Page 1 of 9
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/ X / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1997
OR
/___/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-11929
DOVER DOWNS ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 51-0357525
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1131 North DuPont Highway, Dover, Delaware 19901
(Address of principal executive offices) (Zip Code)
(302) 674-4600
(Registrant's telephone number, including area code)
(Former name of registrant)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Sections 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
As of January 31, 1997, the number of shares of each class of
the registrant's common stock outstanding is as follows:
Common stock - 2,889,000 shares
Class A common stock - 12,246,830 shares
FORM 10-Q Page 2 of 9
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
A. Basis of Preparation
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with the instructions to
Form 10-Q and do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the
quarter and six months ended January 31, 1997 are not necessarily
indicative of the results that may be expected for the year ending July
31, 1997.
B. Business Operations
For the video lottery operations, the difference between the
amount wagered by bettors and the amount paid out to bettors is
referred to as the win. The win is included in the amount recorded in
the Company's financial statements as gaming revenue. The Delaware
State Lottery Office sweeps the winnings from the video lottery
operations, collects the State's share of the winnings and the amount
due to the vendors under contract with the State who provide the video
lottery machines and associated computer systems, collects the amount
allocable to purses for harness horse racing and remits the remainder
to the Company as its commission for acting as a Licensed Agent.
Operating expenses include the amounts collected by the State (i) for
the State's share of the winnings, (ii) for remittance to the providers
of the video lottery machines and associated computer systems, and
(iii) for harness horse racing purses.
FORM 10-Q Page 3 of 9
DOVER DOWNS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF EARNINGS
Dollars in Thousands, Except Per Share Amounts
Quarter Ended Six Months Ended
January 31, January 31,
1997 1996 1997 1996
Revenues:
Motorsports $ 53 $ 18 $ 9,439 $ 8,497
Gaming (including win) (1) 18,157 4,673 34,975 4,739
18,210 4,691 44,414 13,236
Expenses:
Operating 14,411 3,946 30,277 7,049
Depreciation 530 343 989 642
General and administrative 656 526 1,406 925
15,597 4,815 32,672 8,616
Operating earnings 2,613 (124) 11,742 4,620
Interest (income) expense, net (130) 74 (47) 87
Earnings before income taxes 2,743 (198) 11,789 4,533
Income taxes 1,120 (14) 4,879 1,908
Net earnings $ 1,623 $ (184) $ 6,910 $ 2,625
Earnings per common share $ .10 $ (.01) $ .46 $ .18
Weighted average common shares
and common share equivalents
outstanding (000) 15,181 14,511
Dividends paid per common share None None
(1) Gaming revenues from the Company's video lottery (slot) machine
gaming operations include the total win from such operations.
The Delaware State Lottery Office collects the win and remits
a portion thereof to the Company as its commission for acting
as a Licensed Agent. The difference between total win and the
amount remitted to the Company is reflected in Operating
Expenses.
FORM 10-Q Page 4 of 9
DOVER DOWNS ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEET
Dollars in Thousands
January 31, July 31,
1997 1996
ASSETS
Current assets:
Cash and cash equivalents $11,378 $ 3,461
Accounts receivable 2,648 1,023
Due from State of Delaware 2,392 1,573
Inventories 425 380
Prepaid expenses 494 647
Prepaid income taxes 544 -
Deferred income taxes 62 59
Total current assets 17,943 7,143
Property, plant and equipment, net 43,509 36,466
Total assets $61,452 $43,609
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ - $ 3,500
Accounts payable 1,028 823
Purses due horsemen 2,087 2,254
Accrued liabilities 2,001 2,119
Income taxes payable - 2,445
Current portion of long-term debt 22 22
Deferred revenue 7,237 6,738
Dividend payable 1,211 -
Total current liabilities 13,586 17,901
Long-term debt 761 774
Deferred income taxes 552 487
Commitments and contingent liabilities
See Part II Legal Proceedings
Shareholders' equity:
Preferred stock, $.10 par value;
1,000,000 shares authorized; issued
and outstanding: none
Common stock, $.10 par value;
35,000,000 shares authorized; issued
and outstanding: January - 2,889,000;
July - none 289 -
Class A common stock, $.10 par value;
30,000,000 shares authorized; issued
and outstanding: January - 12,246,830;
July - 14,015,830 1,224 1,402
Additional paid-in capital 20,997 4,701
Retained earnings 24,043 18,344
Total shareholders' equity 46,553 24,447
Total liabilities and shareholders' equity $61,452 $43,609
FORM 10-Q Page 5 of 9
DOVER DOWNS ENTERTAINMENT, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Dollars in Thousands
Six Months Ended
January 31,
1997 1996
Cash flows provided by operating activities:
Net earnings $ 6,910 $ 2,625
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation 989 642
(Increase) decrease in assets:
Accounts receivable (1,625) (1,009)
Due from affiliate - 362
Due from State of Delaware (819) (787)
Inventories (45) (222)
Prepaid expenses 153 (483)
Increase (decrease) in liabilities:
Accounts payable 205 1,795
Purses due horsemen (167) -
Accrued liabilities (118) (448)
Current and deferred income taxes (2,927) (1,728)
Deferred revenue 499 269
Net cash provided by operating activities 3,055 1,016
Cash flows from investing activities:
Sale of short-term investments - 3,300
Capital expenditures (8,032) (8,885)
Net cash used in investing activities (8,032) (5,585)
Cash flows from financing activities:
Short-term borrowings (repayments) (3,500) 7,375
Repayment of long-term debt (13) (38)
Repayment to shareholder - (193)
Net proceeds from initial public offering 16,386 -
Proceeds of stock options exercised 21 -
Net cash provided by financing activities 12,894 7,144
Net increase in cash and cash equivalents 7,917 2,575
Cash and cash equivalents, beginning of period 3,461 98
Cash and cash equivalents, end of period $11,378 $ 2,673
Supplemental information:
Interest paid $ 125 $ 71
Income taxes paid $ 7,806 $ 3,048
FORM 10-Q Page 6 of 9
Item 2.Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations: Six Months Ended January 31, 1997 vs. Six
Months Ended January 31, 1996
Revenues increased by $31,178,000 to $44,414,000 primarily as a
result of the introduction of video lottery (slot) machines which were
in operation for the entire first six months of fiscal 1997 compared
with 34 days of operations in the first six months of fiscal 1996.
Motorsports revenues increased $942,000 or 11.1%. Approximately
$441,000 of the total motorsports revenue increase resulted from
increased attendance and $291,000 from increased ticket prices. The
remainder of the motorsports revenue increase of $210,000 related to
sponsorship, concession, broadcast and other ancillary revenues.
Harness horse racing revenues increased by $908,000 as a result of 183
days of simulcast operations in the first six months of fiscal 1997
compared with 59 days in the first six months of 1996 and from revenues
associated with exporting live harness horse races on 43 days in fiscal
1997 compared with none in fiscal 1996.
Operating expenses increased by $23,228,000 of which $20,803,000
was due to the introduction of video lottery (slot) machine operations.
Amounts retained by the State of Delaware, fees to the manager who
operates the video lottery (slot) machine operations, and the amount
collected by the State of Delaware for payment to the vendors under
contract with the State who provide the video lottery machines and
associated computer systems were $13,843,000 in the first six months of
fiscal 1997 and $1,495,000 in the first six months of fiscal 1996.
Amounts allocated from the video lottery operation for harness horse
racing purses were $4,003,000 in the first six months of 1997 and
$485,000 in the first six months of 1996. Wages and benefits of
recently hired employees for the video lottery (slot) machine operation
were $2,402,000. Advertising, promotional and customer complimentary
costs of $1,675,000 and costs associated with casino food and beverage
sales of $372,000 were the other significant operating costs of the
video lottery (slot) machine operations during the six-month period
ended January 31, 1997.
For the harness horse racing and simulcasting operations, wages and
benefits of recently hired people increased by $411,000, simulcast
costs increased by $521,000 and advertising expenses increased by
$130,000. All of the increases were related to the additional
simulcast days in the first six months of fiscal 1997.
Motorsports operating expenses were higher in 1997 primarily due to
a $245,000 increase in purse obligation expenses and related sanction
fees and a $72,000 increase in advertising expenses.
Depreciation increased by $347,000 or 54.0% primarily as a result
of capital expenditures related to the Company's video lottery casino
and motorsports facilities expansion.
FORM 10-Q Page 7 of 9
General and administrative costs increased by $481,000 to
$1,406,000 from $925,000 primarily as a result of increased wages and
benefits related to the video lottery operations.
The Company's effective income tax rates for the first six months
of fiscal 1997 and fiscal 1996 were 41.4% and 42.1%, respectively.
Net earnings increased by $4,285,000 due to the video lottery
(slot) machine operations that were in operation for the entire first
six months of fiscal 1997 compared with 34 days of operations in the
first six months of fiscal 1996, and also due to higher attendance and
event-related revenues at the Company's NASCAR sanctioned events in
September 1996 compared with September 1995.
Results of Operations: Quarter Ended January 31, 1997 vs. Quarter
Ended January 31, 1996
Revenues increased by $13,519,000 to $18,210,000 primarily as a
result of the introduction of video lottery (slot) machines, which were
in operation for the entire second quarter of fiscal 1997 compared with
34 days in the second quarter of fiscal 1996. Harness horse racing
revenues increased by $402,000 as a result of 91 days of simulcast
operations in the second quarter of fiscal 1997 compared with 48 days
in the second quarter of 1996 and from exporting live harness horse
races on 43 days in the second quarter of fiscal 1997 compared with
none in fiscal 1996.
Operating expenses increased by $10,465,000 of which $9,564,000 was
due to the introduction of video lottery (slot) machine operations.
Amounts retained by the State of Delaware, fees to the manager who
operates the video lottery (slot) machine operation, and the amount
collected by the State of Delaware for payment to the vendors under
contract with the State who provide the video lottery machines and
associated computer systems were $7,027,000 in the second quarter of
fiscal 1997 and $1,495,000 in the second quarter of 1996. Amounts
allocated from the video lottery operation for harness horse racing
purses were $2,062,000 in the second quarter of 1997 and $485,000 in
the second quarter of 1996. Wages and benefits related to the video
lottery (slot) machine operation were $1,356,000 in the second quarter
of 1997. Advertising, promotional and customer complimentary costs of
$752,000 and costs associated with casino food and beverage sales of
$201,000 were the other significant operating costs of the video
lottery (slot) machine operation.
For the harness horse racing and simulcasting operations, wages and
benefits increased by $182,000, simulcast costs increased by $255,000,
and advertising expenses increased by $105,000.
Depreciation increased by $187,000 or 54.5% primarily as a result
of capital expenditures related to the Company's video lottery casino
and motorsports facilities expansion.
FORM 10-Q Page 8 of 9
General and administrative costs increased by $130,000 to $656,000
from $526,000 primarily as a result of increased wages and benefits
related to the video lottery operations.
The Company's effective income tax rate for the second quarter of
fiscal 1997 was 40.8%.
Net earnings increased by $1,807,000 due to the video lottery
(slot) machine operations that were in operation for the entire second
quarter of fiscal 1997 compared with 34 days of operations in the
second quarter of fiscal 1996.
Liquidity and Capital Resources
Cash flows from operations for the six months ended January 31,
1997 and 1996 were $3,055,000 and $1,016,000, respectively. The reason
for the increase in cash flows was primarily the increased net
earnings, offset by the timing of certain income tax and other
payments.
Capital expenditures for the first six months of fiscal 1997 were
$8,032,000 and related primarily to the expansion of the video lottery
(slot) facility and the addition of motorsports grandstand seating.
On January 29, 1997, the Board of Directors of the Company declared
a quarterly cash dividend on common stock of $.08 per share. The
dividend will be payable on March 10, 1997 to shareholders of record at
the close of business on February 10, 1997.
The Company has a $20,000,000 committed revolving line of credit
from PNC Bank to provide seasonal funding needs and to finance capital
improvements. There were no amounts outstanding under the credit
facility at January 31, 1997.
On October 3, 1996, the Company issued 1,075,000 shares of common
stock at $17.00 per share. The Company used $3,500,000 of the proceeds
to pay down the Company's revolving credit facility and has financed
capital expenditures through January 31, 1997 with the proceeds.
Management expects to use the remaining proceeds from the initial
public offering for additional capital expenditures and general
corporate purposes.
Management believes that the net proceeds of the public offering
together with cash flows from operations and funds available under its
bank credit facility will satisfy the Company's cash requirements for
fiscal 1997.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are various claims and legal actions pending against the
Company. In the opinion of management, based on the advice of counsel,
it is only remotely likely that the ultimate resolution of these claims
and actions will be material.
FORM 10-Q Page 9 of 9
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
DATE: February 26, 1997 Dover Downs Entertainment, Inc.
(Registrant)
/s/ Denis McGlynn
Denis McGlynn
President and Chief Executive Officer
/s/ Timothy R. Horne
Timothy R. Horne
Vice President-Finance
(Principal Financial and
Accounting Officer)