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DVD > SEC Filings for DVD > Form 10-Q on 9-Nov-2012All Recent SEC Filings

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Form 10-Q for DOVER MOTORSPORTS INC


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations

The following discussion is based upon and should be read together with the consolidated financial statements and notes thereto included elsewhere in this document.

We classify our revenues as admissions, event-related, broadcasting and other. "Admissions" includes ticket sales for all our 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 any ancillary media rights fees.

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 provide advertising or other goods or services in exchange for sponsorships of


motorsports events are recorded at fair value. Barter transactions accounted for $202,000 and $424,000, and $95,000 and $400,000 of total revenues for the three and nine-month periods ended September 30, 2012 or 2011, respectively.

Expenses that are not directly related to a specific event are recorded as incurred. Expenses that specifically relate to an event are deferred until the event is held, at which time they are expensed. These expenses include prize and point fund monies and sanction fees paid to various sanctioning bodies, including NASCAR, marketing and other expenses associated with the promotion of our racing events.

Results of Operations

Three Months Ended September 30, 2012 vs. Three Months Ended September 30, 2011

We promoted three racing events during the third quarters of 2012 and 2011. We promoted a NASCAR Sprint Cup Series event, a NASCAR Nationwide Series event and a NASCAR K&N Pro Series East event at our Dover International Speedway facility in the third quarter of 2012; however, only the K&N Pro Series event was held in the third quarter of 2011 while the Sprint Cup Series and Nationwide Series events were held in the fourth quarter of 2011. Additionally, we promoted a NASCAR Nationwide Series event and a NASCAR Camping World Truck Series event at our Nashville facility in the third quarter of 2011. These events did not occur in 2012 since we no longer promote NASCAR events at that facility. The majority of our revenues are derived from our two NASCAR Sprint Cup Series events.

Admissions revenue was $5,105,000 in the third quarter of 2012 as compared to $752,000 in the third quarter of 2011. The $4,353,000 increase was related to the aforementioned changes in and the timing of our major motorsports event schedule, partially offset by lower admissions revenue at our NASCAR event weekend at Dover International Speedway primarily from lower average ticket prices.

Event-related revenue was $5,708,000 in the third quarter of 2012 as compared to $1,321,000 in the third quarter of 2011. The $4,387,000 increase was primarily related to the aforementioned changes in and the timing of our major motorsports event schedule. Additionally, revenues from the inaugural three day Firefly Music Festival which was held on our property in July 2012 contributed to the increase. We received a fee for the use of our property and a portion of the concession sales for this event.

Broadcasting revenue was $11,959,000 in the third quarter of 2012 as compared to $841,000 in the third quarter of 2011. The 2012 revenue relates to our NASCAR event weekend at Dover International Speedway while the 2011 revenue relates to events at our Nashville Superspeedway facility.

Operating and marketing expenses were $12,075,000 in the third quarter of 2012 as compared to $4,382,000 in the third quarter of 2011. The increase was primarily related to the aforementioned changes in and the timing of our major motorsports event schedule. Additionally, expenses related to the inaugural three day Firefly Music Festival which was held on our property in July 2012 contributed to the increase.

General and administrative expenses were $1,723,000 in the third quarter of 2012 as compared to $2,200,000 in the third quarter of 2011. The decrease was primarily related to lower employee related expenses at our Dover and Nashville facilities.

Depreciation expense decreased to $824,000 in the third quarter of 2012 as compared to $992,000 in the third quarter of 2011. The decrease was primarily related to cessation of depreciation after the impairment of all depreciable assets of our Nashville facility during the third quarter of 2011.

Net interest expense was $332,000 in the third quarter of 2012 as compared to $381,000 in the third quarter of 2011. The decrease was due primarily to lower average borrowings and lower interest rates. Additionally, the 2011 interest expense reflects the reversal of $120,000 of previously recorded interest expense on uncertain income tax positions which were no longer subject to examination.

On August 3, 2011, we announced that our wholly-owned subsidiary Nashville Superspeedway had notified NASCAR that it will not seek 2012 sanction agreements. Since the facility will no longer generate sales taxes from


NASCAR sanctioned events, we have estimated that a portion of the debt service will not be covered by applicable taxes. As a result, we recorded a $2,245,000 provision for contingent obligation in the third quarter of 2011 reflecting the estimated portion of the Wilson County bonds debt service that will not be covered by applicable taxes.

Our effective income tax rates for the third quarters of 2012 and 2011 were 41.5% and 36.5%, respectively. The lower effective income tax rate in the prior year was primarily due to the state tax losses at our Midwest facilities which have no state income tax benefits as a result of recording valuation allowances on the state net operating loss carry-forwards.

Nine Months Ended September 30, 2012 vs. Nine Months Ended September 30, 2011

We promoted six racing events during the first nine months of 2012 compared to eight racing events during the first nine months of 2011. We promoted a NASCAR Sprint Cup Series event and a NASCAR Nationwide Series event at our Dover International Speedway facility in the third quarter of 2012; however, these events were held in the fourth quarter of 2011. Additionally, we promoted two NASCAR Nationwide Series events and two NASCAR Camping World Truck Series events at our Nashville facility in the first nine months of 2011. These events did not occur in 2012 since we no longer promote NASCAR events at that facility. The majority of our revenues are derived from our two NASCAR Sprint Cup Series events.

Admissions revenue was $10,428,000 in the first nine months of 2012 as compared to $7,468,000 in the first nine months of 2011. The $2,960,000 increase was related to in the aforementioned changes in and the timing of our major motorsports event schedule, partially offset by lower admissions revenue at our NASCAR event weekends at Dover International Speedway primarily from lower average ticket prices.

Event-related revenue was $9,789,000 in the first nine months of 2012 as compared to $5,899,000 in the first nine months of 2011. The $3,890,000 increase was primarily related to the aforementioned changes in and the timing of our major motorsports event schedule. Additionally, revenues from the inaugural three day Firefly Music Festival which was held on our property in July 2012 contributed to the increase. We received a fee for the use of our property and a portion of the concession sales for this event.

Broadcasting revenue increased to $26,393,000 in the first nine months of 2012 from $15,956,000 in the first nine months of 2011. The increase was primarily related to the aforementioned changes in and the timing of our major motorsports event schedule.

Operating and marketing expenses were $25,703,000 in the first nine months of 2012 as compared to $21,158,000 in the first nine months of 2011. The increase was primarily related to the aforementioned changes in and the timing of our major motorsports event schedule. Additionally, expenses related to the inaugural three day Firefly Music Festival which was held on our property in July 2012 contributed to the increase.

General and administrative expenses were $5,458,000 in the first nine months of 2012 as compared to $6,497,000 in the first nine months of 2011. The decrease was primarily related to lower employee related expenses at our Dover and Nashville facilities.

Depreciation expense decreased to $2,491,000 in the first nine months of 2012 as compared to $3,745,000 in the first nine months of 2011. The decrease was primarily related to cessation of depreciation after the impairment of all depreciable assets of our Nashville facility during the third quarter of 2011.

Net interest expense was $1,105,000 in the first nine months of 2012 as compared to $1,814,000 in the first nine months of 2011. The decrease was due primarily to lower average borrowings as well as a lower average interest rate pursuant to our new credit facility entered into on April 12, 2011. Additionally, the 2011 interest expense reflects the reversal of $120,000 of previously recorded interest expense on uncertain income tax positions which were no longer subject to examination.

Our effective income tax rates for the first nine months of 2012 and 2011 were 42.7% and 34.9%, respectively. The lower effective income tax rate in the prior year was primarily due to the state tax losses at our Midwest facilities which have no state income tax benefits as a result of recording valuation allowances on the state net operating loss carry-forwards.


Liquidity and Capital Resources

Our operations and cash flows from operating activities are seasonal in nature with a majority of our motorsports events occurring during the second and third quarters this year.

Net cash provided by operating activities was $5,306,000 for the nine months ended September 30, 2012 as compared to $2,390,000 for the nine months ended September 30, 2011. The increase was primarily due to the increase in earnings before income taxes as a result of reduced operating losses from our remaining and former Midwest facilities and lower costs at our Dover facility.

Net cash provided by investing activities was $21,000 for the nine months ended September 30, 2012 as compared to $1,643,000 for the nine months ended September 30, 2011. Capital expenditures were $464,000 for the nine months ended September 30, 2012 and related primarily to capital improvements at our Dover facility. Capital expenditures were $229,000 for the nine months ended September 30, 2011 and related primarily to replacement of SAFER barriers at our Nashville facility and improvements to our luxury skybox suites at our Dover facility. We completed the sale of several parcels of land at our Gateway facility in September 2012 which resulted in net proceeds of $585,000. We completed the sale of our Memphis facility in January 2011 which resulted in additional net proceeds of $1,875,000.

Net cash used in financing activities was $4,567,000 for the nine months ended September 30, 2012 as compared to $3,703,000 for the nine months ended September 30, 2011. We had net repayments on our outstanding line of credit of $4,540,000 in the first nine months of 2012 as compared to $3,220,000 in the first nine months of 2011.

On October 24, 2012, our Board of Directors declared a cash dividend on both classes of common stock of $0.04 per share. The dividend is payable on December 10, 2012 to stockholders of record at the close of business on November 9, 2012.

At September 30, 2012, Dover Motorsports, Inc. and its wholly owned subsidiaries Dover International Speedway, Inc. and Nashville Speedway, USA, Inc., as co-borrowers, had a $60,000,000 secured credit agreement with a bank group. There was $24,620,000 outstanding under the credit facility at September 30, 2012, at an interest rate of 2.5%. The maximum borrowing limit under the facility reduces to $55,000,000 as of March 31, 2013 and the facility expires April 12, 2014. The credit facility provides for seasonal funding needs, capital improvements, letter of credit requirements and other general corporate purposes. Interest is based upon LIBOR plus a margin that varies between 200 and 325 basis points depending on the leverage ratio (225 basis points at September 30, 2012). The terms of the credit facility contain certain covenants including minimum interest coverage and maximum funded debt to earnings before interest, taxes, depreciation and amortization. Material adverse changes in our results of operations could impact our ability to maintain financial ratios necessary to satisfy these requirements. We expect to be in compliance with the financial covenants, and all other covenants, for all measurement periods during the next twelve months. In addition, the credit agreement includes a material adverse change clause, prohibits the payment of dividends by us and provides the lenders with a first lien on all of our assets. On October 2, 2012, the credit agreement was modified to allow us to repurchase shares of our common stock in the open market and/or pay dividends with respect to our common stock for an aggregate amount of not more than $2,500,000 in any fiscal year. The credit facility also provides that if we default under any other loan agreement, that would be a default under this facility. At September 30, 2012, we were in compliance with the terms of the credit facility. After consideration of stand-by letters of credit outstanding, the remaining maximum borrowings available pursuant to the credit facility were $15,451,000 at September 30, 2012; however, in order to maintain compliance with the required quarterly debt covenant calculations as of September 30, 2012 $14,518,000 could have been borrowed as of that date.

On August 3, 2011, we announced that our wholly-owned subsidiary Nashville Superspeedway notified NASCAR that it would not seek 2012 sanction agreements and therefore we no longer promote NASCAR events at this facility. We continue to use the track for motorsports race team testing and are currently evaluating all of our options for the facility. We incurred a non-cash impairment charge of $15,687,000 and severance costs of approximately $150,000 in the third quarter of 2011 as a result of our decision to no longer promote NASCAR events at this facility. Additionally, we recorded a $2,250,000 provision for contingent obligation reflecting the present value of the estimated portion of the Wilson County bonds debt service that may not be covered by the


projected sales and incremental property taxes from the facility (see NOTE 11 - Commitments and Contingencies for further discussion). Due to changing interest rates, the provision for contingent obligation was increased by $21,000 and decreased by $263,000, net, in the three and nine-month periods ended September 30, 2012, respectively. The provision for contingent obligation is $1,987,000 at September 30, 2012.

We promoted eight racing events in the first nine months of 2011 and six events in the first nine months of 2012, all of which were sanctioned by NASCAR. In 2011, four events were held at our Nashville Superspeedway facility and four events were held at our Dover International Speedway facility. In 2012, all racing events were held at our Dover International Speedway facility.

We expect that our net cash flows from operating activities and funds available from our credit facility will be sufficient to provide for our working capital needs, capital spending requirements, as well as any cash dividends our Board of Directors may declare at least through the next twelve months and also provide for our long-term liquidity. Based on current business conditions, we do not expect any significant capital spending for the remainder of 2012. Additionally, we contributed $146,000 to our pension plans in the first nine months of 2012. We do not expect to make any further contributions to our pension plans in 2012.

Contractual Obligations



At September 30, 2012, we had the following contractual obligations and other
commercial commitments:



                                                                  Payments Due by Period
                                    Total          2012       2013 - 2014      2015 - 2016     Thereafter
Revolving line of credit(a)      $ 24,620,000    $       -    $ 24,620,000    $           -    $         -
Estimated interest payments
on revolving line of
credit(b)                             928,000      152,000         776,000                -              -
Contingent obligation(c)            1,987,000            -               -                -      1,987,000
Operating leases                       74,000       26,000          35,000           13,000              -
Total contractual cash
obligations                      $ 27,609,000    $ 178,000    $ 25,431,000    $      13,000    $ 1,987,000



(a) Our current credit facility expires on April 12, 2014.

(b) The future interest payments on our revolving credit agreement were estimated using the current outstanding principal as of September 30, 2012 and current interest rates.

(c) 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 $19,600,000 was outstanding at September 30, 2012. Annual principal payments range from $800,000 in September 2013 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 therefore have historically not been required to be recorded on our consolidated balance sheet. If the applicable taxes are insufficient for the payment of principal and interest on the bonds, we would become responsible for the difference. We are exposed to fluctuations in interest rates for these bonds. In the event we were unable to make the payments, they would be made pursuant to a $19,929,000 irrevocable direct-pay letter of credit issued by our bank group.

As of September 30, 2012 and December 31, 2011, $1,767,000 and $1,534,000, 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 first nine months of 2012, we paid $957,000 into the sales and incremental property tax fund and $724,000 was deducted from the fund for principal and interest payments. 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.

On August 3, 2011, we announced that our wholly-owned subsidiary Nashville Superspeedway notified NASCAR that it would not seek 2012 sanction agreements and therefore we no longer promote NACAR events at this facility. We continue to use the track for motorsports race team testing and are currently evaluating all of our


options for the facility. We incurred a non-cash impairment charge of $15,687,000 and severance costs of approximately $150,000 in the third quarter of 2011 as a result of our decision to no longer promote NASCAR events at this facility. Additionally, we recorded a $2,250,000 provision for contingent obligation reflecting the present value of the estimated portion of the Wilson County bonds debt service that may not be covered by the projected sales and incremental property taxes from the facility (see NOTE 11 - Commitments and Contingencies for further discussion). Due to changing interest rates, the provision for contingent obligation was increased by $21,000 and decreased by $263,000, net, in the three and nine-month periods ended September 30, 2012, respectively. The provision for contingent obligation is $1,987,000 at September 30, 2012.

Related Party Transactions

See NOTE 10 - Related Party Transactions of the consolidated financial statements included elsewhere in this document.

Critical Accounting Policies

The accounting policies described below are those we consider critical in preparing our consolidated financial statements. These policies include significant estimates made by management using information available at the time the estimates are made. As described below, these estimates could change materially if different information or assumptions were used.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating losses. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. As of September 30, 2012, our valuation allowance on state net operating loss carry-forwards net of federal income taxes was $12,228,000, which increased by $39,000 in the first nine months of 2012. These state net operating losses are related to our Midwest facilities that have not produced taxable income. Valuation allowances fully reserve the state net operating loss carryforwards, net of federal tax benefit. We have considered ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. In the event we were to determine that we would be able to realize all or a portion of these deferred tax assets, an adjustment to the valuation allowance would increase earnings in the period such determination was made. Likewise, should we determine that we would not be able to realize all or a portion of our remaining deferred tax assets in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination was made.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is provided for financial reporting purposes using the straight-line method over estimated useful lives ranging from 3 to 10 years for furniture, fixtures and equipment and up to 40 years for facilities. These estimates require assumptions that are believed to be reasonable. We perform reviews for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is measured as the amount by which the carrying amount of the asset exceeds its fair value.

Over the past six years, we recorded several impairment charges relating to our Midwest tracks to reduce the carrying value of the tracks to their then estimated fair value. Fair value was based on either independent third party appraisals or pending/completed sales transactions.

Determining fair value involves the use of estimates and assumptions. We employ estimates and assumptions that we believe to be reasonable but that are inherently uncertain and subject to change. In certain cases, industry events beyond our control have to be factored into our fair value analysis. Our initial impairment charge in 2006 was


to all three Midwest tracks and resulted from a reduction in projected future cash flows based on new broadcast agreements with NASCAR. An additional impairment charge in 2008 resulted from (i) the decline in economic conditions and its impact on our projected operations, (ii) a lower than anticipated allocation of contractual revenue from NASCAR, and (iii) an agreement of sale for one of our Midwest tracks at a selling price lower than its carrying value.

We no longer conduct motorsports events at either of the remaining properties of our former Midwest tracks. We continue to own land with an appraised fair value of approximately $630,000 near one of our former facilities and have exited from the various property leases under which we previously operated. The appraised fair value of the remaining facility primarily consists of its land value of approximately $30.3 million for approximately 1,400 acres. Additional impairment charges were taken in 2009, 2010 and 2011 and were primarily the result of the expiration in 2009 of an agreement of sale for one track that had previously formed the basis for the track's carrying value, the cessation of operations at another track announced in 2010 and the cessation of operations at the third track announced in 2011. Following these charges, the carrying value of the remaining assets has been reduced primarily to land value.

Fair value for land is determined using valuation techniques such as the comparable sales approach. The primary economic assumptions used in the valuation techniques include: (i) land value which is estimated by comparable transactions; and (ii) that the highest and best use for the land is potential real estate development such as industrial warehouse or light manufacturing development. We review the fair value of the land on a regular basis and it is possible that the assumptions used to value the land can change in the future and this could have a significant effect on the outcome of future valuations.

Accrued Pension Cost

On June 15, 2011, we decided to freeze participation and benefit accruals under our pension plans. The freeze was effective July 31, 2011. The benefits provided by our defined-benefit pension plans are based on years of service and employee's remuneration through July 31, 2011. Accrued pension costs are developed using actuarial principles and assumptions which consider a number of factors, including estimates for the discount rate and expected long-term rate of return on assets. Changes in these estimates would impact the amounts that we record in our consolidated financial statements.

Recent Accounting Pronouncements

There have been no recent accounting pronouncements or changes in accounting pronouncements during the three months ended September 30, 2012 that are of significance, or potential significance, to us.

Factors That May Affect Operating Results; Forward-Looking Statements

This report and the documents incorporated by reference may contain forward-looking statements. In Item 1A of this report, we disclose the important factors that could cause our actual results to differ from our expectations.

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