets and liabilities ................................ (8) (80) Dividends paid .............................................. (2,474) (3,412) --------- --------- Net cash (used in) provided by financing activities of continuing operations ...................................................... (8,914) 20,362 --------- --------- Net cash used in discontinued operation ......................... (1,730) (5,465) --------- --------- Net (decrease) increase in cash and cash equivalents ............ (2,241) 1,677 Cash and cash equivalents, beginning of period .................. 2,948 408 --------- --------- Cash and cash equivalents, end of period ........................ $ 707 $ 2,085 ========= ========= Supplemental information: Interest paid ................................................ $ 2,379 $ 1,117 ========= ========= Income taxes paid ............................................ $ 1,120 $ 1,365 ========= =========
The Notes to the Consolidated Financial Statements are an integral part of these statements. 4 DOVER MOTORSPORTS, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - Basis of Presentation The accompanying consolidated financial statements have been prepared in compliance with Rule 10-01 of Regulation S-X and accounting principles generally accepted in the United States of America, but do not include all of the information and disclosures required for complete financial statements. The statements should be read in conjunction with the consolidated financial statements and notes thereto included in the latest annual report on Form 10-K for Dover Motorsports, Inc. (formerly Dover Downs Entertainment, Inc.) and its wholly owned subsidiaries. In the opinion of management, these statements include all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of operations, financial position and cash flows for the interim periods presented. Operating results for the three and six-month periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002 due to the seasonal nature of the Company's business. References in this document to "we," "our," "us," "DVD" or "the Company" mean Dover Motorsports, Inc. and its wholly owned subsidiaries. NOTE 2 - Business Operations Dover Motorsports, Inc. is a leading promoter of motorsports events in the United States. Its motorsports subsidiaries operate seven motorsports tracks (four permanent facilities and three temporary circuits) in six states and are scheduled to promote 18 major events during 2002 under the auspices of four of the premier sanctioning bodies in motorsports - the National Association for Stock Car Auto Racing (NASCAR), Championship Auto Racing Teams (CART), the Indy Racing League (IRL) and the National Hot Rod Association (NHRA). The Company owns and operates Dover International Speedway in Dover, Delaware; Nashville Superspeedway near Nashville, Tennessee; Gateway International Raceway near St. Louis, Missouri; and Memphis Motorsports Park near Memphis, Tennessee. The Company also organizes and promotes the Toyota Grand Prix of Long Beach in California, the Grand Prix of Denver in Colorado, beginning with the inaugural event scheduled for September 2002, and the Grand Prix of St. Petersburg in Florida, beginning with the inaugural event scheduled for February 2003. The Company's tax-free spin-off of Dover Downs, Inc., its gaming business, was effective March 31, 2002. The Company changed its name to Dover Motorsports, Inc. and will focus on the fixed facility and temporary circuit motorsports operations. To accomplish the spin-off, the Company contributed 100 percent of the issued and outstanding common stock of Dover Downs, Inc. to Dover Downs Gaming & Entertainment, Inc. (Gaming & Entertainment), a newly formed wholly owned subsidiary of the Company. On the effective date of the spin-off, the Company distributed all of the capital stock of Gaming & Entertainment to the Company's stockholders on a pro-rata basis. Holders of the Company's common stock or Class A common stock received 0.7 shares of Gaming & Entertainment common stock or Class A common stock for each share of the Company's common stock or Class A common stock owned at the close of business on March 18, 2002, the record date for the spin-off. Each share of common stock or Class A common stock distributed was accompanied by one stock purchase right. Accordingly, the operations of this business have been reflected as a discontinued operation in the accompanying consolidated financial statements. No gain or loss was recognized as a result of the spin-off due to the pro-rata nature of the distribution. The Company's continuing operations subsequent to the spin-off consist solely of its motorsports activities. Based on an Internal Revenue Service Private Letter ruling, the spin-off is tax-free to the Company and its stockholders, except for cash received for any fractional shares. Immediately following the spin-off, the Company owned no shares of Gaming & Entertainment, and Gaming & Entertainment became an independent public company. A total of 9,998,976 shares of Gaming & Entertainment common stock and 16,638,359 shares of Gaming & Entertainment Class A common stock were distributed in connection with the spin-off. Also as part of the spin-off, a $9.5 million receivable from Gaming & Entertainment was cancelled. See NOTE 4 - Discontinued Operation for further discussion. 5 NOTE 3 - Summary of Significant Accounting Policies Revenue and expense recognition-Revenues, including admissions, broadcasting rights, sponsorships, concessions, luxury suite rentals, and souvenir sales and vendor commissions, and certain direct expenses pertaining to specific events are deferred until the event is held. Deferred expenses primarily include race purses and sanctioning fees remitted to NASCAR or other sanctioning bodies. Earnings per share-Basic and diluted earnings per share (EPS) are calculated using the following number of weighted average shares:
Three Months Ended June 30, Six Months Ended June 30, ------------------------------ ------------------------------- 2002 2001 2002 2001 ------------- -------------- ------------- ------------- Basic EPS 38,059,000 37,940,000 38,056,000 37,925,000 Effect of options 515,000 324,000 411,000 285,000 ------------- -------------- ------------- ------------- Diluted EPS 38,574,000 38,264,000 38,467,000 38,210,000 ============= ============== ============= =============
Property and equipment-Interest is capitalized in connection with the construction of major facilities. The capitalized interest is amortized over the estimated useful life of the asset to which it relates. During the three and six-month periods ended June 30, 2002, the Company incurred $1,138,000 and $2,035,000 of interest cost, respectively, none of which was capitalized. During the three months ended June 30, 2001, the Company incurred $1,115,000 of interest cost, $251,000 of which was capitalized. During the six months ended June 30, 2001, the Company incurred $2,395,000 of interest cost, of which $1,531,000 was capitalized. Use of estimates-The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Segment information-The Company accounts for its operating segment in accordance with FASB Statement No. 131, Disclosures About Segments of an Enterprise and Related Information. Statement No. 131 provides guidelines for public companies in determining operating segments based on those used for internal reporting to management. Based on these guidelines, the Company reports information under a single motorsports segment. Reclassifications-Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation. These reclassifications had no effect on net earnings. Recent accounting pronouncements-In June 2001, the FASB issued Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of Statement No. 142. The Company adopted the provisions of Statement No. 142 effective January 1, 2002, at which time the Company ceased to record amortization expense related to its goodwill. The adoption of Statement No. 142 resulted in a $363,000 reduction in amortization expense in the three months ended June 30, 2002 as compared to the three months ended June 30, 2001, and a $727,000 reduction in amortization expense in the six months ended June 30, 2002 as compared to the six months ended June 30, 2001. To comply with the transitional provisions of Statement No. 142, we have determined our reporting units and assigned goodwill and other net assets to those reporting units. Goodwill attributable to each of our reporting units at January 1, 2002 was tested for impairment by comparing the fair value of each reporting unit with its carrying value. Fair value was primarily determined through the use of a discounted cash flow methodology by an independent appraisal. To the extent fair value was determined to be less than the carrying value, fair value was then allocated to identifiable tangible and intangible assets resulting in an implied valuation of the goodwill associated with the reporting unit. Based on this analysis of goodwill, the Company recorded a non-cash charge of $28,606,000 associated with the goodwill of Grand Prix Association of Long Beach, Inc. (Grand Prix), a wholly owned subsidiary, as a cumulative effect of an accounting change for the write-off of goodwill in the first six months of 2002. Goodwill associated with Grand Prix, which was acquired through a tax-free merger, is not deductible for income tax purposes and represents a permanent 6 difference for which no current or deferred income tax liabilities are recorded. As such, no income tax benefit was recognized from the impairment write-off. The following schedules reconcile net earnings (loss) and earnings (loss) per share adjusted to exclude after-tax amortization expense for the period prior to adoption of Statement No. 142, and the cumulative effect of the accounting change recognized in the current year (in thousands, except per share amounts):
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Net earnings (loss) $ 7,382 $ 14,368 $ (21,110) $ 16,750 Earnings from discontinued operation and direct costs of spin-off, net of income taxes - (5,414) (4,477) (11,143) ----------- ----------- ----------- ----------- Earnings (loss) from continuing operations 7,382 8,954 (25,587) 5,607 Amortization expense, net of income tax benefit of $16 for the three months ended June 30, 2001 and $33 for the six months ended June 30, 2001 - 347 - 694 Cumulative effect of accounting change - - 28,606 - ----------- ----------- ----------- ----------- Adjusted net earnings from continuing operations $ 7,382 $ 9,301 $ 3,019 $ 6,301 =========== =========== =========== =========== Earnings Per Common Share - Basic: ---------------------------------- Net earnings (loss) $ 0.19 $ 0.38 (0.55) $ 0.44 Earnings from discontinued operation - (0.14) (0.12) (0.29) ----------- ----------- ----------- ----------- Earnings (loss) from continuing operations 0.19 0.24 (0.67) 0.15 Amortization expense, net of income tax benefit - 0.01 - 0.02 Cumulative effect of accounting change - - 0.75 - ----------- ----------- ----------- ----------- Adjusted net earnings per share from continuing operations $ 0.19 $ 0.25 $ 0.08 $ 0.17 =========== =========== =========== =========== Earnings Per Common Share - Diluted: ------------------------------------ Net earnings (loss) $ 0.19 $ 0.38 $ (0.55) $ 0.44 Earnings from discontinued operation - (0.14) (0.12) (0.29) ----------- ----------- ----------- ----------- Earnings (loss) from continuing operations 0.19 0.24 (0.67) 0.15 Amortization expense, net of income tax benefit - 0.01 - 0.02 Cumulative effect of accounting change - - 0.75 - ----------- ----------- ----------- ----------- Adjusted net earnings per share from continuing operations $ 0.19 $ 0.25 $ 0.08 $ 0.17 =========== =========== =========== ===========
In June 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal use of the asset. Statement No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, a gain or loss on settlement would be recognized. 7 We are required and plan to adopt the provisions of Statement No. 143 in 2003. To accomplish this, we must identify all legal obligations for asset retirement obligations, if any, and determine the fair value of these obligations on the date of adoption. We have not yet completed our analysis of the impact of adoption of this standard. In August 2001, the FASB issued Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While Statement No. 144 supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of that Statement. Statement No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. We adopted the provisions of Statement No. 144 effective January 1, 2002. The adoption of Statement No. 144 did not have a significant impact on our results of operations, financial position or cash flows since the spin-off transaction was governed by the prior rules of APB Opinion No. 30. On April 30, 2002, the FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The Statement updates, clarifies and simplifies existing accounting pronouncements. Statement No. 145 rescinds Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in APB Opinion 30 will now be used to classify those gains and losses. Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements, amended Statement No. 4, and is no longer necessary because Statement 4 has been rescinded. Statement No. 145 amends Statement No. 13, Accounting for Leases, to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. Certain provisions of Statement No. 145 are effective for fiscal years beginning after May 15, 2002, while other provisions are effective for transactions occurring after May 15, 2002. The adoption of Statement No. 145 is not expected to have a significant impact on our results of operations, financial position or cash flows. In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and nullifies EITF 94-3. The Company plans to adopt Statement No. 146 in January 2003. Management believes that the adoption of this statement will not have a material effect on the Company's future results of operations. NOTE 4 - Discontinued Operation The Company's former gaming segment has been accounted for as a discontinued operation and, accordingly, the accompanying consolidated financial statements have been reclassified to report separately the net assets and operating results of this discontinued operation. The historical financial statements also include an allocation of interest expense of $332,000 for the three months ended June 30, 2001, and $351,000 and $684,000 for the six months ended June 30, 2002 and 2001, respectively, which has been allocated based upon each company's earnings before interest, taxes, depreciation and amortization, income tax payments and capital expenditures. Management believes this is a reasonable method of allocating interest expense. 8 A summary of the net assets of this discontinued operation is as follows (the March 31, 2002 amounts are immediately prior to the spin-off): March 31, December 31, 2002 2001 ------------- ------------- Current assets $ 18,657,000 $ 24,485,000 Property and equipment, net 115,971,000 106,772,000 Current liabilities (25,819,000) (27,658,000) Deferred income taxes (988,000) (946,000) ------------- ------------- Net assets of discontinued operation $ 107,821,000 $ 102,653,000 ============= ============= A summary of the operating results of this discontinued operation which are included in the net earnings (loss) of DVD is as follows (the Company's tax-free spin-off of its gaming business was effective March 31, 2002, therefore there were no earnings from discontinued operation in the second quarter of 2002):
Three Months Ended June 30, Six Months Ended June 30, ----------------------------- 2001 2002 2001 ------------- ------------------------------ Revenues $ 44,687,000 $ 49,780,000 $ 89,595,000 Operating earnings 9,122,000 8,710,000 18,910,000 Earnings before income taxes 9,126,000 8,710,000 18,782,000 Income taxes 3,712,000 3,542,000 7,639,000 Net earnings $ 5,414,000 $ 5,168,000 $ 11,143,000
In conjunction with the spin-off, the Company and Gaming & Entertainment have entered into various agreements that address the allocation of assets and liabilities between the two companies and that define the companies' relationship after the separation. These are the Agreement Regarding Distribution and Plan of Reorganization, the Real Property Agreement, the Employee Benefits Agreement, the Transition Support Services Agreement, and the Tax Sharing Agreement. The Plan of Reorganization sets forth the principal corporate transactions required to effect the separation of the gaming business from the motorsports business, the continuation of the gaming business following such separation, including the allocation between the Company and Gaming & Entertainment of certain assets and liabilities, and the distribution of shares of Gaming & Entertainment common stock and Class A common stock. After the spin-off, all assets and liabilities relating to the gaming business are owned and assumed by Gaming & Entertainment or its subsidiaries, and all assets and liabilities relating to the motorsports business are owned and assumed by the Company or its subsidiaries. The Real Property Agreement governs certain real property transfers, leases and easements affecting our Dover, Delaware facility. The Employee Benefits Agreement provides for the transition from employee benefits under plans or programs sponsored by the Company to those sponsored by Gaming & Entertainment. In connection with the spin-off and pursuant to the terms of the Employee Benefits Agreement, the Company will transfer to Gaming & Entertainment the assets and liabilities associated with the Company's defined benefit pension plan and the 401(k) plan currently sponsored by the Company with respect to employees who become employees of Gaming & Entertainment (or remain employed by Dover Downs, Inc.) after the spin-off. The Transition Support Services Agreement provides for each of the Company and Gaming & Entertainment to provide each other with certain administrative and operational services. The party receiving the services will be required to pay for them within 30 business days after receipt of an invoice at rates agreed upon by the Company and Gaming & Entertainment. Each party will provide these services until terminated by the party receiving the service or by the party providing the service after the expiration of a one year transition period. 9 The Tax Sharing Agreement provides for, among other things, the treatment of income tax matters for periods beginning before and including the date of the spin-off and any taxes resulting from transactions effected in connection with the spin-off. With respect to any period ending on or before the spin-off or any tax period in which the spin-off occurs, the Company: .. continues to be the sole and exclusive agent for Gaming & Entertainment in all matters relating to the income, franchise, property, sales and use tax liabilities of Gaming & Entertainment; .. subject to Gaming & Entertainment's obligation to pay for items relating to its gaming business, bears any costs relating to tax audits, including tax assessments and any related interest and penalties and any legal, litigation, accounting or consulting expenses; .. continues to have the sole and exclusive responsibility for the preparation and filing of combined federal and combined state income tax returns; and .. subject to the right and authority of Gaming & Entertainment to direct the Company in the defense or prosecution of the portion of a tax contest directly and exclusively related to any Gaming & Entertainment tax adjustment, generally has the powers, in the Company's sole discretion, to contest or compromise any claim or refund on Gaming & Entertainment's behalf. NOTE 5 - Indebtedness Long-term debt is as follows: June 30, December 31, 2002 2001 ------------- ------------- Notes payable to banks $ 59,688,000 $ 110,610,000 SWIDA loan 19,905,000 20,540,000 ------------- ------------- 79,593,000 131,150,000 Less: current portion (685,000) (111,245,000) ------------- ------------- $ 78,908,000 $ 19,905,000 ============= ============= The Company entered into a new $105,000,000 unsecured credit facility on February 20, 2002 that expires on February 19, 2005. This new facility replaced the prior $150,000,000 facilities on its April 1, 2002 effective date. The new $105,000,000 credit facility does not include Dover Downs, Inc., as it was spun-off effective March 31, 2002. $45 million of the amount outstanding under the previous DVD credit facilities was paid down on April 1, 2002 through a new $55 million credit facility which has been established by Gaming & Entertainment. Interest is based, at the Company's option, upon LIBOR or the base rate (the greater of the prime rate or the federal funds rate plus .5%), plus a margin determined by the Company's leverage ratio. The credit facility contains certain covenants including; minimum net worth, fixed charge coverage and maximum leverage ratio requirements. The Company was not in compliance with the leverage ratio covenant at June 30, 2002, but on July 29, 2002 the Company and the banks entered into an amendment that revised this covenant effective as of June 29, 2002. As a result of the amendment, the Company is now in compliance with the leverage ratio covenant. The Company expects to be in compliance with the covenants at the next measurement date. Material adverse changes in the Company's results of operation would impact our ability to maintain financial ratios necessary to satisfy these requirements. The facility is for seasonal funding needs, capital improvements and other general corporate purposes, and is guaranteed by all of the Company's subsidiaries. At June 30, 2002, there was $59,688,000 outstanding under the facility at a weighted average interest rate of 4.69%. A subsidiary of the Company entered into an agreement (the "SWIDA loan") with Southwestern Illinois Development Authority ("SWIDA") to receive the proceeds from the "Taxable Sports Facility Revenue Bonds, Series 1996 (Gateway International Motorsports Corporation Project)", a Municipal Bond Offering, in the aggregate principal amount of $21,500,000, of which $19,905,000 is outstanding at June 30, 2002. The offering of the bonds closed on June 21, 1996. The repayment terms and debt service reserve requirements of the bonds issued in the Municipal Bond Offering correspond to the terms of the SWIDA loan. SWIDA loaned all of the proceeds from the Municipal Bond Offering to the Company's subsidiary for the purpose of the redevelopment, construction and expansion of Gateway International Raceway, and the proceeds of the SWIDA loan were irrevocably committed to complete construction of 10 Gateway International Raceway, to fund interest, to create a debt service reserve fund and to pay for the cost of issuance of the bonds. The Company has established certain restricted cash funds to meet debt service as required by the SWIDA loan, which are held by the trustee (BNY Trust Company of Missouri). At June 30, 2002, $1,522,000 of the Company's cash balance is restricted by the SWIDA loan and is appropriately classified as a non-current asset in the accompanying consolidated balance sheet. A standby letter of credit for $2,502,000, which is secured by a Trust Deed on the Company's facilities in Memphis, Tennessee, also was obtained to satisfy debt service reserve fund obligations. The SWIDA loan is secured by a first mortgage lien on all the real property owned and a security interest in all property leased by the Company's subsidiary at Gateway International Raceway. Also, the SWIDA loan is unconditionally guaranteed by Grand Prix. The SWIDA loan bears interest at varying rates ranging from 8.35% to 9.25% with an effective rate of approximately 9.1%. The structure of the bonds permits amortization from February 1997 through February 2017 with debt service beginning in 2000 following interest only payments from February 1997 through August 1999. In addition, a portion of the property taxes to be paid by the Company (if any) to the City of Madison Tax Incremental Fund have been pledged to the annual retirement of debt and payment of interest. NOTE 6 - Stockholders' Equity Changes in the components of stockholders' equity are as follows (in thousands):
Class A Additional Common Common Paid-in Retained Stock Stock Capital Earnings ----------- ----------- ----------- ---------- Balance at December 31, 2001 $ 1,428 $ 2,376 $ 120,080 $ 128,425 Net earnings (loss) - - - (21,110) Repayment of shareholder loan - - 92 - Proceeds from stock options exercised 1 - 32 - Dividends paid - - - (2,474) Conversion of Class A to common 15 (15) - - Cancellation of receivable from Gaming & Entertainment - - - (9,520) Debt paid down by Gaming & Entertainment on April 1, 2002 - - - 45,000 Spin-off transaction - - - (107,821) ----------- ----------- ----------- ---------- Balance at June 30, 2002 $ 1,444 $ 2,361 $ 120,204 $ 32,500 =========== =========== =========== ==========
The Company has a stock option plan pursuant to which the Company's Board of Directors may grant stock options to officers and key employees at not less than 100% of the fair market value at the date of the grant. The stock options have eight-year terms and generally vest equally over a period of six years from the date of grant. Historically, certain Gaming & Entertainment employees participated in the DVD stock option plan. In conjunction with the spin-off, Gaming & Entertainment adopted a stock option plan for its employees. Following the spin-off, grants to purchase 125,000 shares of common stock under the DVD plan held by Gaming & Entertainment employees were cancelled and replaced with Gaming & Entertainment stock option grants. NOTE 7 - Related Party Transactions During the six months ended June 30, 2002 and 2001, Gaming & Entertainment allocated corporate costs of $429,000 and $1,040,000, respectively, to the Company. The allocation was based on both an allocation to the business that directly incurred the costs and an analysis of each company's share of the costs. The net costs incurred by each company for these services are not necessarily indicative of the costs that would have been incurred if the companies had been separate, independent entities and had otherwise managed these functions; however, management believes that these allocations are reasonable. At June 30, 2002, Gaming & Entertainment owed the Company $2.7 million for its portion of the Company's consolidated federal income tax liability for 2002. This receivable is included in the income taxes receivable balance reported on the June 30, 2002 balance sheet and is expected to be received by September 15, 2002. 11 Use by Gaming & Entertainment of the Company's 5/8-mile harness racing track is under an easement granted by the Company which does not require the payment of any rent. Under the terms of the easement Gaming & Entertainment has exclusive use of the harness track during the period beginning November 1 of each year and ending April 30 of the following year, together with set up and tear down rights for the two weeks before and after such period. The harness track is located on property owned by the Company and is on the inside of its one-mile motorsports speedway. Gaming & Entertainment's indoor grandstands are used by the Company free of charge in connection with its motorsports events. The Company also leases its principal executive office space from Gaming & Entertainment. Various easements and agreements relative to access, utilities and parking have also been entered into between the Company and Gaming & Entertainment. In conjunction with the spin-off, the Company and Gaming & Entertainment entered into various agreements that address the allocation of assets and liabilities between the two companies and that define the companies' relationship after the separation. The Transition Support Services Agreement provides for each of the Company and Gaming & Entertainment to provide each other with certain administrative and operational services subsequent to the spin-off. The Tax Sharing Agreement provides for, among other things, the treatment of income tax matters for periods beginning before and including the date of the spin-off and any taxes resulting from transactions effected in connection with the spin-off. Refer to NOTE 4 - Discontinued Operation for further discussion. NOTE 8 - Commitments and Contingencies In September 1999, the Sports Authority of the County of Wilson, Tennessee issued its Variable Rate Tax Exempt Infrastructure Revenue Bonds, Series 1999, in the amount of $25,900,000. The proceeds were used to acquire, construct and develop certain public infrastructure improvements in Wilson County, Tennessee, which will be beneficial to the operation of the superspeedway complex the Company constructed through Nashville Speedway, USA. Interest only payments are required until September 1, 2002 and will be made from a capitalized interest fund established from bond proceeds. When the capitalized interest fund is depleted, which is estimated to be September 1, 2002, the debt service on the bonds will be payable solely from sales and incremental property taxes (the taxes) generated from the facility. If the taxes are insufficient to cover the payment of principal and interest on the bonds, payments will be made under a $26,326,000 letter of credit issued on behalf of the Company by several banks and the bonds would become a liability of the Company. The Company received a notice of proposed tax adjustment for the years 1997 through 2000 related to a state sales and use tax audit. The Company is vigorously contesting the notice. Final proposed adjustments have not been received for these years. Management believes that the ultimate outcome of the audit will not have a material adverse impact on the Company's results of operations, financial position or cash flows. On April 4, 2002, the Illinois Supreme Court reversed its earlier decision of April 19, 2001 and ruled that Southwestern Illinois Development Authority ("SWIDA") exceeded its constitutional authority in its acquisition of certain property which it subsequently conveyed to the Company's subsidiary, Gateway International Motorsports Corp. ("Gateway"). The 148.5 acre tract of land at issue was acquired by SWIDA in a quick take eminent domain proceeding and then conveyed to Gateway in 1998 for $900,000 in connection with Gateway's desire to expand its parking facilities. The circuit court of St. Clair County originally ruled that SWIDA had properly exercised its authority to take the land. This decision was then reversed by an appellate court. In 2001, the Illinois Supreme Court reversed the appellate court's decision and found that the taking was proper. The Court has now reversed that decision and Gateway is pursuing an appeal to the United States Supreme Court. If the United States Supreme Court does not choose to hear the case or if Gateway is unsuccessful on appeal, it will (a) be required to find other property or alternate means to meet its parking needs, (b) have the $900,000 purchase price refunded, and (c) need to expense approximately $350,000 of legal and engineering costs associated with the purchase. In addition, the former landowner has indicated that it intends to make a claim for attorney's fees alleged to approximate $900,000. The Company believes that it has viable defenses to and would vigorously contest any such claim. The Company is from time to time a party to ordinary routine litigation incidental to its business. Management does not believe that the resolution of any of these matters is likely to have a serious adverse effect on our results of operations, financial condition or cash flows. 12 Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations The following discussion is based upon and should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. On July 25, 2001, the Board of Directors of the Company resolved to pursue the separation of its gaming and motorsports business segments into two publicly owned companies. On March 31, 2002, the tax-free spin-off of Dover Downs, Inc., its gaming business, became effective. Accordingly, the operations of this business have been reflected as a discontinued operation and excluded from the accompanying consolidated financial statements and our discussions herein. Results of Operations Three Months Ended June 30, 2002 vs. Three Months Ended June 30, 2001 Revenues increased by $2,135,000, or 4.6%, to $48,641,000, primarily the result of increased admissions and other event related revenue at Dover International Speedway's spring NASCAR weekend and the addition of a second Busch Series event at Nashville Superspeedway. The aforementioned increases in revenues were offset by a decline in admission revenues at the Company's Grand Prix of Long Beach and Nashville April Busch Series events. Operating expenses increased by $3,412,000, or 13.7%, in the second quarter of 2002 compared with the second quarter of 2001, primarily due to increased purse and sanction fee expenses related to Dover International Speedway's spring NASCAR weekend and the addition of a second Busch Series event at Nashville Superspeedway. Depreciation and amortization expense decreased by $228,000 primarily due to the adoption of Statement of Financial Accounting Standards No. 142 which reduced the Company's amortization expense by $363,000 in the second quarter of 2002 as compared to the second quarter of 2001. The decrease in amortization expense was offset by an increase in depreciation expense related to the addition of grandstand seats at Dover International Speedway in June 2001. General and administrative expenses increased by $1,215,000 to $3,886,000 from $2,671,000 in the second quarter of 2001, primarily due to an increase in wages and related employee benefits, insurance, taxes, and pre-opening expenses related to the inaugural Grand Prix of Denver event scheduled for September 2002 and the inaugural Grand Prix of St. Petersburg event scheduled for February 2003. Net interest expense increased by $249,000 primarily the result of the Company capitalizing $251,000 of interest related to the construction of major facilities in the second quarter of 2001. No interest was capitalized in the second quarter of 2002. Capitalization of interest on Nashville Superspeedway ceased when the facility opened in April 2001. The Company's effective income tax rates for the three months ended June 30, 2002 and 2001 were 42.9% and 42.0%, respectively. The increase resulted primarily from the limitation of state net operating losses for the Company's Grand Prix subsidiary located in California. Earnings from continuing operations decreased by $1,572,000, primarily the result of lower admission revenues at the Company's Grand Prix of Long Beach and Nashville April Busch Series events, increased purse and sanction fee expenses related to Dover International Speedway's spring NASCAR weekend and the addition of a second Busch Series event at Nashville Superspeedway, increased general and administrative expenses due to an increase in wages and related employee benefits, insurance, taxes, and pre-opening expenses related to the inaugural Grand Prix of Denver and the inaugural Grand Prix of St. Petersburg, and increased interest expense due to the opening of Nashville Superspeedway in April 2001 at which point capitalization of interest on construction of the Superspeedway ceased. The aforementioned decreases in earnings from continuing operations were offset by an increase in revenues primarily the result of increased admissions and other event related revenue at Dover International Speedway's spring NASCAR weekend and the addition of a second Busch Series event at Nashville Superspeedway, and a decrease in depreciation and amortization expense primarily due to the adoption of Statement of Financial Accounting Standards No. 142. 13 The Company's tax-free spin-off of its gaming business was effective March 31, 2002, therefore there were no earnings from discontinued operation in the second quarter of 2002 as compared with the second quarter of 2001. Six Months Ended June 30, 2002 vs. Six Months Ended June 30, 2001 Revenues increased by $2,055,000, or 4.3%, to $49,637,000, primarily the result of increased admissions and other event related revenue at Dover International Speedway's spring NASCAR weekend and the addition of a second Busch Series event at Nashville Superspeedway. The aforementioned increases in revenues were offset by a decline in admission revenues at the Company's Grand Prix of Long Beach and Nashville April Busch Series events. Operating expenses increased by $3,619,000, or 13.4%, in the first six months of 2002 compared with the first six months of 2001, primarily due to increased purse and sanction fee expenses related to Dover International Speedway's spring NASCAR weekend, the opening of Nashville Superspeedway in April 2001 and the addition of a second Busch Series event at Nashville Superspeedway in 2002. Depreciation and amortization expense increased by $87,000 primarily due to the opening of Nashville Superspeedway in April 2001 and the addition of grandstand seats at Dover International Speedway in June 2001. The aforementioned increase was offset by the adoption of Statement of Financial Accounting Standards No. 142 which reduced the Company's amortization expense by $727,000 in the first six months of 2002 as compared to the first six months of 2001. General and administrative expenses increased by $2,019,000 to $7,397,000 from $5,378,000 in the first six months of 2001, primarily due to the opening of Nashville Superspeedway in April 2001 and an increase in wages and related employee benefits, insurance, taxes, and pre-opening expenses related to the inaugural Grand Prix of Denver event scheduled for September 2002 and the inaugural Grand Prix of St. Petersburg event scheduled for February 2003. Net interest expense increased by $1,261,000 primarily the result of the Company capitalizing $1,531,000 of interest related to the construction of major facilities in the first six months of 2001. No interest was capitalized in the first six months of 2002. Capitalization of interest on Nashville Superspeedway ceased when the facility opened in April 2001. The Company's effective income tax rates for the six months ended June 30, 2002 and 2001 were 39.3% and 43.4%, respectively. The decrease resulted primarily from the classification of direct costs of the spin-off as part of the discontinued operation and the non-deductibility of some of these costs for tax purposes. Earnings from continuing operations before cumulative effect of accounting change decreased by $2,588,000, primarily the result of lower admission revenues at the Company's Grand Prix of Long Beach and Nashville April Busch Series events, increased purse and sanction fee expenses related to Dover International Speedway's spring NASCAR weekend, the opening of Nashville Superspeedway in April 2001 and the addition of a second Busch Series event at Nashville Superspeedway, increased general and administrative expenses due to the opening of Nashville Superspeedway and an increase in wages and related employee benefits, insurance, taxes, and pre-opening expenses related to the inaugural Grand Prix of Denver and the inaugural Grand Prix of St. Petersburg, and increased interest expense due to the opening of Nashville Superspeedway at which point capitalization of interest on construction of the Superspeedway ceased. The aforementioned decreases in earnings from continuing operations were offset by an increase in revenues primarily the result of increased admissions and other event related revenue at Dover International Speedway's spring NASCAR weekend and the addition of a second Busch Series event at Nashville Superspeedway. Earnings from discontinued operation (net of income taxes) were $4,477,000 in the first six months of 2002 compared to $11,143,000 in the first six months of 2001. The Company's tax-free spin-off of its gaming business became effective March 31, 2002 and as a result, earnings from discontinued operation were no longer recognized by the Company subsequent to that date. 14 The Company recorded a non-cash charge of $28,606,000 as a cumulative effect of an accounting change for the write-off of goodwill associated with the Grand Prix Association of Long Beach, Inc. (Grand Prix), a wholly owned subsidiary, in the first six months of 2002. The charge resulted from the adoption of FASB Statement No. 142, Goodwill and Other Intangible Assets, which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually for impairment. Goodwill associated with Grand Prix, which was acquired through a tax-free merger, is not deductible for income tax purposes and represents a permanent difference for which no current or deferred income tax liabilities are recorded. As such, no income tax benefit was recognized from the impairment write-off. Liquidity and Capital Resources Net cash provided by continuing operations was $9,284,000 for the six months ended June 30, 2002 compared to $9,510,000 for the six months ended June 30, 2001. The decrease in 2002 as compared to 2001 was primarily due to a reduction in earnings from continuing operations before cumulative effect of accounting change and depreciation and amortization expense from $10,249,000 in 2001 to $7,748,000 in 2002, the timing of receipts from customers, and an increase in prepaid insurance and other expenses that are incurred directly by the Company subsequent to the spin-off. The aforementioned decreases in net cash provided by continuing operations were offset by the timing of construction related payments, the timing of certain income tax payments and an increase in deferred revenue related to the inaugural Grand Prix of Denver event. Net cash used in investing activities was $881,000 for the six months ended June 30, 2002 compared to $22,730,000 for the six months ended June 30, 2001. The decrease in 2002 was primarily due to the completion of Nashville Superspeedway in April 2001. Net cash used in financing activities was $8,914,000 for the six months ended June 30, 2002 as compared to net cash provided by financing activities of $20,362,000 for the six months ended June 30, 2001. The change from 2002 to 2001 was primarily due to reduced borrowings under our revolving credit agreement since the majority of the 2001 borrowings were for construction of the Nashville Superspeedway. The Company entered into a new $105,000,000 unsecured credit facility on February 20, 2002 that expires on February 19, 2005. This new facility replaced the prior $150,000,000 facilities on its April 1, 2002 effective date. The new $105,000,000 credit facility does not include Dover Downs, Inc., as it was spun-off effective March 31, 2002. $45 million of the amount outstanding under the previous DVD credit facilities was paid down on April 1, 2002 through a new $55 million credit facility which has been established by Gaming & Entertainment. Interest is based, at the Company's option, upon LIBOR or the base rate (the greater of the prime rate or the federal funds rate plus .5%) , plus a margin determined by the Company's leverage ratio. The credit facility contains certain covenants including; minimum net worth, fixed charge coverage and maximum leverage ratio requirements. The Company was not in compliance with the leverage ratio covenant at June 30, 2002, but on July 29, 2002 the Company and the banks entered into an amendment that revised this covenant effective June 29, 2002. As a result of the amendment, the Company is now in compliance with the leverage ratio covenant. The Company expects to be in compliance with the covenants at the next measurement date. Material adverse changes in the Company's results of operation would impact our ability to maintain financial ratios necessary to satisfy these requirements. The facility is for seasonal funding needs, capital improvements and other general corporate purposes, and is guaranteed by all of the Company's subsidiaries. At June 30, 2002, there was $59,688,000 outstanding under the facility at a weighted average interest rate of 4.69%. We expect to make capital expenditures of approximately $6 million during the second half of 2002. These projects primarily relate to improvements necessary to promote our inaugural Grand Prix of Denver and Grand Prix of St. Petersburg events, as well as, various improvements at our fixed facilities. The Company expects that its net cash flows from operating activities and funds available from its credit facility will be sufficient to provide for its working capital needs and capital spending requirements in calendar 2002, as well as any cash dividends the board of directors may declare. If there are no significant additions to our race schedule, our future capital expenditure requirements should be significantly less than in 2001. As a result, we would expect cash flows from operating activities and funds available from our credit facility to also provide for long-term liquidity. 15 Related Party Transactions During the six months ended June 30, 2002 and 2001, Gaming & Entertainment allocated corporate costs of $429,000 and $1,040,000, respectively, to the Company. The allocation was based on both an allocation to the business that directly incurred the costs and an analysis of each company's share of the costs. The net costs incurred by each company for these services are not necessarily indicative of the costs that would have been incurred if the companies had been separate, independent entities and had otherwise managed these functions; however, management believes that these allocations are reasonable. At June 30, 2002, Gaming & Entertainment owed the Company $2.7 million for its portion of the consolidated federal income tax liability for 2002. This receivable is included in the income taxes receivable balance reported on the June 30, 2002 balance sheet and is expected to be received by September 15, 2002. Use by Gaming & Entertainment of our 5/8-mile harness racing track is under an easement granted by us which does not require the payment of any rent. Under the terms of the easement Gaming & Entertainment has exclusive use of the harness track during the period beginning November 1 of each year and ending April 30 of the following year, together with set up and tear down rights for the two weeks before and after such period. The harness track is located on property owned by us and is on the inside of our one-mile motorsports speedway. Gaming & Entertainment's indoor grandstands are used by us free of charge in connection with our motorsports events. We also lease our principal executive office space from Gaming & Entertainment. Various easements and agreements relative to access, utilities and parking have also been entered into between the Company and Gaming & Entertainment. In conjunction with the spin-off, the Company and Gaming & Entertainment entered into various agreements that address the allocation of assets and liabilities between the two companies and that define the companies' relationship after the separation. The Transition Support Services Agreement provides for each of the Company and Gaming & Entertainment to provide each other with certain administrative and operational services subsequent to the spin-off. The Tax Sharing Agreement provides for, among other things, the treatment of income tax matters for periods beginning before and including the date of the spin-off and any taxes resulting from transactions effected in connection with the spin-off. Refer to NOTE 4 - Discontinued Operation for further discussion. Contractual Obligations The Company has issued a standby letter of credit to guarantee Variable Rate Tax Exempt Infrastructure Revenue Bonds, Series 1999, issued by the Sports Authority of Wilson, Tennessee in the amount of $25,900,000. The proceeds from the bonds were used to acquire, construct and develop certain public infrastructure improvements in Wilson County, Tennessee. Interest only payments are required until September 1, 2002, and will be made from a capitalized interest fund established from the bond proceeds. The principal payments range from $400,000 in September 2002 to $1,600,000 in 2029. When the capitalized interest fund is depleted, which is estimated to be September 1, 2002, the debt service on the bonds will be payable solely from sales and incremental property taxes generated from the facility. If the taxes are insufficient to cover the payment of principal and interest on the bonds, payments will be made pursuant to the aforementioned letter of credit. The Company believes that the sales and incremental property taxes generated from the facility will satisfy the debt service requirements of the bonds. However, if the debt service is not satisfied from the aforementioned sources, the bonds would become a liability of the Company. If we fail to maintain the letter of credit which secures the bonds or we allow an uncured default to exist under our reimbursement agreement relative to the letter of credit, the bonds would be immediately redeemable. The Company has entered into several sanctioning agreements to conduct motorsports events at its various venues. The Company has held NASCAR-sanctioned events for 33 consecutive years and its subsidiary, Grand Prix Association of Long Beach, has operated the Grand Prix of Long Beach for 28 consecutive years. Nonrenewal or termination of a sanctioning body event license could have a material adverse effect on the Company's financial condition and results of operations. 16 A subsidiary of the Company entered into an agreement (the "SWIDA loan") with Southwestern Illinois Development Authority ("SWIDA") to receive the proceeds from the "Taxable Sports Facility Revenue Bonds, Series 1996 (Gateway International Motorsports Corporation Project)", a Municipal Bond Offering, in the aggregate principal amount of $21,500,000, of which $19,905,000 is outstanding on June 30, 2002. The offering of the bonds closed on June 21, 1996. The repayment terms and debt service reserve requirements of the bonds issued in the Municipal Bond Offering correspond to the terms of the SWIDA loan. SWIDA loaned all of the proceeds from the Municipal Bond Offering to the Company's subsidiary for the purpose of the redevelopment, construction and expansion of Gateway International Raceway, and the proceeds of the SWIDA loan were irrevocably committed to complete construction of Gateway International Raceway, to fund interest, to create a debt service reserve fund and to pay for the cost of issuance of the bonds. The Company has established certain restricted cash funds to meet debt service as required by the SWIDA loan, which are held by the trustee (BNY Trust Company of Missouri). At June 30, 2002, $1,522,000 of the Company's cash balance is restricted by the SWIDA loan and is appropriately classified as a non-current asset in the accompanying consolidated balance sheet. A standby letter of credit for $2,502,000, which is secured by a Trust Deed on the Company's facilities in Memphis, Tennessee, also was obtained to satisfy debt service reserve fund obligations. The SWIDA loan is secured by a first mortgage lien on all the real property owned and a security interest in all property leased by the Company's subsidiary at Gateway International Raceway. Also, the SWIDA loan is unconditionally guaranteed by Grand Prix Association of Long Beach, Inc., a wholly owned subsidiary of the Company. The SWIDA loan bears interest at varying rates ranging from 8.35% to 9.25% with an effective rate of approximately 9.1%. The structure of the bonds permits amortization from February 1997 through February 2017 with debt service beginning in 2000 following interest only payments from February 1997 through August 1999. In addition, a portion of the property taxes to be paid by the Company (if any) to the City of Madison Tax Incremental Fund have been pledged to the annual retirement of debt and payment of interest. Critical Accounting Policies The accounting policies described below are those the Company considers critical in preparing its consolidated financial statements. These policies include significant estimates made by management using information available at the time the estimates are made. However, as described below, these estimates could change materially if different information or assumptions were used. The descriptions below are summarized and have been simplified for clarity. Goodwill The Company has made acquisitions in the past that included goodwill. Under accounting principles generally accepted in the United States of America in effect through December 31, 2001, these assets were amortized over their estimated useful lives, and were tested periodically to determine if they were recoverable from operating earnings on an undiscounted basis over their useful lives. Effective January 1, 2002, goodwill is no longer amortized but is subject to an annual (or under certain circumstances more frequent) impairment test based on its estimated fair value. Estimated fair value is typically less than values based on undiscounted operating earnings because fair value estimates include a discount factor in valuing future cash flows. We completed our analysis of impairment of our goodwill as a result of adopting Statement No. 142 during the second quarter of 2002 and recorded a non-cash charge of $28,606,000. There are many assumptions and estimates underlying the determination of our impairment loss. Another estimate using different, but still reasonable, assumptions could produce a significantly different result. Therefore, additional impairment losses could be recorded in the future. Accrued Pension Cost The benefits provided by the Company's pension plans are based on years of service and employee's remuneration over their employment with the Company. The Company establishes accrued pension costs in accordance with the provisions of Statement No. 87, Employers' Accounting for Pensions. Accrued pension costs are developed using actuarial principles and assumptions which consider a number of factors, including estimates for discount rate, assumed rate of compensation increase, and expected long-term rate of return on assets. Changes in these estimates would impact the amounts that the Company records in its consolidated financial statements. 17 Recent Accounting Pronouncements In June 2001, the FASB issued Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of Statement No. 142. The Company adopted the provisions of Statement No. 142 effective January 1, 2002, at which time the Company ceased to record amortization expense related to its goodwill. The adoption of Statement No. 142 resulted in a $363,000 reduction in amortization expense in the three months ended June 30, 2002 as compared to the three months ended June 30, 2001, and a $727,000 reduction in amortization expense in the six months ended June 30, 2002 as compared to the six months ended June 30, 2001. To comply with the transitional provisions of Statement No. 142, we have determined our reporting units and assigned goodwill and other net assets to those reporting units. Goodwill attributable to each of our reporting units at January 1, 2002 was tested for impairment by comparing the fair value of each reporting unit with its carrying value. Fair value was primarily determined through the use of a discounted cash flow methodology by an independent appraisal. To the extent fair value was determined to be less than the carrying value, fair value was then allocated to identifiable tangible and intangible assets resulting in an implied valuation of the goodwill associated with the reporting unit. Based on this analysis of goodwill, the Company recorded a non-cash charge of $28,606,000 associated with the goodwill of Grand Prix as a cumulative effect of an accounting change for the write-off of goodwill in the first six months of 2002. Goodwill associated with Grand Prix, which was acquired through a tax-free merger, is not deductible for income tax purposes and represents a permanent difference for which no current or deferred income tax liabilities are recorded. As such, no income tax benefit was recognized from the impairment write-off. In June 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The standard applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) normal use of the asset. Statement No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The fair value of the liability is added to the carrying amount of the associated asset and this additional carrying amount is depreciated over the life of the asset. The liability is accreted at the end of each period through charges to operating expense. If the obligation is settled for other than the carrying amount of the liability, a gain or loss on settlement would be recognized. We are required and plan to adopt the provisions of Statement No. 143 in 2003. To accomplish this, we must identify all legal obligations for asset retirement obligations, if any, and determine the fair value of these obligations on the date of adoption. We have not yet completed our analysis of the impact of adoption of this standard. In August 2001, the FASB issued Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While Statement No. 144 supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of that Statement. Statement No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. We adopted the provisions of Statement No. 144 effective January 1, 2002. The adoption of Statement No. 144 did not have a significant impact on our results of operations, financial position or cash flows since the spin-off transaction was governed by the prior rules of APB Opinion No. 30. On April 30, 2002, the FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The Statement updates, clarifies and simplifies existing accounting pronouncements. Statement No. 145 rescinds Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Opinion 30 will now be used to classify those gains and losses. Statement No. 64, Extinguishments of Debt Made to Satisfy 18 Sinking-Fund Requirements, amended Statement No. 4, and is no longer necessary because Statement 4 has been rescinded. Statement No. 145 amends Statement No. 13, Accounting for Leases, to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. Certain provisions of Statement No. 145 are effective for fiscal years beginning after May 15, 2002, while other provisions are effective for transactions occurring after May 15, 2002. The adoption of Statement No. 145 is not expected to have a significant impact on our results of operations, financial position or cash flows. In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and nullifies EITF 94-3. The Company plans to adopt Statement No. 146 in January 2003. Management believes that the adoption of this statement will not have a material effect on the Company's future results of operations. Factors That May Affect Operating Results; Forward-Looking Statements In addition to historical information, this Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, relating to our financial condition, profitability, liquidity, resources, business outlook, proposed acquisitions, market forces, corporate strategies, consumer preferences, contractual commitments, legal matters, capital requirements and other matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. To comply with the terms of the safe harbor, we note that a variety of factors could cause our actual results and experience to differ substantially from the anticipated results or other expectations expressed in our forward-looking statements. When words and expressions such as: "believes," "expects," "anticipates," "estimates," "plans," "intends," "objectives," "goals," "aims," "projects," "forecasts," "possible," "seeks," "may," "could," "should," "might," "likely," "enable," or similar words or expressions are used in this document, as well as statements containing phrases such as "in our view," "there can be no assurance," "although no assurance can be given," or "there is no way to anticipate with certainty," forward-looking statements are being made. Various risks and uncertainties may affect the operation, performance, development and results of our business and could cause future outcomes to differ materially from those set forth in our forward-looking statements, including the following factors: .. success of or changes in our growth strategies; .. our development and potential acquisition of new facilities; .. anticipated trends in the motorsports industry; .. patron demographics; .. our ability to enter into additional contracts with sponsors, broadcast media and race event sanctioning bodies; .. our relationships with sponsors; .. general market and economic conditions, including consumer and corporate spending sentiment; .. our ability to finance future business requirements; .. the availability of adequate levels of insurance; .. our ability to successfully integrate acquired companies and businesses; .. management retention and development; 19 .. changes in Federal, state, and local laws and regulations, including environmental regulations; .. the effect of weather conditions on outdoor event attendance; .. military or other government actions; .. availability of air travel; and .. national or local catastrophic events. We undertake no obligation to publicly update or revise any forward-looking statements as a result of future developments, events or conditions. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ significantly from those forecast in any forward-looking statements. Given these risks and uncertainties, stockholders should not overly rely or attach undue weight to our forward-looking statements as an indication of our actual future results. Our Relationship With Sanctioning Bodies Is Vital To Our Success In Motorsports Our continued success in motorsports is dependent upon keeping a good working relationship with the governing bodies of motorsports that sanction national racing events. These governing bodies include NASCAR, CART, IRL and NHRA. The governing bodies regularly issue and award sanctioned events and their issuance depends, in large part, on maintaining good working relationships with the sanctioning bodies. Many events are sanctioned on an annual basis. By awarding a sanctioned event or a series of sanctioned events, the sanctioning bodies do not warrant, either expressly or by implication, nor are they responsible for, the financial success of any sanctioned event. Moreover, no existing sanction agreement, unless expressly provided for in the agreement, can be construed to require the sanctioning body to enter into a sanction agreement or to issue a sanction for any other event in the future. Our inability to obtain additional sanctioned events in the future and to maintain sanction agreements at current levels would likely result in lower than anticipated revenues from admissions, sponsorships, hospitality, concessions, and merchandise, which could have a material adverse effect on our business, financial condition and results of operations. We Rely On Sponsorship Contracts To Generate Revenues We receive a substantial portion of our annual revenues from sponsorship agreements, including the sponsorship of our various events, our permanent venues, "official product" sponsorships, billboards, signage and skyboxes. Loss of our title sponsors or other major sponsorship agreements or failure to secure such sponsorship agreements in the future could have a material adverse effect on our business, financial condition and results of operations. Increased Government Regulation Of Sponsors And Restrictions On Advertising Could Substantially Reduce Our Advertising Revenue We receive a significant portion of our revenue from sponsorship and advertising by various companies. Tobacco and liquor companies have traditionally sponsored motorsports events. In June 1997, major tobacco companies entered into an agreement with federal negotiators and various states attorneys general whereby the tobacco companies agreed to give up certain advertising and promotional activity in exchange for liability limits in pending and future lawsuits. New laws or settlements could have a material adverse effect on the tobacco and liquor industry motorsports sponsorship and advertising expenditures. Government regulations and restrictions on advertising by tobacco companies, liquor companies and other potential sponsors could adversely impact revenues as well as the revenues of the motorsports industry as a whole. While we believe that the popularity of motorsports would allow us to secure alternate sponsors, there is no assurance that alternate sponsors could be obtained. 20 Our Motorsports Events Face Intense Competition For Attendance, Television Viewership And Sponsorship We compete with other auto speedways for the patronage of motor racing spectators as well as for promotions and sponsorships. Moreover, racing events sanctioned by different organizations are often held on the same dates at different tracks. The quality of the competition, type of racing event, caliber of the event, sight lines, ticket pricing, location and customer conveniences, among other things, distinguish the motorsports facilities. In addition, all of our events compete with other sports and recreational events scheduled on the same dates. As a result, our revenues and operations are affected not only by our ability to compete in the motorsports promotion market, but also by the availability of alternative spectator sports events, forms of entertainment and changing consumer preferences. Our Street Races Depend On City Permits And Good Relationships With City Officials And Others In order to conduct the Grand Prix of Long Beach, we must obtain an annual permit from the City of Long Beach to hold the race on city streets. Although Grand Prix has operated a racing event on the streets of Long Beach for twenty-eight years, there can be no assurance that this event will continue to be held or be successful. Similarly, the Grand Prix events we have planned for Denver, Colorado and St. Petersburg, Florida require that we obtain a variety of licenses and permits. Our agreements with the cities of Denver and St. Petersburg extend though 2008 and 2007, respectively. Our ability to conduct street races requires that we maintain excellent relationships with the host city and its officials. Furthermore, a portion of the Grand Prix of Denver will be run on property leased to us by the Pepsi Center. Therefore, we must maintain an excellent relationship with management of the Pepsi Center. Grand Prix's Ability To Meet Payment Obligations Under A Loan Agreement With An Illinois Government Agency Depends On Revenues From Gateway In order to finance the redevelopment of Gateway International Raceway, Grand Prix entered into a loan agreement with the Southwest Illinois Development Authority, which agreed to fund a loan to Grand Prix by issuing municipal bonds in the aggregate principal amount of $21,500,000. The bonds are unconditionally guaranteed by Grand Prix. Grand Prix issued a 20-year $21,500,000 promissory note to SWIDA which bears interest at an effective rate of approximately 9.1% per annum. Payments on the SWIDA loan are intended to be made primarily from the revenues from the operations of Gateway. Although Grand Prix is current on its obligation and expects to meet its future debt payment obligations out of the revenues from Gateway, and although Grand Prix will receive certain assistance from the City of Madison, Illinois in the form of a tax increment finance fund which should assist it in meeting its debt burdens, there can be no assurance that earnings from the future operations of Gateway will be sufficient to meet Grand Prix's debt service obligations. A default under the SWIDA loan could have a material adverse effect on our business, financial condition and results of operations. The Sales Tax And Property Tax Revenues To Service The Revenue Bonds For Infrastructure Improvements At Nashville May Be Inadequate In September 1999, the Sports Authority of Wilson County, Tennessee issued $25,900,000 in revenue bonds to build local infrastructure improvements which will benefit the operation of Nashville Superspeedway. Interest only payments are required until September 1, 2002 and will be made from a capitalized interest fund established from bond proceeds. When the capitalized interest fund is depleted, which is estimated to be September 1, 2002, the debt service on the bonds will be payable solely from sales and incremental property taxes generated from the facility. In the event the taxes are insufficient to cover the payment of principal and interest on the bonds, payments will be made under a $26,326,000 irrevocable direct-pay letter of credit issued by several banks pursuant to a reimbursement and security agreement under which we have agreed to reimburse the banks for drawings made under the letter of credit. Such an event could have a material adverse effect on our business, financial condition and results of operations. 21 The Seasonality Of Our Motorsports Events Increases The Variability Of Quarterly Earnings Our business has been, and is expected to remain, seasonal given that it depends on our outdoor events for a substantial portion of revenues. We derive a substantial portion of our motorsports revenues from admissions and event-related revenue attributable to six NASCAR-sanctioned events at Dover, Delaware which are currently held in June and September. This has been offset to some degree by our other motorsports events, but quarterly earnings will vary. Our Insurance May Not Be Adequate To Cover Catastrophic Incidents We maintain insurance policies that provide coverage within limits that are sufficient, in the opinion of management, to protect us from material financial loss incurred in the ordinary course of business. We also purchase special event insurance for motorsports events to protect against race-related liability. However, there can be no assurance that this insurance will be adequate at all times and in all circumstances. If we are held liable for damages beyond the scope of our insurance coverage, including punitive damages, our business, financial condition and results of operations could be materially and adversely affected. Bad Weather Can Have An Adverse Financial Impact On Our Motorsports Events We sponsor and promote outdoor motorsports events. Weather conditions affect sales of tickets, concessions and souvenirs, among other things at these events. Although we sell many tickets well in advance of the outdoor events and these tickets are issued on a non-refundable basis, poor weather conditions may adversely affect additional ticket sales, and concessions and souvenir sales, which could have an adverse effect on our business, financial condition and results of operations. We do not currently maintain weather-related insurance for major events. Due to the importance of clear visibility and safe driving conditions to motorsports racing events, outdoor racing events may be significantly affected by weather patterns and seasonal weather changes. Any unanticipated weather changes could impact our ability to stage events. This could have a material adverse effect on our business, financial condition and results of operations. Our Goodwill May Become Further Impaired In The Future And Require A Write Down To Comply With Accounting Standards In June 2001, the FASB issued Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with the provisions of Statement No. 142. We adopted the provisions of Statement No. 142 effective January 1, 2002 and as a result recorded a non-cash charge of $28,606,000 associated with the goodwill of Grand Prix as a cumulative effect of accounting change in the first six months of 2002. Even after this charge, approximately $21,883,000, or 7.5%, of our total assets as of June 30, 2002, consists of goodwill. If in the future the application of the test for impairment of goodwill results in a reduction in the carrying value of the goodwill, we will be required to record the amount of the reduction in goodwill as a non-cash charge against operating earnings which would also reduce our stockholders' equity. Item 3. Quantitative And Qualitative Disclosure About Market Risk The carrying values of DVD's long-term debt approximates its fair value at June 30, 2002 and December 31, 2001. DVD is exposed to market risks related to fluctuations in interest rates for its variable rate borrowings of $59,688,000 at June 30, 2002 under its revolving credit facilities. A change in interest rates of one percent on the balance outstanding at June 30, 2002 would cause a change in total annual interest costs of $597,000. In September 1999, the Sports Authority of the County of Wilson, Tennessee issued its Variable Rate Tax Exempt Infrastructure Revenue Bonds, Series 1999, in the amount of $25,900,000. DVD is exposed to market risks related to fluctuations in interest rates for these bonds. A significant change in interest rates could result in the Company being responsible for debt service payments not covered by the capitalized interest fund or the sales and incremental property taxes generated from the facility. 22 Part II - Other Information Item 1. Legal Proceedings We are a party to ordinary routine litigation incidental to our business. Management does not believe that the resolution of any of these matters is likely to have a serious negative effect on our results of operations, financial condition or cash flows. Item 2. Changes In Securities And Use Of Proceeds None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission Of Matters To A Vote Of Security Holders At the Annual Meeting of Stockholders held on May 22, 2002, Denis McGlynn and Jeffrey W. Rollins were re-elected as directors by the Company's stockholders. Directors whose terms of office continued after the meeting were Henry B. Tippie, Denis McGlynn, Patrick J. Bagley, Melvin Joseph, Jeffrey W. Rollins, John W. Rollins, Jr., R. Randall Rollins and Eugene W. Weaver. In addition to the election of two directors, the stockholders gave the Board of Directors discretionary authority to effect a reverse stock split in a ratio of one for two.
Votes Votes Shares Votes For Against Abstained Not Voted ----------- -------- --------- --------- Election of Denis McGlynn .............................. 245,963,659 - 2,991,409 3,020,034 Election of Jeffrey W. Rollins ......................... 248,798,009 - 157,059 3,020,034 Authorization for Board of Directors to effect a reverse stock split in a ratio of one for two .................. 248,471,570 443,414 40,084 3,020,034
Item 5. Other Information None. Item 6. Exhibits And Reports On Form 8-K (a) Exhibits 3.1 Amended and Restated By-laws of Dover Motorsports, Inc. dated April 1, 2002 as filed with the Company's Quarterly Report on Form 10-Q dated May 10, 2002, is incorporated herein by reference. 10.1 First Amendment to Credit Agreement among Dover Downs Entertainment, Inc. and PNC Bank, National Association, as agent, dated as of March 31, 2002. 10.2 Second Amendment to Credit Agreement among Dover Motorsports, Inc. and PNC Bank, National Association, as agent, dated as of July 29, 2002. 99.1 Certification of Periodic Financial Reports 23 (b) Reports on Form 8-K The Company filed a Form 8-K on April 1, 2002 announcing that the spin-off of Dover Downs, Inc., the gaming business of DVD, to the Company's stockholders was effective. The Company filed a Form 8-K on May 10, 2002 announcing the election of Patrick J. Bagley to the position of Vice President - Finance and the appointment of Kenneth K. Chalmers to the Company's Board of Directors and his appointment as chairman of the Company's audit committee. 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. DATED: August 7, 2002 Dover Motorsports, Inc. ----------------------- Registrant /s/ Denis McGlynn --------------------------- Denis McGlynn President and Chief Executive Officer and Director /s/ Patrick J. Bagley --------------------------- Patrick J. Bagley Vice President-Finance and Chief Financial Officer 24 EX-10.1 3 dex101.txt FIRST AMENDMENT TO CREDIT AGREEMENT DATED 3/31/2002 Exhibit 10.1 FIRST AMENDMENT TO CREDIT AGREEMENT FIRST AMENDMENT TO CREDIT AGREEMENT ( this "Amendment"), dated as of March 31, 2002, among DOVER DOWNS ENTERTAINMENT, INC. (the "Borrower"), the several banks and other financial institutions parties to the Credit Agreement (as hereinafter defined) (individually, a "Bank"; collectively, the "Banks") and PNC BANK, NATIONAL ASSOCIATION, as administrative agent for the Banks (in such capacity, the "Agent"). WHEREAS, the Borrower, the Banks and the Agent are parties to a Credit Agreement dated as of February 20, 2002 (as so amended, supplemented or otherwise modified, the "Credit Agreement"); WHEREAS, pursuant to Section 4.1(l) of the Credit Agreement, the agreement of each Bank to make the initial Extension of Credit is conditioned upon the completion by the Borrower of the spin off of its gaming operations in accordance with the transactions referred to in Section 6.4(c) of the Credit Agreement (the "Spinoff"); WHEREAS, simultaneously with and after giving effect to the Spinoff, the Borrower desires to change its name to Dover Motorsports, Inc (the "Name Change"); and WHEREAS, the Borrower, the Agent, and the Banks have agreed to modify the Credit Agreement to reflect (i) the change in the Borrower's name to Dover Motorsports, Inc., and (ii) the termination of the Swing Line Commitment therefrom, all on the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing and for other consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Defined Terms. Unless otherwise defined herein, terms defined in the Credit Agreement are used herein as therein defined. 2. Amendment to Credit Agreement. The Credit Agreement is hereby amended as follows effective as of the effective date of the Name Change: (a) Any reference to the Borrower as Dover Downs Entertainment, Inc. is hereby modified to reflect the change in the Borrower's name to Dover Motorsports, Inc. The Swing Line Commitment is hereby terminated and any reference thereto or to the terms the "Swing Line Bank", "Swing Line Commitment", "Swing Line Loan", the "Swing Line Note", and "Swing Line Repayment Date" shall not be given any effect. The revised Schedule I attached hereto, which reflects the termination of the Swing Line Commitment, shall be substituted for the Schedule I now attached to the Credit Agreement. (b) Section 2.3 is hereby amended and restated to read in full as follows: "2.3 Intentionally Deleted." 3. Amended. The Borrower shall execute and deliver to the Agent amended and restated revolving credit notes (the "Amended Notes") for each Bank reflecting the Borrower's name change to Dover Motorsports, Inc. The Agent shall deliver the Amended Notes to each Bank in exchange for the existing Notes of such Bank which shall thereafter, and together with the Swing Line Note, be returned by the Agent to the Borrower for cancellation. 4. Representations and Warranties. The Borrower hereby represents and warrants to the Banks and the Agent that: (a) There exists no Default or Event of Default under the Credit Agreement as amended hereby; (b) The representations and warranties made in the Credit Agreement are true and correct in all material respects on and as of the date hereof as if made on and as of the date hereof after giving effect to the revised Schedules attached hereto; (c) The Spinoff has been completed; (d) Other than the Name Change, there have been no changes to either of the certificate of incorporation or by-laws of the Borrower as in effect since the most recent date true and correct copies were delivered to the Agent; and (e) The execution and delivery of this Amendment and the Amended Notes by and on behalf of the Borrower, has been duly authorized by all requisite action on behalf of the Borrower and this Amendment and the Amended Notes constitute the legal, valid and binding obligations of the Borrower, enforceable against it in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 5. Conditions Precedent. The effectiveness of the amendments set forth herein is subject to the fulfillment, to the satisfaction of the Agent and its counsel, of the following conditions precedent: (a) The Borrower shall have delivered to the Agent the following, all of which shall be in form and substance satisfactory to the Agent and shall be duly completed and executed: (i) This Amendment; (ii) The Amended Notes; (iii) Evidence of the Borrower's name change filed with the Delaware Secretary of State; and 2 (iv) Such additional documents, certificates, and information as the Agent may require pursuant to the terms hereof or otherwise reasonably request. (b) The representations and warranties set forth in the Credit Agreement shall be true and correct in all material respects on and as of the date hereof after giving effect to the updated Schedules attached hereto. 6. Ratification; References; No Waiver. Except as the provisions thereof have been expressly amended or waived by this Amendment, the Credit Agreement shall continue to be, and shall remain, unaltered and in full force and effect in accordance with its terms. All references in the Credit Agreement and the other Loan Documents to the Credit Agreement shall be to the Credit Agreement as amended by this Amendment and all references in the Credit Agreement and the other Loan Documents to the Notes shall include the Amended Notes. This Amendment does not and shall not be deemed to constitute a waiver by the Agent or the Banks of any Default or Event of Default or of any of the Agent's or the Banks' other rights or remedies. 7. Release and Indemnity. Recognizing and in consideration of the Banks' and the Agent's agreement to the waivers and amendments set forth herein, the Borrower hereby waives and releases the Banks and the Agent and their respective officers, attorneys, agents, and employees from any liability, suit, damage, claim, loss or expense of any kind or nature whatsoever and howsoever arising that such Borrower ever had or now has against any of them arising out of or relating to any Bank's or the Agent's acts or omissions with respect to this Amendment, the Credit Agreement, the other Loan Documents or any other matters described or referred to herein or therein. The Borrower further hereby agrees to indemnify and hold the Agent and the Banks and their respective officers, attorneys, agents and employees harmless from any loss, damage, judgment, liability or expense (including counsel fees) suffered by or rendered against the Banks or the Agent or any of them on account of anything arising out of this Amendment, the Credit Agreement, the other Loan Documents or any other document delivered pursuant thereto up to and including the date hereof; provided that, no Borrower shall have any obligation hereunder to any Bank or the Agent with respect to indemnified liabilities arising from the gross negligence or willful misconduct of such Bank or the Agent. 8. Miscellaneous. (a) Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania. (b) Successor and Assigns. The terms and provisions of this Amendment shall be binding upon and shall inure to the benefit of the Borrower, the Agent and the Banks and their respective successors and assigns. (c) Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed to be an original, and all of which shall constitute one and the same instrument. (d) Headings. The headings of any paragraph of this Amendment are for convenience only and shall not be used to interpret any provision hereof. 3 (e) Modifications. No modification hereof or any agreement referred to herein shall be binding or enforceable unless in writing and signed on behalf of the party against whom enforcement is sought. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. DOVER DOWNS ENTERTAINMENT, INC. By: /s/ Denis McGlynn --------------------------------- Name: Denis McGlynn Title: President 4 PNC BANK, DELAWARE, as Agent and as a Bank By: /s/ Theodore Prushinski ------------------------------------- Name: Theodore Prushinski Title: Vice President WILMINGTON TRUST COMPANY, as a Bank By: /s/ Michael B. Gast ------------------------------------- Name: Michael B. Gast Title: Vice President ALLFIRST BANK, as a Bank By: /s/ William Keehn ------------------------------------- Name: William Keehn Title: Assistant Vice President WILMINGTON SAVINGS FUND SOCIETY, FSB, as a Bank By: /s/ M. Scott Baylis ------------------------------------- Name: M. Scott Baylis Title: Vice President FIRST UNION NATIONAL BANK, as a Bank By: /s/ Eileen McCrickard -------------------------------------- Name: Eileen McCrickard Title: Vice President NATIONAL CITY BANK, as a Bank By: /s/ Tara M. Handforth ------------------------------------- Name: Tara M. Handforth Title: Vice President 5 SCHEDULE I BANK AND COMMITMENT INFORMATION Bank and Address Commitment ---------------- ---------- PNC Bank, Delaware $35,000,000 222 Delaware Avenue 18th Floor Wilmington, DE 19801 Attn: Theodore Prushinski Wilmington Trust Company $15,000,000 121 South State Street Dover, DE 19901 Attn: Michael B. Gast Allfirst Bank $10,000,000 25 S. Charles St. M/C 101-744 Baltimore, MD 21201 Attn: William Keehn Wilmington Savings Fund Society, FSB $5,000,000 838 Market Street Wilmington, De 19801 Attn: M. Scott Baylis First Union National Bank $25,000,000 301 S. College Street Charlotte, NC 28288 Attn: Eileen McCrickard National City Bank $15,000,000 1 South Broad St. Philadelphia, PA 19107 Attn: Tara M. Handforth ------------- $105,000,000 6 EX-10.2 4 dex102.txt SECOND AMENDMENT TO CREDIT AGREEMENT DATED 07/30/2002 Exhibit 10.2 SECOND AMENDMENT TO CREDIT AGREEMENT SECOND AMENDMENT TO CREDIT AGREEMENT ( this "Amendment"), dated as of July 30, 2002, among DOVER MOTORSPORTS, INC. (the "Borrower"), the several banks and other financial institutions parties to the Credit Agreement (as hereinafter defined) (individually, a "Bank"; collectively, the "Banks") and PNC BANK, DELAWARE, as administrative agent for the Banks (in such capacity, the "Agent"). WHEREAS, the Borrower, the Banks and the Agent are parties to a Credit Agreement dated as of February 20, 2002, as amended by a First Amendment to Credit Agreement dated as of March 31, 2002 (as so amended, supplemented or otherwise modified, the "Credit Agreement"); and WHEREAS, the Borrower, the Agent, and the Banks have agreed to amend the Credit Agreement by (i) modifying the Applicable Margin for Base Rate Loans and Eurodollar Loans, (ii) modifying the Commitment Fee Rate, and (iii) resetting the Leverage Ratio, all on the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the foregoing and for other consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Defined Terms. Unless otherwise defined herein, terms defined in the Credit Agreement are used herein as therein defined. 2. Amendment to Credit Agreement. The Credit Agreement is hereby amended as follows effective as of June 29, 2002: (a) The table set forth in the definition of "Applicable Margin" in Section 1.1 is hereby amended and restated in full to read as follows: "Level Leverage Ratio Base Rate Loan Eurodollar Loan ------ -------------- -------------- --------------- I Less than or equal to 2.50 0% 1.75% to 1.0 II Greater than 2.50 to 1.0 0% 2.00% but less than or equal to 3.00 to 1.0 III Greater than 3.00 to 1.0 0.25% 2.75% but less than or equal to 3.50 to 1.0 IV Greater than 3.50 to 1.0 0.50% 3.00%" (b) The table set forth in the definition of "Commitment Fee Rate" in Section 1.1 is hereby amended and restated in full to read as follows: "Level Leverage Ratio Commitment Fee Rate ------ -------------- ------------------- I Less than or equal to 2.50 to 1.0 0.25% II Greater than 2.50 to 1.0 but less 0.375% than or equal to 3.00 to 1.0 III Greater than 3.00 to 1.0 but less 0.375% than or equal to 3.50 to 1.0 IV Greater than 3.50 to 1.0 0.50%" (c) Section 6.1(a) entitled "Leverage Ratio" is hereby amended and restated in full to read as follows: "(a) Leverage Ratio. Permit, as of the end of any fiscal quarter ending during the periods specified below, the Leverage Ratio to exceed that set forth opposite such periods: "Period Ratio ------ ----- June 30, 2002 through December 30, 2002 4.25 to 1 December 31, 2002 through March 30, 2003 4.00 to 1 March 31, 2003 through June 29, 2003 3.25 to 1 June 30, 2003 and thereafter 2.75 to 1" 3. Representations and Warranties. The Borrower hereby represents and warrants to the Banks and the Agent that: (a) There exists no Default or Event of Default under the Credit Agreement as amended hereby; (b) The representations and warranties made in the Credit Agreement are true and correct in all material respects on and as of the date hereof as if made on and as of the date hereof; and (c) The execution and delivery of this Amendment by and on behalf of the Borrower, has been duly authorized by all requisite action on behalf of the Borrower and this Amendment constitute the legal, valid and binding obligations of the Borrower, enforceable 2 against it in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law). 4. Conditions Precedent. The effectiveness of the amendments set forth herein is subject to the fulfillment, to the satisfaction of the Agent and its counsel, of the following conditions precedent: (a) The Borrower shall have delivered to the Agent the following, all of which shall be in form and substance satisfactory to the Agent and shall be duly completed and executed: (i) This Amendment; (ii) Copies, certified by the Secretary or an Assistant Secretary of the Borrower, of resolutions of the Board of Directors of the Borrower in effect on the date hereof authorizing the execution, delivery and performance of this Amendment and the other documents and transactions contemplated hereby; (iii) Copies, certified by one of the officers of the Borrower, the certificate of incorporation, By-laws and fictitious name filing, if any, of the Borrower as in effect, or a certificate stating that there have been no changes to any such documents since the most recent date, true and correct copies thereof were delivered to the Agent; and (iv) Such additional documents, certificates, and information as the Agent may require pursuant to the terms hereof or otherwise reasonably request. (b) The representations and warranties set forth in the Credit Agreement shall be true and correct in all material respects on and as of the date hereof. (c) The Borrower shall pay to the Agent for the benefit of the Banks an amendment and modification fee of 20 basis points (0.20%) on the amount of each Bank's Commitment. 5. Ratification; References; No Waiver. Except as the provisions thereof have been expressly amended or waived by this Amendment, the Credit Agreement shall continue to be, and shall remain, unaltered and in full force and effect in accordance with its terms. All references in the Credit Agreement and the other Loan Documents to the Credit Agreement shall be to the Credit Agreement as amended by this Amendment. This Amendment does not and shall not be deemed to constitute a waiver by the Agent or the Banks of any Default or Event of Default or of any of the Agent's or the Banks' other rights or remedies. 6. Release and Indemnity. Recognizing and in consideration of the Banks' and the Agent's agreement to the waivers and amendments set forth herein, the Borrower hereby waives and releases the Banks and the Agent and their respective officers, attorneys, agents, and employees from any liability, suit, damage, claim, loss or expense of any kind or nature whatsoever and howsoever arising that such Borrower ever had or now has against any of them 3 arising out of or relating to any Bank's or the Agent's acts or omissions with respect to this Amendment, the Credit Agreement, the other Loan Documents or any other matters described or referred to herein or therein. The Borrower further hereby agrees to indemnify and hold the Agent and the Banks and their respective officers, attorneys, agents and employees harmless from any loss, damage, judgment, liability or expense (including counsel fees) suffered by or rendered against the Banks or the Agent or any of them on account of anything arising out of this Amendment, the Credit Agreement, the other Loan Documents or any other document delivered pursuant thereto up to and including the date hereof; provided that, no Borrower shall have any obligation hereunder to any Bank or the Agent with respect to indemnified liabilities arising from the gross negligence or willful misconduct of such Bank or the Agent. 7. Miscellaneous. (a) Expenses. The Borrower agrees to pay all of the Agent's reasonable out-of-pocket expenses incurred in connection with the preparation, negotiation and execution of this Amendment including, without limitation, the reasonable fees and expenses of Ballard Spahr Andrews & Ingersoll, LLP. (b) Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Delaware. (c) Successor and Assigns. The terms and provisions of this Amendment shall be binding upon and shall inure to the benefit of the Borrower, the Agent and the Banks and their respective successors and assigns. (d) Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed to be an original, and all of which shall constitute one and the same instrument. (e) Headings. The headings of any paragraph of this Amendment are for convenience only and shall not be used to interpret any provision hereof. (f) Modifications. No modification hereof or any agreement referred to herein shall be binding or enforceable unless in writing and signed on behalf of the party against whom enforcement is sought. 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. DOVER MOTORSPORTS, INC. By: /s/ Patrick J. Bagley ----------------------------------------- Name: Patrick J. Bagley Title: Vice President - Finance PNC BANK, DELAWARE, as Agent and as a Bank By: /s/ Theodore Prushinski ------------------------------------------- Name: Theodore Prushinski Title: Vice President WILMINGTON TRUST COMPANY, as a Bank By: /s/ Michael B. Gast ------------------------------------------ Name: Michael B. Gast Title: Vice President ALLFIRST BANK, as a Bank By: /s/ William Keehn ------------------------------------------ Name: William Keehn Title: Assistant Vice President WILMINGTON SAVINGS FUND SOCIETY, FSB, as a Bank By: /s/ M. Scott Baylis ------------------------------------------ Name: M. Scott Baylis Title: Vice President WACHOVIA BANK, NATIONAL ASSOCIATION (formerly known as First Union National Bank), as a Bank By: /s/ Grainne M. Pergolini ------------------------------------------- Name: Grainne M. Pergolini Title: Vice President 5 NATIONAL CITY BANK, as a Bank By: /s/ Tara M. Handforth ------------------------------------------- Name: Tara M. Handforth Title: Vice President 6 EX-99.1 5 dex991.txt CERTIFICATION OF PERIODIC FINANCIAL REPORTS Exhibit 99.1 Certification of Periodic Financial Reports The undersigned hereby certify that the Quarterly Report on Form 10-Q of Dover Motorsports, Inc. for the quarterly period ended June 30, 2002, as filed on August 7, 2002 with the Securities and Exchange Commission, fully complies with the requirements of Section 13(a) of The Securities Exchange Act of 1934 (15 U.S.C. 78m) and that the information contained in the quarterly report fairly presents, in all material respects, the financial condition and results of operations of Dover Motorsports, Inc. DATED: August 7, 2002 /s/ Denis McGlynn ------------------------------------------ Denis McGlynn President and Chief Executive Officer and Director DATED: August 7, 2002 /s/ Patrick J. Bagley ------------------------------------------ Patrick J. Bagley Vice President-Finance and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----