NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
Business Operations
References in this document to we, us and our mean Dover Motorsports, Inc. and/or its wholly owned subsidiaries, as
appropriate.
Dover Motorsports, Inc. is a public holding company that is a leading
marketer and promoter of motorsports entertainment in the United States. Our motorsports subsidiaries operate four motorsports tracks in three states and we promoted 15 major events during 2007 under the auspices of three of the premier sanctioning
bodies in motorsportsthe National Association for Stock Car Auto Racing (NASCAR), the Indy Racing League (IRL) and the National Hot Rod Association (NHRA). We own and operate Dover International
Speedway
®
in Dover, Delaware; Gateway International Raceway
®
near St. Louis, Missouri; Memphis Motorsports Park
®
in Memphis, Tennessee; and Nashville Superspeedway
®
near Nashville, Tennessee.
In 2007, we promoted the following major events:
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|
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2 NASCAR Sprint Cup Series events (formerly known as NEXTEL Cup Series events);
|
|
|
|
6 NASCAR Nationwide Series events (formerly known as Busch Series, Grand National Division events);
|
|
|
|
4 NASCAR Craftsman Truck Series events;
|
Additionally, we
promoted a NASCAR Busch East Series event at Dover International Speedway in connection with our September NASCAR event weekend.
NOTE 2 Summary
of Significant Accounting Policies
Basis of consolidation and presentation
The accompanying consolidated financial
statements include the accounts of Dover Motorsports, Inc. and our wholly owned subsidiaries. Intercompany transactions and balances have been eliminated.
Cash equivalents
We consider as cash equivalents all highly-liquid investments with an original maturity of three months or less.
Investments
We account for our investments in marketable securities in accordance with Financial Accounting Standards Board
(FASB) Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. These investments, which consist of mutual funds, are classified as available-for-sale and reported at fair-value in our consolidated
balance sheets. Changes in fair value are reported in other comprehensive income (loss). See NOTE 10 Stockholders Equity and NOTE 11 Financial Instruments for further discussion.
Accounts receivable
Accounts receivable are stated at their estimated collectible amount and do not bear interest.
Inventories
Inventories of items for resale are stated at the lower of cost or market with cost being determined on the first-in, first-out
basis.
Derivative instruments and hedging activities
We are subject to interest rate risk on the variable component of the
interest rate under our revolving credit agreement. Effective October 21, 2005, we entered into a $37,500,000 interest rate swap agreement. The notional amount of the swap agreement decreased to $30,000,000 on November 1, 2006, to
$20,000,000 on November 1, 2007, and decreases to $10,000,000 on November 1, 2008. The agreement terminates on November 1, 2009. The interest rate swap is being accounted for in accordance with the provisions of FASB Statement
No. 133,
Accounting for Derivative Instruments and Hedging Activities,
as amended by Statement
37
Nos. 137, 138 and 149 and related interpretations. We have designated the interest rate swap as a cash flow hedge. Changes in the fair value of the effective
portion of the interest rate swap are recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. See NOTE 7 Long-Term Debt and NOTE 11 Financial Instruments for further discussion.
Property and equipment
Property and equipment is stated at cost. Depreciation is provided for financial reporting purposes using the
straight-line method over the following estimated useful lives:
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Facilities
|
|
10-40 years
|
Furniture, fixtures and equipment
|
|
5-10 years
|
Impairment of long-lived assets
We evaluate our long-lived assets other than goodwill
in accordance with the provisions of FASB Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets
. Long-lived assets other than goodwill are assessed for impairment whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. To analyze recoverability for assets to be held and used, we project undiscounted net future cash flows expected to be generated by the asset over the remaining lives of such assets. If these
projected cash flows are less than the carrying value, an impairment loss would be recognized equal to the difference between the carrying value and the fair value of the assets. See NOTE 3 Impairment Charges for further discussion.
Interest capitalization
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 years ended December 31, 2007 and 2006, respectively, we incurred $4,482,000 and $4,115,000 of interest cost, of which $147,000 and $57,000 was
capitalized. No interest was capitalized during the year ended December 31, 2005.
Income taxes
Deferred income taxes are
provided
,
on all differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements based upon enacted statutory tax rates in effect at the balance sheet date. We record a valuation
allowance to reduce our deferred tax assets when uncertainty regarding their realizability exists. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.
As
further discussed in NOTE 8 Income Taxes, we adopted FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48), on January 1, 2007. We record interest related to unrecognized tax
benefits in interest expense in the consolidated statements of operations and other liabilities in the consolidated balance sheets.
Revenue recognition
We classify our revenues as admissions, event-related, broadcasting and other. Admissions revenue includes ticket sales for all Company events. Event-related revenue includes amounts
received from sponsorship fees; luxury suite rentals; hospitality tent rentals and catering; concessions and souvenir sales and vendor commissions for the right to sell concessions and souvenirs at our facilities; sales of programs; track rentals
and other event-related revenues. Broadcasting revenue includes rights fees obtained for television and radio broadcasts of events held at our speedways and ancillary rights fees. Other revenue includes other miscellaneous
revenues.
Revenues pertaining to specific events are deferred until the event is held. Concession revenue from concession stand sales and
sales of souvenirs are recorded at the time of sale. Revenues and related expenses from barter transactions in which we receive advertising or other goods or services in exchange for sponsorships of motorsports events are recorded at fair value in
accordance with Emerging Issues Task Force (EITF) Issue No. 99-17,
Accounting for Advertising Barter Transactions
. Barter transactions accounted for $1,240,000, $1,207,000 and $1,438,000 of total revenues for the years ended
December 31, 2007, 2006 and 2005, respectively.
We derive a substantial portion of our motorsports revenues from admissions,
event-related and broadcasting revenue attributable to our NASCAR Sprint Cup Series and NASCAR Nationwide Series events at Dover, Delaware which are currently held in June and September.
38
Under the terms of our sanction agreements, NASCAR retains 10% of the gross broadcast rights fees
allocated to each NASCAR Sprint Cup Series or NASCAR Nationwide Series event as a component of its sanction fees and remits the remaining 90% to the event promoter, which we record as revenue. The event promoter is required to pay 25% of the gross
broadcast rights fees to the event as part of the awards to the competitors, which we record as operating expenses.
Expense
recognition
Certain direct expenses pertaining to specific events, including prize and point fund monies and sanction fees paid to various sanctioning bodies, including NASCAR, advertising and other expenses associated with the promotion of
our racing events are deferred until the event is held, at which point they are expensed.
The cost of non-event related advertising,
promotion and marketing programs is expensed as incurred.
Advertising expenses were $3,299,000, $2,755,000 and $2,879,000 in 2007, 2006
and 2005, respectively.
Net earnings (loss) per common share
Weighted average shares used in computing basic and diluted net
earnings (loss) per common share (EPS) are as follows:
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|
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|
|
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|
Years ended December 31,
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|
2007
|
|
2006
|
|
2005
|
Basic EPS
|
|
35,875,000
|
|
35,994,000
|
|
38,913,000
|
Effect of dilutive securities
|
|
142,000
|
|
|
|
174,000
|
|
|
|
|
|
|
|
Diluted EPS
|
|
36,017,000
|
|
35,994,000
|
|
39,087,000
|
|
|
|
|
|
|
|
Dilutive securities include stock options and nonvested stock awards.
For the years ended December 31, 2007, 2006 and 2005, options to purchase approximately 238,000, 303,000 and 378,000 shares of common stock,
respectively, were outstanding but not included in the computation of diluted EPS because the effect would be anti-dilutive. For the year ended December 31, 2006, options to purchase 804,596 shares of common stock were outstanding but not
included in the computation of diluted EPS because we had a net loss and all outstanding options would have been anti-dilutive. In addition, as a result of the net loss for the year ended December 31, 2006, 266,200 shares of nonvested stock
awards were not included in the computation of diluted EPS as they would also have been anti-dilutive.
Accounting for stock-based
compensation
Prior to January 1, 2006, we accounted for our stock-based compensation expense in accordance with Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees
, and
related interpretations, pursuant to which we recognized compensation expense for our nonvested stock awards over the vesting period equal to the fair market value of the stock on the grant date. We were not required to recognize compensation
expense related to our stock options as all options granted had an exercise price equal to the market value of the underlying common stock on the grant date.
Effective January 1, 2006, we adopted FASB Statement No. 123R,
Share-Based Payment.
Statement No. 123R revises FASB Statement No. 123,
Accounting for Stock-Based Compensation,
and
supercedes APB Opinion No. 25 and related interpretations. Statement No. 123R requires recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the
employee is required to perform the services. We adopted Statement No. 123R using the modified prospective method. Under this method, we are required to record compensation expense for all awards granted after the date of adoption and for the
unvested portion of previously granted awards that remain outstanding at the date of adoption. We calculate compensation expense for our stock options based upon the fair value at the grant date using the Black-Scholes option pricing model. The
modified prospective approach does not allow for the restatement of prior period amounts.
Prior to the adoption of Statement
No. 123R, we presented all tax benefits of deductions resulting from the vesting of nonvested stock awards and exercise of stock options as tax benefit of stock options exercised within operating cash flows. Statement No. 123R requires the
cash flows resulting from the tax benefits from tax deductions in excess of the compensation cost recognized for nonvested stock awards and options (Excess Tax Benefits) to be classified as financing cash flows. The adoption of Statement
No. 123R had an immaterial effect on cash flows for the year ended December 31, 2006.
39
We recorded total stock-based compensation expense of $493,000, $411,000 and $200,000 as general and
administrative expenses for the years ended December 31, 2007, 2006 and 2005, respectively. Total stock-based compensation expense of $1,116,000 would have been recorded as general and administrative expenses for the year ended
December 31, 2005 had we been subject to reporting under Statement No. 123R during that period. Our loss from continuing operations before income tax benefit and net loss for the year ended December 31, 2006 was $177,000 lower than it
would have been pursuant to our previous accounting method for stock-based compensation, respectively. We recorded income tax benefits of $150,000, $95,000 and $82,000 for the years ended December 31, 2007, 2006 and 2005, respectively, related
to our nonvested restricted stock awards. The adoption of Statement No. 123R had no impact on basic and diluted earnings per share for the year ended December 31, 2006.
The following table illustrates the effect on net earnings and net earnings per common share if we had applied the fair-value recognition provisions of
Statement No. 123 to stock-based employee compensation:
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Year ended
December 31,
2005
|
|
Net earnings, as reported
|
|
$
|
4,576,000
|
|
Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects
|
|
|
118,000
|
|
Deduct: Total stock-based employee compensation expense determined under fair-value based method for all awards, net of related tax effects
|
|
|
(1,034,000
|
)
|
|
|
|
|
|
Pro forma net earnings
|
|
$
|
3,660,000
|
|
|
|
|
|
|
Net earnings per common share:
|
|
|
|
|
Basic as reported
|
|
$
|
0.12
|
|
Basic pro forma
|
|
$
|
0.09
|
|
|
|
Diluted as reported
|
|
$
|
0.12
|
|
Diluted pro forma
|
|
$
|
0.09
|
|
On December 12, 2005, the Compensation and Stock Incentive Committee of our Board of
Directors approved the accelerated vesting of unvested stock options held by our employees with an exercise price of $7.00 or higher, excluding those held by our President and Chief Executive Officer. This accelerated vesting affected options for
approximately 104,000 shares of our common stock, all of which had an exercise price in excess of the market price at the time. The decision to accelerate vesting of these stock options was made primarily to avoid recognizing compensation expense
upon our adoption of FASB Statement No. 123R. As a result of the acceleration, we included $430,000 of additional compensation expense in our 2005 pro forma net earnings above which we would have expensed over the course of the original vesting
periods had we not accelerated the vesting. Approximately, $184,000 of such compensation expense was avoided in 2006.
Use of
estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Segment information
We account for our operating segment in accordance with FASB Statement No. 131,
Disclosures About Segments of an
Enterprise and Related Information
. Statement No. 131 establishes guidelines for public companies in determining operating segments based on those used for internal reporting to management. Based on these guidelines, we report information
under a single motorsports segment.
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement
No. 157,
Fair Value Measurements
, which establishes a framework for measuring fair value and expands disclosures about fair value measurements. Statement No. 157 applies under other accounting pronouncements that require or permit
fair value measurements and, accordingly, Statement No. 157 does not require any new fair value measurements. Statement
40
No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal
years, for financial assets and liabilities that are measured at fair value on a recurring basis. The FASB has agreed to a one-year deferral of Statement No. 157s fair value measurement requirements for non-financial assets and
liabilities that are not required or permitted to be measured at fair value on a recurring basis. We do not expect the adoption of Statement No. 157 to have a significant impact on our consolidated financial statements.
In February 2007, the FASB issued Statement No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities
. Statement
No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value. Statement No. 159 is effective for fiscal years beginning after November 15, 2007. Companies may not adopt SFAS
No. 159 on a retrospective basis unless they choose early adoption. We do not expect the adoption of Statement No. 159 to have a significant impact on our consolidated financial statements.
NOTE 3 Impairment Charges
Approximately
one-third of our revenues are derived from the broadcast rights received through the arrangements that NASCAR has made with various broadcast media. In October of 2006, NASCAR informed us of the amount of live broadcast revenue the
industry expects to receive for each of the eight years beginning with the 2007 season under agreements that NASCAR has reached with its various broadcast partners.
Industry live broadcast revenue in 2007 was approximately $505,000,000 for the NASCAR Sprint Cup Series, NASCAR Nationwide Series and NASCAR Craftsman
Truck Series as compared with industry live broadcast revenue of approximately $576,000,000 in 2006. The average for the eight-year contract from 2007 through 2014 is $560,000,000, a 40% increase over the average for the prior six-year contract of
$400,000,000.
For the 2007 season, NASCAR allocated the live broadcast revenue as follows: $473,437,500 or 93.75% to the NASCAR
Sprint Cup Series; $29,037,500 or 5.75% to the NASCAR Nationwide Series; and $2,525,000 or 0.50% to the NASCAR Craftsman Truck Series. The allocation for 2007 was not significantly different than it was for the six years in the prior
contract. NASCAR reserves the right in its sole discretion to make changes to this allocation in future years.
Management anticipated that
the new contract would include an allocation of more of the broadcast revenue from the NASCAR Sprint Cup Series to the NASCAR Nationwide Series. The cash flows of our three Midwest facilities, consisting of Nashville Superspeedway, Memphis
Motorsports Park and Gateway International Raceway, are dependent upon sponsorships, admissions and live broadcast revenues, particularly from the NASCAR Nationwide Series. Because the allocation of live broadcast revenue for the NASCAR Nationwide
Series was less than anticipated, we concluded that it was necessary for us to review the long-lived assets of each of our three Midwest facilities for impairment. In accordance with FASB Statement No. 144, the recoverability of assets to be
held and used was measured by a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. As a result of the recoverability test, we concluded that the carrying amount of
each of our Midwest facilities exceeded the undiscounted cash flows.
If the carrying amount of the asset exceeds its fair value, then an
impairment charge is recognized by the amount by which the carrying amount of the asset exceeds its fair value. Fair value of the asset is determined primarily by the estimated fair market values of the assets. The valuation methodology employed
consisted of the cost approach, which gives specific consideration to the value of the land plus contributory value to the improvements. The long-lived assets deemed to be impaired consisted of track facilities. Based upon the cost approach utilized
for the valuations, there is an assumption that these three facilities will continue to operate as racetracks and it is our intention to continue operating them unless it is determined that future prospects no longer justify such action. These
facilities have generated negative cash flows for several years and we expect that these negative cash flows will continue at a declining rate as we monitor industry and Nationwide series changes made by NASCAR while continuing to reduce operating
expenses and increase revenues.
41
Based on the results of this analysis, we recorded non-cash impairment charges to write-down the carrying
value of long-lived assets at our Midwest facilities to fair value in 2006, as follows:
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|
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|
|
|
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Carrying Value of
Long-Lived Assets
|
|
Fair Value of
Long-Lived Assets
|
|
Non-Cash
Impairment Charges
|
Nashville
|
|
$
|
73,670,000
|
|
$
|
57,500,000
|
|
$
|
16,170,000
|
Memphis
|
|
|
20,582,000
|
|
|
12,700,000
|
|
|
7,882,000
|
Gateway
|
|
|
54,557,000
|
|
|
17,200,000
|
|
|
37,357,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
148,809,000
|
|
$
|
87,400,000
|
|
$
|
61,409,000
|
|
|
|
|
|
|
|
|
|
|
We account for goodwill in accordance with the provisions of FASB Statement No. 142,
Goodwill and Other Intangible Assets
. Goodwill is not amortized but is subject to an annual (or under certain circumstances more frequent) impairment test based on its estimated fair value. Based on the factors noted above related to the
long-lived assets impairment, we completed an assessment of goodwill for potential impairment and determined that there was an impairment loss related to the goodwill balance of $2,487,000 associated with our Midwest operations. As a result of this
analysis, we also recorded a non-cash impairment charge of $2,487,000 in the third quarter of 2006 to write-down to zero the carrying value of our goodwill.
Additionally, on October 27, 2006 we sold our corporate aircraft. Since the fair value of the aircraft was less than its carrying value of $4,792,000, we recorded a non-cash impairment charge of $722,000 in the
third quarter of 2006. Net proceeds from the sale were $4,098,000.
NOTE 4 Discontinued Operation
In June of 2005, we completed the sale of substantially all of the assets used by our wholly owned subsidiary Midwest Racing, Inc. formerly known as Grand
Prix Association of Long Beach, Inc. (Midwest Racing) for $15,132,000, net of transaction costs, resulting in a pre-tax gain on the sale of $5,143,000. These assets were used to promote Midwest Racings temporary circuit motorsports
events and in its grandstand rental business. In accordance with FASB Statement No. 144, the results of operations for all of Midwest Racings temporary circuit motorsports events and its grandstand rental business are reported as a
discontinued operation and accordingly, the accompanying consolidated financial statements have been reclassified to report separately the assets, liabilities and operating results of this discontinued operation.
The following are the summarized results of operations for Midwest Racings temporary circuit motorsports events and grandstand rental business:
|
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|
|
|
|
|
Year Ended
December 31,
2005
|
|
Revenues
|
|
$
|
8,096,000
|
|
Loss from operations before income taxes
|
|
$
|
(968,000
|
)
|
Income tax benefit on operations
|
|
$
|
338,000
|
|
Gain on sale, net of income taxes of $3,912,000
|
|
$
|
1,231,000
|
|
Earnings from discontinued operation
|
|
$
|
601,000
|
|
The assets sold of Midwest Racing included goodwill of $6,034,000.
As a result of the sale, we no longer promote temporary circuit motorsports events and are no longer in the grandstand rental business.
42
NOTE 5 Property and Equipment
Property and equipment consists of the following as of December 31:
|
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|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Land
|
|
$
|
28,403,000
|
|
|
$
|
28,260,000
|
|
Facilities
|
|
|
191,161,000
|
|
|
|
178,349,000
|
|
Furniture, fixtures and equipment
|
|
|
12,780,000
|
|
|
|
11,759,000
|
|
Construction in progress
|
|
|
1,645,000
|
|
|
|
4,195,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
233,989,000
|
|
|
|
222,563,000
|
|
Less accumulated depreciation
|
|
|
(76,241,000
|
)
|
|
|
(70,061,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
157,748,000
|
|
|
$
|
152,502,000
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense was $6,302,000, $8,684,000 and $9,358,000 for the years ended
December 31, 2007, 2006 and 2005, respectively.
NOTE 6 Accrued Liabilities
Accrued liabilities consist of the following as of December 31:
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
Payroll and related items
|
|
$
|
694,000
|
|
$
|
770,000
|
Real estate taxes
|
|
|
1,026,000
|
|
|
1,024,000
|
Other
|
|
|
1,744,000
|
|
|
1,606,000
|
|
|
|
|
|
|
|
|
|
$
|
3,464,000
|
|
$
|
3,400,000
|
|
|
|
|
|
|
|
NOTE 7 Long-Term Debt
Long-term debt consists of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Revolving line of credit
|
|
$
|
42,300,000
|
|
|
$
|
39,000,000
|
|
SWIDA bonds
|
|
|
4,209,000
|
|
|
|
4,906,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,509,000
|
|
|
|
43,906,000
|
|
Less current portion
|
|
|
(111,000
|
)
|
|
|
(695,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
46,398,000
|
|
|
$
|
43,211,000
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007, Dover Motorsports, Inc. and all of its wholly owned subsidiaries, as
co-borrowers, were parties to a $73,000,000 unsecured revolving credit agreement with a bank group. The facility was amended effective May 1, 2007 and expires July 1, 2011. It provides for seasonal funding needs, capital improvements,
letter of credit requirements and other general corporate purposes. Interest is based, at our option, upon LIBOR plus a margin that varies between 125 and 200 basis points (200 basis points at December 31, 2007) depending on the ratio of funded
debt to earnings before interest, taxes, depreciation and amortization (the leverage ratio) or the base rate (the greater of the prime rate or the federal funds rate plus 0.5%) plus a margin that varies between -50 and +25 basis points
depending on the leverage ratio, except that the base rate option is not available for the portion of indebtedness equal to the notional amount under the interest rate swap agreement described below. The terms of the credit facility contain certain
covenants including minimum tangible net worth, fixed charge coverage and maximum funded debt to earnings before interest, taxes, depreciation and amortization (EBITDA). The credit facility also provides that if we default under any
other loan agreement, that would be a default under this credit facility. At December 31, 2007, we were in compliance with the terms of the facility including all covenants.
Material adverse changes in our results of operations could impact our ability to maintain financial ratios necessary to satisfy these requirements.
There was $42,300,000 outstanding under the facility at December 31, 2007, at a weighted average interest rate of 6.9%. After consideration of stand-by letters of credit outstanding, borrowings of $7,416,000 were available pursuant to the
facility at December 31, 2007. Based on projected future results, we expect to be in compliance with all of the covenants for all measurement periods over the next twelve months.
43
Effective October 21, 2005, we entered into an interest rate swap agreement that effectively
converted $37,500,000 of our variable-rate debt to a fixed-rate basis, thereby hedging against the impact of potential interest rate changes on future interest expense. The notional amount of the swap agreement decreased to $30,000,000 on
November 1, 2006, to $20,000,000 on November 1, 2007, and decreases to $10,000,000 on November 1, 2008. The agreement terminates on November 1, 2009. Under this agreement, we pay a fixed interest rate of 4.74%. In return, the
issuing lender refunds to us the variable-rate interest paid to the bank group under our revolving credit agreement on the same notional principal amount, excluding the margin that varies between 125 and 200 basis points depending on the leverage
ratio.
In 1996, Midwest Racing entered into an agreement (the SWIDA bonds) 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 $4,209,000 was outstanding at December 31, 2007. SWIDA loaned all of the proceeds from the Municipal Bond Offering to Midwest Racing for the purpose of the redevelopment, construction and expansion of Gateway International Raceway
(Gateway). The proceeds of the SWIDA bonds were irrevocably committed to complete construction of Gateway, to fund interest, to create a debt service reserve fund and to pay for the cost of issuance of the bonds. The repayment terms and
debt service reserve requirements of the bonds issued in the Municipal Bond Offering correspond to the terms of the SWIDA bonds. The bonds are being amortized through February 2012.
We have established certain restricted cash funds to meet debt service as required by the SWIDA bonds, which are held by the trustee (BNY Trust Company
of Missouri). At December 31, 2007, $4,169,000 of our cash balance was restricted by the SWIDA bonds and is appropriately classified as a non-current asset in our consolidated balance sheet. The SWIDA bonds are secured by a first mortgage lien
on all the real property owned and a security interest in all property leased by Gateway. Also, the SWIDA bonds are unconditionally guaranteed by Midwest Racing. The SWIDA bonds bear interest at rates of 9.2% and 9.25% with an effective rate of
approximately 9.2%. Interest expense related to the SWIDA bonds was $394,000, $456,000 and $1,447,000 for the years ended December 31, 2007, 2006 and 2005, respectively. On October 6, 2005, Midwest Racing redeemed $11,908,000 of the
outstanding SWIDA bonds for $14,587,000 (including a $2,676,000 premium to the bondholders), plus accrued interest. We wrote-off $495,000 of deferred bond costs as a result of the redemption. The redemption resulted in a loss on extinguishment of
debt of $3,174,000. We have a stand-by letter of credit for $1,035,000, which is secured by a trust deed on our facilities in Memphis, Tennessee, available to satisfy debt service reserve fund obligations. In addition, a portion of the property
taxes to be paid by Gateway (if any) to the City of Madison Tax Incremental Fund have been pledged to the annual retirement of debt and payment of interest. Refer to NOTE 13 Commitments and Contingencies.
The scheduled maturities of long-term debt outstanding at December 31, 2007 are as follows: 2008-$111,000; 2009-$1,130,000; 2010-$1,235,000;
2011-$43,645,000; 2012-$388,000.
NOTE 8 Income Taxes
The current and deferred income tax (expense) benefit from continuing operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
(8,000
|
)
|
|
$
|
(87,000
|
)
|
State
|
|
|
(1,560,000
|
)
|
|
|
(2,390,000
|
)
|
|
|
(1,854,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,560,000
|
)
|
|
|
(2,398,000
|
)
|
|
|
(1,941,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,923,000
|
)
|
|
|
19,476,000
|
|
|
|
(2,077,000
|
)
|
State
|
|
|
(115,000
|
)
|
|
|
414,000
|
|
|
|
(394,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,038,000
|
)
|
|
|
19,890,000
|
|
|
|
(2,471,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax (expense) benefit
|
|
$
|
(3,598,000
|
)
|
|
$
|
17,492,000
|
|
|
$
|
(4,412,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44
A reconciliation of the effective income tax rate with the applicable statutory federal income tax rate
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Federal tax at statutory rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State taxes, net of federal benefit
|
|
8.4
|
%
|
|
2.5
|
%
|
|
8.7
|
%
|
Valuation allowance
|
|
6.5
|
%
|
|
(5.2
|
%)
|
|
8.9
|
%
|
Other
|
|
(0.9
|
%)
|
|
0.8
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
49.0
|
%
|
|
33.1
|
%
|
|
52.6
|
%
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets and liabilities are comprised of the following as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Accruals not currently deductible for income taxes
|
|
$
|
905,000
|
|
|
$
|
629,000
|
|
Net operating loss carry-forwards
|
|
|
8,975,000
|
|
|
|
9,857,000
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax assets
|
|
|
9,880,000
|
|
|
|
10,486,000
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(22,430,000
|
)
|
|
|
(31,577,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,550,000
|
)
|
|
|
(21,091,000
|
)
|
Valuation allowance
|
|
|
(7,365,000
|
)
|
|
|
(6,889,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income tax liability
|
|
$
|
(19,915,000
|
)
|
|
$
|
(27,980,000
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheet:
|
|
|
|
|
|
|
|
|
Current deferred income tax assets
|
|
$
|
186,000
|
|
|
$
|
193,000
|
|
Noncurrent deferred income tax liabilities
|
|
|
(20,101,000
|
)
|
|
|
(28,173,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(19,915,000
|
)
|
|
$
|
(27,980,000
|
)
|
|
|
|
|
|
|
|
|
|
Deferred income taxes relate to the temporary differences between financial accounting income and
taxable income and are primarily attributable to differences between the book and tax basis of property and equipment and net operating loss carry-forwards (expiring through 2027). At December 31, 2007, we have available federal and state net
operating loss carryforwards of $1,622,000 and $217,350,000, respectively. Valuation allowances on state net operating loss carryforwards, net of federal tax benefit, increased in 2007, 2006 and 2005 by $476,000, $3,168,000 and $1,350,000,
respectively. We believe that it is more likely than not that the remaining deferred tax assets will be realized based upon reversals of existing taxable temporary differences.
We adopted the provisions of FIN 48 on January 1, 2007 and, as a result, recorded a liability for unrecognized income tax benefits of $8,718,000 and
a corresponding decrease to noncurrent deferred income tax liabilities. The unrecognized tax benefits relate to the appropriate period to depreciate certain of our assets and do not affect our effective income tax rate or our reported earnings.
During 2007, our unrecognized income tax benefits increased by $1,235,000 to $9,687,000 solely related to prior year tax positions. We estimate that our unrecognized tax benefits will increase by approximately $316,000 in 2008.
Interest expense related to FIN 48 was $645,000 in 2007. Total accrued interest as of December 31, 2007, was $950,000 and was included in other
liabilities in the consolidated balance sheet.
We file income tax returns with the Internal Revenue Service and the states in which we
conduct business. We have identified the U.S. federal and state of Delaware as our major tax jurisdictions. As of December 31, 2007, tax years after 2003 remain open to examination for the federal and Delaware jurisdictions.
NOTE 9 Pension Plan
We maintain a
non-contributory tax qualified defined benefit pension plan. All of our full time employees are eligible to participate in the qualified plan. Benefits provided by our qualified pension plan are based on years of
45
service and employees remuneration over their employment period. Pension costs are funded in accordance with the provisions of the Internal Revenue
Code. We also maintain a non-qualified, non-contributory defined benefit pension plan for certain employees. This excess plan provides benefits that would otherwise be provided under the qualified pension plan but for maximum benefit and
compensation limits applicable under federal tax law. The cost associated with the excess plan is determined using the same actuarial methods and assumptions as those used for our qualified pension plan.
The following table sets forth the plans funded status and amounts recognized in our consolidated balance sheet as of December 31:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
5,801,000
|
|
|
$
|
5,674,000
|
|
Service cost
|
|
|
368,000
|
|
|
|
374,000
|
|
Interest cost
|
|
|
359,000
|
|
|
|
319,000
|
|
Actuarial gain
|
|
|
(235,000
|
)
|
|
|
(454,000
|
)
|
Benefits paid
|
|
|
(116,000
|
)
|
|
|
(112,000
|
)
|
Other
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
|
6,181,000
|
|
|
|
5,801,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
5,019,000
|
|
|
|
3,946,000
|
|
Actual return on plan assets
|
|
|
300,000
|
|
|
|
671,000
|
|
Employer contribution
|
|
|
752,000
|
|
|
|
1,000,000
|
|
Benefits paid
|
|
|
(116,000
|
)
|
|
|
(112,000
|
)
|
Other
|
|
|
|
|
|
|
(486,000
|
)
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
5,955,000
|
|
|
|
5,019,000
|
|
|
|
|
|
|
|
|
|
|
Unfunded status
|
|
$
|
(226,000
|
)
|
|
$
|
(782,000
|
)
|
|
|
|
|
|
|
|
|
|
The following table presents the amounts recognized in our consolidated balance sheet as of
December 31:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Long term pension asset
|
|
$
|
532,000
|
|
|
$
|
|
|
Accrued benefit cost
|
|
|
(22,000
|
)
|
|
|
(11,000
|
)
|
Liability for pension benefits
|
|
|
(736,000
|
)
|
|
|
(771,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(226,000
|
)
|
|
$
|
(782,000
|
)
|
|
|
|
|
|
|
|
|
|
The accumulated benefit obligation for our pension plans was $5,555,000 and $5,196,000,
respectively, as of December 31, 2007 and 2006.
Amounts recognized in accumulated other comprehensive loss that have not yet been
recognized as components of net periodic benefit cost at December 31, 2007 are as follows:
|
|
|
|
Net actuarial loss
|
|
$
|
1,046,000
|
Prior service cost
|
|
|
127,000
|
|
|
|
|
|
|
$
|
1,173,000
|
|
|
|
|
For the year ending December 31, 2008, we expect to recognize the following amounts as
components of net periodic benefit cost which are included in accumulated other comprehensive loss as of December 31, 2007:
|
|
|
|
Actuarial loss
|
|
$
|
38,000
|
Prior service cost
|
|
|
23,000
|
|
|
|
|
|
|
$
|
61,000
|
|
|
|
|
46
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for
pension plans with accumulated benefit obligations in excess of plan assets were $754,000, $709,000 and $0, respectively, as of December 31, 2007 and $720,000, $659,000 and $0, respectively, as of December 31, 2006.
We plan to contribute between $250,000 and $750,000 to our pension plans in 2008.
Benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:
|
|
|
|
2008
|
|
$
|
139,000
|
2009
|
|
$
|
170,000
|
2010
|
|
$
|
185,000
|
2011
|
|
$
|
301,000
|
2012
|
|
$
|
343,000
|
2013-2017
|
|
$
|
2,200,000
|
As of December 31, 2005, the actuarial present value of accumulated benefits exceeded plan
assets and accrued pension liabilities. As a result, we were required to record an additional minimum pension liability that increased pension liabilities by $428,000, increased intangible assets by $96,000, increased deferred income tax assets by
$122,000 and recognized other comprehensive loss of $210,000. As of December 31, 2006, the assets of the plan exceeded the actuarial present value of accumulated benefits and accrued pension liabilities. As a result, we reversed our minimum
pension liability and recognized $1,245,000 ($737,000 after income taxes) as other comprehensive income. Because these adjustments had no cash impact, the effect has been excluded from the accompanying consolidated statements of cash flows.
The components of net periodic pension cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Service cost
|
|
$
|
368,000
|
|
|
$
|
374,000
|
|
|
$
|
367,000
|
|
Interest cost
|
|
|
359,000
|
|
|
|
319,000
|
|
|
|
294,000
|
|
Expected return on plan assets
|
|
|
(446,000
|
)
|
|
|
(386,000
|
)
|
|
|
(316,000
|
)
|
Recognized net actuarial loss
|
|
|
62,000
|
|
|
|
105,000
|
|
|
|
91,000
|
|
Net amortization
|
|
|
23,000
|
|
|
|
24,000
|
|
|
|
23,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
366,000
|
|
|
$
|
436,000
|
|
|
$
|
459,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The principal assumptions used to determine the net periodic pension cost for the years ended
December 31, 2007, 2006 and 2005, and the actuarial value of the projected benefit obligation at December 31, 2007 and 2006 (the measurement dates) for our pension plans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Pension Cost
|
|
|
Projected Benefit Obligation
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
Weighted-average discount rate
|
|
6.15
|
%
|
|
5.85
|
%
|
|
6.25
|
%
|
|
6.50
|
%
|
|
6.15
|
%
|
Weighted-average rate of compensation increase
|
|
4.00
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
Expected long-term rate of return on plan assets
|
|
8.50
|
%
|
|
9.00
|
%
|
|
9.00
|
%
|
|
n/a
|
|
|
n/a
|
|
For 2007, we assumed a long-term rate of return on plan assets of 8.5%. In developing the 8.5%
expected long-term rate of return assumption, we considered our historical compounded return and reviewed asset class return expectations and long-term inflation assumptions.
Our pension plan asset allocation at December 31, 2007 and 2006, and target allocation for 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of Plan Assets
|
|
|
Target
Allocation
|
|
Asset Category
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
Equity mutual funds
|
|
66
|
%
|
|
65
|
%
|
|
70
|
%
|
Fixed income mutual funds
|
|
29
|
%
|
|
30
|
%
|
|
20
|
%
|
Other (money market mutual funds)
|
|
5
|
%
|
|
5
|
%
|
|
10
|
%
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
47
Our investment goals are to maximize returns subject to specific risk management policies. Our risk
management policies permit investments in mutual funds, and prohibit direct investments in debt and equity securities and derivative financial instruments. We address diversification by the use of mutual fund investments whose underlying investments
are in domestic and international equity and fixed income securities. These mutual funds are readily marketable and can be sold to fund benefit payment obligations as they become payable.
We also maintain a defined contribution 401(k) plan that permits participation by substantially all employees.
NOTE 10 Stockholders Equity
Changes in
the components of stockholders equity are as follows (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Class A
Common
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Retained
Earnings
(Accumulated
Deficit)
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Deferred
Compensation
|
|
Balance at December 31, 2004
|
|
$
|
1,695
|
|
|
$
|
2,324
|
|
|
$
|
128,542
|
|
|
$
|
6,834
|
|
|
$
|
(527
|
)
|
|
$
|
(402
|
)
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,576
|
|
|
|
|
|
|
|
|
|
Dividends paid, $0.05 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,957
|
)
|
|
|
|
|
|
|
|
|
Proceeds from stock options exercised
|
|
|
14
|
|
|
|
|
|
|
|
750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock awards, net of forfeitures
|
|
|
11
|
|
|
|
|
|
|
|
625
|
|
|
|
|
|
|
|
|
|
|
|
(636
|
)
|
Amortization of deferred compensation, net of forfeitures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200
|
|
Change in minimum pension liability, net of income tax benefit of $122
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(210
|
)
|
|
|
|
|
Conversion of Class A common stock to common stock
|
|
|
101
|
|
|
|
(101
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase and retirement of common stock
|
|
|
(171
|
)
|
|
|
(231
|
)
|
|
|
(28,160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
1,650
|
|
|
|
1,992
|
|
|
|
101,757
|
|
|
|
9,453
|
|
|
|
(737
|
)
|
|
|
(838
|
)
|
Reclassification of deferred compensation upon adoption of FASB Statement No. 123R
|
|
|
|
|
|
|
|
|
|
|
(838
|
)
|
|
|
|
|
|
|
|
|
|
|
838
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35,345
|
)
|
|
|
|
|
|
|
|
|
Dividends paid, $0.06 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,179
|
)
|
|
|
|
|
|
|
|
|
Issuance of restricted stock awards, net of forfeitures
|
|
|
7
|
|
|
|
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess tax benefit on stock awards
|
|
|
|
|
|
|
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of interest rate swap, net of income tax expense of $71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105
|
|
|
|
|
|
Change in minimum pension liability, net of income tax expense of $508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
737
|
|
|
|
|
|
Adoption of FASB Statement No. 158, net of income tax benefit of $549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(798
|
)
|
|
|
|
|
Repurchase and retirement of common stock
|
|
|
(37
|
)
|
|
|
|
|
|
|
(1,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Class A common stock to common stock
|
|
|
15
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
1,635
|
|
|
|
1,977
|
|
|
|
99,412
|
|
|
|
(28,071
|
)
|
|
|
(693
|
)
|
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
Class A
Common
Stock
|
|
|
Additional
Paid-in
Capital
|
|
|
Retained
Earnings
(Accumulated
Deficit)
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Deferred
Compensation
|
Net earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,744
|
|
|
|
|
|
|
|
|
Unrealized losses on available- for-sale securities, net of income tax benefit of $6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
Change in fair value of interest rate swap, net of income tax benefit of $174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(254
|
)
|
|
|
|
Amortization of net actuarial loss and prior service cost included in net periodic pension benefit cost, net of income tax expense of
$71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102
|
|
|
|
|
Dividends paid, $0.06 per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,176
|
)
|
|
|
|
|
|
|
|
Issuance of restricted stock awards, net of forfeitures
|
|
|
13
|
|
|
|
|
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
493
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess tax benefit on stock awards
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase and retirement of common stock
|
|
|
(1
|
)
|
|
|
|
|
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Class A common stock to common stock
|
|
|
25
|
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
1,672
|
|
|
$
|
1,952
|
|
|
$
|
99,849
|
|
|
$
|
(26,503
|
)
|
|
$
|
(854
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Holders of common stock have one vote per share and holders of Class A common stock have ten
votes per share. There is no cumulative voting. Shares of Class A common stock are convertible at any time into shares of common stock on a share for share basis at the option of the holder thereof. Dividends on Class A common stock cannot
exceed dividends on common stock on a per share basis. Dividends on common stock may be paid at a higher rate than dividends on Class A common stock. The terms and conditions of each issue of preferred stock are determined by our Board of
Directors. No preferred shares have been issued.
We have adopted a rights plan with respect to our common stock and Class A common
stock which includes the distribution of rights to holders of such stock. The rights entitle the holder, upon the occurrence of certain events, to purchase additional stock. The rights are exercisable if a person, company or group acquires 10% or
more of the outstanding combined equity of common stock and Class A common stock or engages in a tender offer. We are entitled to redeem each right for $.005.
On July 28, 2004, our Board of Directors authorized the repurchase of up to 2,000,000 shares of our outstanding common stock. The purchases may be made in the open market or in privately negotiated transactions
as conditions warrant. The repurchase authorization has no expiration date, does not obligate us to acquire any specific number of shares and may be suspended at any time. During the year ended December 31, 2006, we purchased and retired
365,393 shares of our outstanding common stock at an average purchase price of $5.23 per share, not including nominal brokerage commissions. No purchases of our equity securities were made pursuant to this authorization during the year ended
December 31, 2007. At December 31, 2007, we had remaining repurchase authority of 1,634,607 shares.
During the years ended
December 31, 2007 and 2006, we purchased and retired 10,151 and 4,843 shares of our outstanding common stock at an average purchase price of $5.35 and $6.03 per share, respectively. These purchases were made from employees in connection with
the vesting of restricted stock awards under our 2004 Stock Incentive Plan and were not pursuant to the aforementioned repurchase authorization. Since the vesting of a restricted stock award is a taxable event to our employees for which income tax
withholding is required, the plan allows employees to surrender to us some of the shares that would otherwise have vested in satisfaction of their tax liability. The surrender of these shares is treated by us as a purchase of the shares.
49
On August 10, 2005, we commenced a tender offer to purchase up to 1,706,543 shares of our common
stock and up to 2,323,019 shares of our Class A common stock at a fixed price of $7.00 per share. The offer expired on September 8, 2005. We purchased 1,706,543 shares of our common stock and 2,311,960 shares of our Class A common
stock for $28,518,000, including expenses, in connection with the tender offer.
We have a 1996 stock option plan (the 1996
Plan) which provided for the grant of stock options to our officers and key employees. Under the 1996 Plan, option grants had to have an exercise price of not less than 100% of the fair market value of the underlying shares of common stock at
the date of the grant. Stock options for 669,482 shares of common stock were outstanding under the 1996 Plan as of December 31, 2007. The options have eight-year terms and generally vest equally over a period of six years from the date of
grant. Once the options are exercised, our plan requires that the common stock be held a minimum of one year. Our Board of Directors has frozen the 1996 Plan and no additional option grants may be made under the 1996 Plan.
In April 2004, we established the 2004 Stock Incentive Plan (the 2004 Plan) which provides for the grant of up to 1,500,000 shares of our
common stock to our officers and key employees through stock options and/or awards, such as nonvested stock awards, valued in whole or in part by reference to our common stock. The nonvested stock vests an aggregate of twenty percent each year
beginning on the second anniversary date of the grant. The aggregate market value of the nonvested stock at the date of issuance is being amortized on a straight-line basis over the six-year service period. No stock options have been granted under
the 2004 Plan. As of December 31, 2007, there were 1,095,194 shares available for granting options or stock awards under the 2004 Plan.
Stock option activity for the year ended December 31, 2007 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term (in yrs)
|
|
Aggregate
Intrinsic
Value
|
Outstanding at December 31, 2006
|
|
804,596
|
|
|
$
|
5.66
|
|
|
|
|
|
Forfeited
|
|
(27,000
|
)
|
|
$
|
5.81
|
|
|
|
|
|
Expired
|
|
(108,114
|
)
|
|
$
|
5.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
669,482
|
|
|
$
|
5.69
|
|
2.0
|
|
$
|
738,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007
|
|
564,099
|
|
|
$
|
5.84
|
|
1.9
|
|
$
|
556,000
|
|
|
|
|
|
|
|
|
|
|
|
|
No stock options were granted during the three year period ending December 31, 2007. No stock
options were exercised during the years ended December 31, 2007 and 2006. The total intrinsic value of stock options exercised during the year ended December 31, 2005 was $151,000.
Nonvested stock option activity for the year ended December 31, 2007 was as follows:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
Nonvested at December 31, 2006
|
|
177,227
|
|
|
$
|
3.06
|
Vested
|
|
(64,344
|
)
|
|
$
|
3.29
|
Forfeited
|
|
(7,500
|
)
|
|
$
|
2.27
|
|
|
|
|
|
|
|
Nonvested at December 31, 2007
|
|
105,383
|
|
|
$
|
2.97
|
|
|
|
|
|
|
|
The total fair value of stock options vested during the years ended December 31, 2007 and
2006 was $212,000 and $383,000, respectively. We recorded compensation expense of $125,000 and $177,000 related to stock options for the years ended December 31, 2007 and 2006, respectively. As of December 31, 2007, there was $106,000 of
total unrecognized compensation cost related to nonvested stock options granted to employees under our stock incentive plans. That cost is expected to be recognized over a weighted-average period of 0.9 years.
50
Nonvested restricted stock activity for the year ended December 31, 2007 was as follows:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
Nonvested at December 31, 2006
|
|
266,200
|
|
|
$
|
5.54
|
Granted
|
|
127,000
|
|
|
$
|
5.15
|
Vested
|
|
(36,200
|
)
|
|
$
|
5.00
|
|
|
|
|
|
|
|
Nonvested at December 31, 2007
|
|
357,000
|
|
|
$
|
5.46
|
|
|
|
|
|
|
|
The aggregate market value of the nonvested stock at the date of issuance is being amortized on a
straight-line basis over the six-year service period. The total fair value of shares vested during the years ended December 31, 2007 and 2006 was $181,000 and $86,000, respectively. No shares vested during the year ended December 31, 2005.
The weighted-average grant-date fair value of nonvested stock awards granted during the years ended December 31, 2007, 2006 and 2005 was $5.15, $6.25 and $5.82, respectively. We recorded compensation expense of $368,000, $234,000 and $200,000
related to nonvested stock awards for the years ended December 31, 2007, 2006 and 2005, respectively. As of December 31, 2007, there was $1,388,000 of total deferred compensation cost related to nonvested stock awards granted to employees
under our stock incentive plans. That cost is expected to be recognized over a weighted-average period of 4.0 years.
As of
December 31, 2007 and 2006, accumulated other comprehensive loss, net of income taxes, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
Net actuarial loss and prior service cost not yet recognized in net periodic benefit cost
|
|
$
|
(696,000
|
)
|
|
$
|
(798,000
|
)
|
Unrealized (loss) gain on interest rate swap
|
|
|
(149,000
|
)
|
|
|
105,000
|
|
Accumulated unrealized loss on available-for-sale securities
|
|
|
(9,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
$
|
(854,000
|
)
|
|
$
|
(693,000
|
)
|
|
|
|
|
|
|
|
|
|
NOTE 11 Financial Instruments
At December 31, 2007 and 2006, there was $42,300,000 and $39,600,000, respectively, outstanding under our revolving credit agreement. The borrowings
under our revolving credit agreement bear interest at the variable rate described in NOTE 7 Long-Term Debt and therefore approximate fair value at December 31, 2007 and 2006, respectively. We are subject to interest rate risk on the
variable component of the interest rate. Our risk management objective is to lock in the interest cash outflows on a portion of our debt. As a result, as described in NOTE 7 Long-Term Debt, we entered into an interest rate swap agreement
effectively converting a portion of the outstanding borrowings under the revolving credit agreement to a fixed-rate, thereby hedging against the impact of potential interest rate changes on future interest expense. At December 31, 2007, the
interest rate swap had a negative fair value of $252,000 which is recorded in other liabilities. At December 31, 2006, the interest rate swap had a positive fair value of $176,000 which is recorded in other long-term assets. The fair value of
the interest rate swap was based on quotes from the issuer of the swap and represents the estimated amounts that we would expect to receive or pay to terminate the swap.
The carrying amount of financial instruments reported in the balance sheet for current assets and current liabilities approximates their fair value because of the short maturity of these instruments.
At December 31, 2007 and 2006, we have marketable securities of $505,000 and $486,000, respectively, that are included in other non-current assets.
These securities are stated at fair value based on the current market values.
At December 31, 2007 and 2006, our outstanding SWIDA
bonds had carrying values of $4,209,000 and $4,906,000, respectively, and estimated fair values of $4,299,000 and $5,243,000, respectively. The fair values were determined through the use of a discounted cash flow methodology utilizing estimated
interest rates that would be available to us for issues with similar terms.
51
NOTE 12 Related Party Transactions
During the years ended December 31, 2007, 2006 and 2005, Dover Downs Gaming & Entertainment, Inc. (Gaming), a company related
through common ownership, allocated costs of $1,873,000, $1,614,000 and $1,613,000, respectively, to us for certain administrative and operating services. Additionally, we allocated costs of $229,000, $121,000 and $113,000, respectively, to Gaming
for the years ended December 31, 2007, 2006 and 2005. The allocations were based on an analysis of each companys share of the costs. In connection with our NASCAR event weekends at Dover International Speedway, Gaming provided certain
services, primarily catering, for which we were invoiced $1,207,000, $965,000 and $938,000, during the years ended December 31, 2007, 2006 and 2005, respectively. Additionally, we invoiced Gaming $429,000, $149,000 and $113,000 during 2007,
2006 and 2005, respectively, for a skybox suite, tickets and other services to the events. As of December 31, 2007 and 2006, our consolidated balance sheet includes an $18,000 and $9,000 receivable from Gaming, respectively, for the
aforementioned items. We received payment for the receivables in January of 2008 and 2007, respectively. 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 unrelated entities and/or had otherwise independently managed these functions; however, management believes that these costs are reasonable.
Use by Gaming of our 5/8-mile harness racing track is under an easement from us which does not require the payment of any rent. Under the terms of the easement, Gaming 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 our property and is on the inside
of our one-mile motorsports superspeedway. Gamings indoor grandstands are used by us at no charge in connection with our motorsports events. We also lease our principal executive office space from Gaming. Various easements and agreements
relative to access, utilities and parking have also been entered into between us and Gaming relative to our respective Dover, Delaware facilities.
Henry B. Tippie, Chairman of our Board of Directors, controls in excess of fifty percent of our voting power. Mr. Tippies voting control emanates from his direct and indirect holdings of common stock and Class A common
stock, from his status as executor of the estate of John W. Rollins, our largest stockholder, and from certain shares as to which he has voting rights pursuant to a voting agreement with R. Randall Rollins, one of our directors. This means that
Mr. Tippie has the ability to determine the outcome of the election of directors and to determine the outcome of many significant corporate transactions, many of which only require the approval of a majority of our voting power. On
January 31, 2008, the voting agreement with R. Randall Rollins terminated. Also on that date, the estate of John W. Rollins transferred all of its holdings in our stock to the RMT Trust, a trust established under the terms of the last will
and testament of John W. Rollins. As trustee of the RMT Trust, Mr. Tippie has sole voting and dispositive power over these stockholdings. Mr. Tippie continues to control in excess of fifty percent of our voting power.
Patrick J. Bagley, Kenneth K. Chalmers, Denis McGlynn, Jeffrey W. Rollins, John W. Rollins, Jr., R. Randall Rollins and Henry B. Tippie
are all Directors of Dover Motorsports, Inc. and Gaming. Denis McGlynn is the President and Chief Executive Officer of both companies and Klaus M. Belohoubek is the Senior Vice President General Counsel and Secretary of both companies.
Mr. Tippie controls in excess of fifty percent of the voting power of Gaming.
In April of 2002, we spun-off our gaming business
which was then owned by our subsidiary, Dover Downs Gaming & Entertainment, Inc. On a tax-free basis, we made a pro rata distribution of all of the capital stock of Gaming to our stockholders. Our continuing
operations subsequent to the spin-off consist solely of our motorsports activities.
In conjunction with the spin-off of Gaming by us,
the two companies entered into various agreements that addressed the allocation of assets and liabilities between the two companies and that define the companies relationship after the separation. Among these are the Real Property Agreement,
the Transition Support Services Agreement and the Tax Sharing Agreement.
52
The Real Property Agreement governs certain real property transfers, leases and easements affecting our
Dover, Delaware facility.
The Transition Support Services Agreement provides for each of the two companies to provide each other with
certain administrative and operational services. The party receiving the services is required to pay for them within 30 business days after receipt of an invoice at rates agreed upon by the companies. The agreement may be terminated in whole or in
part 90 days after the request of the party receiving the services or 180 days after the request of the party providing the services.
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, we:
|
|
|
continue to be the sole and exclusive agent for Gaming in all matters relating to the income, franchise, property, sales and use tax liabilities of Gaming;
|
|
|
|
subject to Gamings obligation to pay for items relating to its gaming business, bear any costs relating to tax audits, including tax assessments and any
related interest and penalties and any legal, litigation, accounting or consulting expenses;
|
|
|
|
continue to have the sole and exclusive responsibility for the preparation and filing of consolidated federal and consolidated state income tax returns; and
|
|
|
|
subject to the right and authority of Gaming to direct us in the defense or prosecution of the portion of a tax contest directly and exclusively related to any
Gaming tax adjustment, generally have the powers, in our sole discretion, to contest or compromise any claim or refund on Gamings behalf.
|
NOTE 13 Commitments and Contingencies
We lease certain land at Gateway with leases expiring at various dates through
2070. We also lease equipment at our facilities with leases expiring at various dates through 2011. Some of the leases are subject to annual adjustments based on increases in the consumer price index. Total rental payments charged to operations
amounted to $375,000, $444,000 and $517,000 for the years ended December 31, 2007, 2006 and 2005, respectively.
The minimum lease
payments due under these leases are as follows:
|
|
|
|
2008
|
|
$
|
313,000
|
2009
|
|
$
|
259,000
|
2010
|
|
$
|
202,000
|
2011
|
|
$
|
177,000
|
2012
|
|
$
|
161,000
|
Thereafter
|
|
$
|
3,402,000
|
In September 1999, the Sports Authority of the County of Wilson (Tennessee) issued $25,900,000 in
Variable Rate Tax Exempt Infrastructure Revenue Bonds, Series 1999, to acquire, construct and develop certain public infrastructure improvements which benefit the operation of Nashville Superspeedway, of which $22,900,000 was outstanding at
December 31, 2007. Annual principal payments range from $600,000 in September 2008 to $1,600,000 in 2029 and are payable solely from sales taxes and incremental property taxes generated from the facility. These bonds are direct obligations of
the Sports Authority and are therefore not recorded on our consolidated balance sheet. If the sales taxes and incremental property taxes are insufficient for the payment of principal and interest on the bonds, we would become responsible for the
difference. In the event we were unable to make the payments, they would be made pursuant to a $23,302,000 irrevocable direct-pay letter of credit issued by our bank group. We are exposed to fluctuations in interest rates for these bonds. A
significant increase in interest rates could result in us being responsible for debt service payments not covered by the sales and incremental property taxes generated from the facility.
53
We believe that the sales taxes and incremental property taxes generated from the facility will continue
to satisfy the necessary debt service requirements of the bonds. As of December 31, 2007 and 2006, $535,000 and $779,000, respectively, was available in the sales and incremental property tax fund maintained by the Sports Authority to pay the
remaining principal and interest due under the bonds. During the year ended December 31, 2007, we paid $1,216,000 into the sales and incremental property tax fund and $1,460,000 was deducted from the fund for principal and interest payments. If
the debt service is not satisfied from the sales and incremental property taxes generated from the facility, the bonds would become our liability. If we fail to maintain the letter of credit that secures the bonds or we allow an uncured event of
default to exist under our reimbursement agreement relative to the letter of credit, the bonds would be immediately redeemable.
We have
employment, severance and noncompete agreements with certain of our officers and directors under which certain change of control, severance and noncompete payments and benefits might become payable in the event of a change in our control, defined to
include a tender offer or the closing of a merger or similar corporate transactions. In the event of such a change in control and the subsequent termination of employment of all employees covered under these agreements, we estimate that the maximum
contingent liability would range from $7,300,000 to $10,600,000 depending on the tax treatment of the payments.
To the extent that any of
the potential payments or benefits due under the agreements constitute an excess parachute payment under the Internal Revenue Code and result in the imposition of an excise tax, each agreement requires that we pay the amount of such
excise tax plus any additional amounts necessary to place the officer or director in the same after-tax position as he would have been had no excise tax been imposed. We estimate that the tax gross ups that could be paid under the agreements in the
event the agreements were triggered due to a change of control could be as high as $3,300,000 and this amount has been included in the maximum contingent liability disclosed above. This maximum tax gross up figure assumes that none of the
payments made after the hypothetical change in control would be characterized as reasonable compensation for services rendered. Each agreement with an executive officer provides that fifty percent of the monthly amount paid during the term is paid
in consideration of the executive officers non-compete covenants. The exclusion of these amounts would reduce the calculated amount of excess parachute payments subject to tax. However, as we are unable to conclude whether the Internal Revenue
Service would characterize all or some of these non-compete payments as reasonable compensation for services rendered, we have included the full amount of these payments in our calculation.
We are also 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 material adverse effect on our results of operations, financial condition or cash flows.
54
NOTE 14 Quarterly Results (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31
|
|
|
June 30
|
|
September 30(a)
|
|
|
December 31
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
882,000
|
|
|
$
|
40,806,000
|
|
$
|
40,951,000
|
|
|
$
|
3,413,000
|
|
Operating (loss) earnings
|
|
$
|
(6,212,000
|
)
|
|
$
|
12,326,000
|
|
$
|
11,875,000
|
|
|
$
|
(6,498,000
|
)
|
Net (loss) earnings
|
|
$
|
(3,560,000
|
)
|
|
$
|
5,593,000
|
|
$
|
5,187,000
|
|
|
$
|
(3,476,000
|
)
|
Net (loss) earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.10
|
)
|
|
$
|
0.16
|
|
$
|
0.14
|
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.10
|
)
|
|
$
|
0.16
|
|
$
|
0.14
|
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
801,000
|
|
|
$
|
45,003,000
|
|
$
|
42,441,000
|
|
|
$
|
3,029,000
|
|
Operating (loss) earnings
|
|
$
|
(6,819,000
|
)
|
|
$
|
16,161,000
|
|
$
|
(51,888,000
|
)
|
|
$
|
(6,328,000
|
)
|
Net (loss) earnings
|
|
$
|
(4,393,000
|
)
|
|
$
|
8,329,000
|
|
$
|
(34,475,000
|
)
|
|
$
|
(4,806,000
|
)
|
Net (loss) earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.12
|
)
|
|
$
|
0.23
|
|
$
|
(0.96
|
)
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.12
|
)
|
|
$
|
0.23
|
|
$
|
(0.96
|
)
|
|
$
|
(0.13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
During the third quarter of 2006, we recorded non-cash impairment charges of $64,618,000 related to our long-lived assets and goodwill. See NOTE 3 Impairment Charges.
|
Per share data amounts for the quarters have each been calculated separately. Accordingly, quarterly amounts may not add to
the annual amounts due to differences in the average common shares outstanding during each period.
55