Form 10-Q

 

 

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

 

Form 10-Q

 

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2008

Commission file number 1-11929

 

 

Dover Motorsports, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   51-0357525
(State or Other Jurisdiction of Incorporation)   (I.R.S. Employer Identification No.)

1131 North DuPont Highway, Dover, Delaware 19901

(Address of principal executive offices)

(302) 883-6500

(Registrant's telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨  No  x

As of April 30, 2008, the number of shares of each class of the registrant's common stock outstanding is as follows:

 

Common Stock -

   16,837,556 shares

Class A Common Stock -

   19,514,975 shares

 

 

 


Part I – Financial Information

 

Item 1. Financial Statements

DOVER MOTORSPORTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE LOSS

In Thousands, Except Per Share Amounts

(Unaudited)

 

     Three Months Ended March 31,  
     2008     2007  

Revenues:

    

Admissions

   $ 800     $ 87  

Event-related

     965       784  

Broadcasting

     709       —    

Other

     38       11  
                
     2,512       882  
                

Expenses:

    

Operating and marketing

     4,610       2,394  

General and administrative

     3,167       3,171  

Depreciation and amortization

     1,662       1,529  
                
     9,439       7,094  
                

Operating loss

     (6,927 )     (6,212 )

Interest income

     31       43  

Interest expense

     (1,101 )     (929 )
                

Loss before income tax benefit

     (7,997 )     (7,098 )

Income tax benefit

     3,849       3,538  
                

Net loss

     (4,148 )     (3,560 )

Unrealized loss on interest rate swap, net of income tax benefit of $130 and $33 for the three months ended March 31, 2008 and 2007, respectively

     (189 )     (48 )

Unrealized (loss) gain on available-for-sale securities, net of income tax benefit (expense) of $12 and ($4) for the three months ended March 31, 2008 and 2007, respectively

     (17 )     6  

Amortization of net actuarial loss and prior service cost included in net periodic pension benefit cost, net of income tax expense of $10

     11       —    
                

Comprehensive loss

   $ (4,343 )   $ (3,602 )
                

Net loss per common share:

    

Basic

   $ (0.12 )   $ (0.10 )
                

Diluted

   $ (0.12 )   $ (0.10 )
                

The Notes to the Consolidated Financial Statements are an integral part of these consolidated statements.

 

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DOVER MOTORSPORTS, INC.

CONSOLIDATED BALANCE SHEETS

In Thousands, Except Share and Per Share Amounts

(Unaudited)

 

      March 31,
2008
    December 31,
2007
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 956     $ 327  

Accounts receivable

     5,127       1,722  

Inventories

     305       185  

Prepaid expenses and other

     3,142       1,773  

Receivable from Dover Downs Gaming & Entertainment, Inc.

     —         18  

Income taxes receivable

     177       —    

Deferred income taxes

     196       186  
                

Total current assets

     9,903       4,211  

Property and equipment, net

     159,142       157,748  

Restricted cash

     3,823       4,169  

Other assets, net

     1,531       1,578  

Deferred income taxes

     97       —    
                

Total assets

   $ 174,496     $ 167,706  
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 2,938     $ 945  

Accrued liabilities

     2,690       3,464  

Payable to Dover Downs Gaming & Entertainment, Inc.

     40       —    

Income taxes payable

     —         257  

Current portion of bonds payable

     1,130       111  

Deferred revenue

     22,294       8,689  
                

Total current liabilities

     29,092       13,466  

Revolving line of credit

     42,300       42,300  

Bonds payable

     2,968       4,098  

Liability for pension benefits

     805       736  

Other liabilities

     1,693       1,202  

Non current income taxes payable

     9,686       9,687  

Deferred income taxes

     16,651       20,101  
                

Total liabilities

     103,195       91,590  
                

Commitments and contingencies (see Notes to the Consolidated Financial Statements)

    

Stockholders’ equity:

    

Preferred stock, $0.10 par value; 1,000,000 shares authorized; shares issued and outstanding: none

     —         —    

Common stock, $0.10 par value; 75,000,000 shares authorized; shares issued and outstanding: 16,843,988 and 16,721,433, respectively

     1,684       1,672  

Class A common stock, $0.10 par value; 55,000,000 shares authorized; shares issued and outstanding: 19,514,975 and 19,514,975, respectively

     1,952       1,952  

Additional paid-in capital

     99,911       99,849  

Accumulated deficit

     (31,197 )     (26,503 )

Accumulated other comprehensive loss

     (1,049 )     (854 )
                

Total stockholders’ equity

     71,301       76,116  
                

Total liabilities and stockholders’ equity

   $ 174,496     $ 167,706  
                

The Notes to the Consolidated Financial Statements are an integral part of these consolidated statements.

 

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DOVER MOTORSPORTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

In Thousands

(Unaudited)

 

     Three Months Ended March 31,  
     2008     2007  

Operating activities:

    

Net loss

   $ (4,148 )   $ (3,560 )

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation and amortization

     1,662       1,529  

Amortization of credit facility fees

     48       45  

Stock-based compensation

     160       124  

Deferred income taxes

     (3,426 )     (3,088 )

Changes in assets and liabilities:

    

Accounts receivable

     (3,405 )     (2,274 )

Inventories

     (120 )     (45 )

Prepaid expenses and other

     (1,416 )     (2,781 )

Receivable from/payable to Dover Downs Gaming & Entertainment, Inc.

     58       (46 )

Income taxes receivable/payable

     (434 )     (370 )

Accounts payable

     552       (1,100 )

Accrued liabilities

     (774 )     (765 )

Deferred revenue

     13,605       14,332  

Other liabilities

     262       94  
                

Net cash provided by operating activities

     2,624       2,095  
                

Investing activities:

    

Capital expenditures

     (1,598 )     (3,004 )

Restricted cash

     346       1,094  
                

Net cash used in investing activities

     (1,252 )     (1,910 )
                

Financing activities:

    

Borrowings from revolving line of credit

     3,500       6,300  

Repayments on revolving line of credit

     (3,500 )     (4,200 )

Repayments of bonds payable

     (111 )     (699 )

Dividends paid

     (546 )     (544 )

Repurchase of common stock

     (95 )     (25 )

Excess tax benefit (expense) on stock awards

     9       (3 )
                

Net cash (used in) provided by financing activities

     (743 )     829  
                

Net increase in cash and cash equivalents

     629       1,014  

Cash and cash equivalents, beginning of period

     327       298  
                

Cash and cash equivalents, end of period

   $ 956     $ 1,312  
                

Supplemental information:

    

Interest paid

   $ 1,036     $ 925  
                

Income taxes paid

   $ 2     $ 10  
                

Change in accounts payable for capital expenditures

   $ 1,441     $ —    
                

The Notes to the Consolidated Financial Statements are an integral part of these consolidated statements.

 

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DOVER MOTORSPORTS, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – Basis of Presentation

References in this document to “we,” “us” and “our” mean Dover Motorsports, Inc. and/or its wholly owned subsidiaries, as appropriate.

The accompanying consolidated financial statements have been prepared in compliance with Rule 10-01 of Regulation S-X and U.S. generally accepted accounting principles, and accordingly do not include all of the information and disclosures required for audited financial statements. These consolidated statements should be read in conjunction with the consolidated financial statements and notes thereto included in our latest Annual Report on Form 10-K filed on March 7, 2008. In the opinion of management, these consolidated statements include all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of operations, financial position and cash flows for the interim periods presented. Operating results for the three months ended March 31, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008 due to the seasonal nature of our business.

NOTE 2 – Business Operations

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 are scheduled to promote 15 major events during 2008 under the auspices of three of the premier sanctioning bodies in motorsports—the 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 2008, we are scheduled to promote the following major events:

 

 

2 NASCAR Sprint Cup Series events;

 

 

6 NASCAR Nationwide Series events;

 

 

4 NASCAR Craftsman Truck Series events;

 

 

1 IRL event; and

 

 

2 NHRA events.

Of the major events listed above, we promoted one NASCAR Nationwide Series event during the first quarter of 2008.

Additionally, we are scheduled to promote a NASCAR Camping World East Series (formerly known as Busch East Series) event at Dover International Speedway in connection with our September NASCAR event weekend.

NOTE 3 – 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.

 

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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 6 – Stockholders’ Equity and NOTE 7 – Financial Instruments for further discussion.

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 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 4 – Long-Term Debt and NOTE 7 – 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. Accumulated depreciation was $77,876,000 and $76,241,000 as of March 31, 2008 and December 31, 2007, respectively.

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.

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 three months ended March 31, 2008, we incurred $1,101,000 of interest cost, none of which was capitalized. During the three months ended March 31, 2007, we incurred $1,000,000 of interest cost, of which $71,000 was capitalized.

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.

We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“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 depreciable lives of certain of our assets and do not affect our effective income tax rate or our reported earnings.

Interest expense related to FIN 48 was $172,000 and $86,000 during the three months ended March 31, 2008 and 2007, respectively. Total accrued interest as of March 31, 2008, was $1,122,000 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 March 31, 2008, tax years after 2003 remain open to examination for the federal and Delaware jurisdictions.

 

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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 and souvenir revenue 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 $56,000 and $14,000 of total revenues for the three months ended March 31, 2008 and 2007, respectively.

We derive a substantial portion of our 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.

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.

We are responsible for collecting sales taxes from our customers on certain revenue generating activities and remitting these taxes to the appropriate governmental taxing authority. We include sales taxes in admissions and event-related revenues on our consolidated statements of operations with an equal amount in operating and marketing expenses. Sales taxes included in revenues and expenses for the three months ended March 31, 2008 and 2007 were $80,000 and $7,000, respectively.

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 $246,000 and $4,000 for the three months ended March 31, 2008 and 2007, respectively.

Net loss per common share—Weighted average shares used in computing basic and diluted net loss per common share (“EPS”) are as follows:

 

     Three Months Ended March 31,
     2008    2007

Basic EPS

   35,903,000    35,866,000

Effect of dilutive securities

   —      —  
         

Diluted EPS

   35,903,000    35,866,000
         

For the three months ended March 31, 2008 and 2007, options to purchase 652,610 and 669,482 shares of common stock, respectively, 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, 455,000 and 374,800 shares of nonvested restricted stock awards, respectively, were not included in the computation of diluted EPS as they would also have been anti-dilutive.

 

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Accounting for stock-based compensation—We account for our stock-based compensation expense in accordance with FASB Statement No. 123R, Share-Based Payment. 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 recorded total stock-based compensation expense of $160,000 and $124,000 as general and administrative expenses for the three months ended March 31, 2008 and 2007, respectively. We recorded income tax benefits of $62,000 and $38,000 for the three months ended March 31, 2008 and 2007, respectively, related to our nonvested restricted stock awards.

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.

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 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. In February 2008, the FASB issued FASB Staff Position (“FSP”) 157-2, Effective Date of FASB Statement No. 157, which delays the effective date of Statement No. 157’s 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 to fiscal years beginning after November 15, 2008. Non-recurring non-financial assets and liabilities for which we have not applied the provisions of Statement No. 157 include our long-lived assets measured at fair value for an impairment assessment under FASB Statement No. 144. The impact of adoption of Statement No. 157 for financial assets and liabilities is discussed in NOTE 7 – Financial Instruments. We do not expect the adoption of Statement No. 157 for non-recurring non-financial assets and liabilities 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 Statement No. 159 on a retrospective basis unless they choose early adoption. We have not elected to apply the fair value option to any of our financial instruments.

NOTE 4 – Long-Term Debt

Long-term debt consists of the following:

 

     March 31,
2008
    December 31,
2007
 

Revolving line of credit

   $ 42,300,000     $ 42,300,000  

SWIDA bonds

     4,098,000       4,209,000  
                
     46,398,000       46,509,000  

Less current portion

     (1,130,000 )     (111,000 )
                
   $ 45,268,000     $ 46,398,000  
                

At March 31, 2008, 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 (175 basis points at March 31, 2008) 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

 

8


prime rate or the federal funds rate plus 0.5%) plus a margin that varies between -50 and +25 basis points (0 basis points at March 31, 2008) 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. The credit facility also provides that if we default under any other loan agreement, that would be a default under this credit facility. At March 31, 2008, we were in compliance with the terms of the facility.

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 March 31, 2008, at a weighted average interest rate of 5.64%. After consideration of stand-by letters of credit outstanding, borrowings of $7,416,000 were available pursuant to the facility at March 31, 2008. 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.

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, our wholly owned subsidiary Midwest Racing, Inc. (“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 $4,098,000 was outstanding at March 31, 2008. 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 March 31, 2008, $3,823,000 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 a rate of 9.2%. Interest expense related to the SWIDA bonds was $96,000 and $102,000 for the three months ended March 31, 2008 and 2007, respectively. 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.

NOTE 5 – Pension Plans

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 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.

 

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The components of net periodic pension cost are as follows:

 

     Three Months Ended March 31,  
     2008     2007  

Service cost

   $ 98,000     $ 93,000  

Interest cost

     101,000       90,000  

Expected return on plan assets

     (136,000 )     (115,000 )

Recognized net actuarial loss

     14,000       15,000  

Net amortization

     7,000       7,000  
                
   $ 84,000     $ 90,000  
                

We plan to contribute between $250,000 and $750,000 to our plans in 2008. No contributions were made to our pension plans during the three months ended March 31, 2008 or March 31, 2007.

NOTE 6 – Stockholders’ Equity

Changes in the components of stockholders’ equity are as follows:

 

     Common
Stock
    Class A
Common
Stock
   Additional
Paid-in
Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Loss
 

Balance at December 31, 2007

   $ 1,672,000     $ 1,952,000    $ 99,849,000     $ (26,503,000 )   $ (854,000 )

Net loss

     —         —        —         (4,148,000 )     —    

Unrealized loss on interest rate swap, net of income tax benefit of $130,000

     —         —        —         —         (189,000 )

Unrealized loss on available-for-sale securities, net of income tax benefit of $12,000

     —         —        —         —         (17,000 )

Amortization of net actuarial loss and prior service cost included in net periodic pension benefit cost, net of income tax expense of $10,000

     —         —        —         —         11,000  

Dividends paid, $0.015 per share

     —         —        —         (546,000 )     —    

Issuance of restricted stock awards, net of forfeitures

     14,000       —        (14,000 )     —         —    

Stock-based compensation

     —         —        160,000       —         —    

Excess tax benefit on stock awards

     —         —        9,000       —         —    

Repurchase and retirement of common stock

     (2,000 )     —        (93,000 )     —         —    
                                       

Balance at March 31, 2008

   $ 1,684,000     $ 1,952,000    $ 99,911,000     $ (31,197,000 )   $ (1,049,000 )
                                       

On April 24, 2008, our Board of Directors declared a quarterly cash dividend on both classes of common stock of $.015 per share. The dividend is payable on June 10, 2008 to stockholders of record at the close of business on May 10, 2008.

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. No purchases of our equity securities were made pursuant to this authorization during the three months ended March 31, 2008 and 2007. At March 31, 2008, we had remaining repurchase authority of 1,634,607 shares.

During the three months ended March 31, 2008 and 2007, we purchased and retired 14,445 and 4,850 shares of our outstanding common stock at an average purchase price of $6.60 and $5.15 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

 

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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.

As of March 31, 2008 and December 31, 2007, accumulated other comprehensive loss, net of income taxes, consists of the following:

 

     March 31,
2008
    December 31,
2007
 

Net actuarial loss and prior service cost not yet recognized in net periodic benefit cost, net of income tax benefit of $468,000 and $478,000, respectively

   $ (685,000 )   $ (696,000 )

Unrealized loss on interest rate swap, net of income tax benefit of $233,000 and $103,000, respectively

     (338,000 )     (149,000 )

Accumulated unrealized loss on available-for-sale securities, net of income tax benefit of $18,000 and $6,000, respectively

     (26,000 )     (9,000 )
                

Accumulated other comprehensive loss

   $ (1,049,000 )   $ (854,000 )
                

NOTE 7 – Financial Instruments

We adopted FASB Statement No. 157 effective January 1, 2008 for financial assets and liabilities measured on a recurring basis. Statement No. 157 applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis. There was no impact from the adoption of Statement No. 157 to the consolidated financial statements. Statement No. 157 requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. The statement requires fair value measurement be classified and disclosed in one of the following three categories:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability;

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

The following table summarizes the valuation of our financial instruments by the Statement No. 157 pricing levels as of March 31, 2008:

 

     Total     Quoted Prices
In Active
Markets
(Level 1)
   Significant Other
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)

Available-for-sale securities

   $ 477,000     $ 477,000    $ —       $ —  

Interest rate swap

     (571,000 )     —        (571,000 )     —  

Our investments in available-for-sale securities are recorded at fair value based on quoted market prices. These investments are included in other non-current assets on our consolidated balance sheets.

At March 31, 2008 and December 31, 2007, there was $42,300,000 outstanding under our revolving credit agreement. The borrowings under our revolving credit agreement bear interest at the variable rate described in NOTE 4 – Long-Term Debt and therefore approximate fair value at March 31, 2008 and December 31, 2007, 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 4 – 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 March 31, 2008 and December 31, 2007, the interest rate swap had a negative fair value of $571,000 and $252,000, respectively, which is recorded in other liabilities. 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 pay to terminate the swap.

 

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The carrying amounts of other financial instruments reported in the balance sheet for current assets and current liabilities approximate their fair values because of the short maturity of these instruments.

At March 31, 2008 and December 31, 2007, our outstanding SWIDA bonds had carrying values of $4,098,000 and $4,209,000, respectively, and estimated fair values of $4,266,000 and $4,299,000, 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.

NOTE 8 – Related Party Transactions

During the three months ended March 31, 2008 and 2007, Dover Downs Gaming & Entertainment, Inc. (“Gaming”), a company related through common ownership, allocated costs of $526,000 and $492,000, respectively, to us for certain administrative and operating services. Additionally, we allocated costs of $36,000 and $48,000, respectively, to Gaming for the three months ended March 31, 2008 and 2007. The allocations were based on an analysis of each company’s share of the costs. In connection with our NASCAR event weekends at Dover International Speedway, we invoiced Gaming $89,000 and $85,000 during the three months ended March 31, 2008 and 2007, respectively, for a skybox suite, tickets and other services to the events. As of March 31, 2008 and December 31, 2007, our consolidated balance sheets include a $40,000 payable to and $18,000 receivable from Gaming, respectively, for the aforementioned items. We have since settled the payable in the second quarter of 2008 and the receivable was settled in the first quarter of 2008. 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. Gaming’s 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. Tippie's 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, Klaus M. Belohoubek is the Senior Vice President – General Counsel and Secretary of both companies and Timothy R. Horne is the Senior Vice President – Finance and Chief Financial Officer of both companies. Mr. Tippie controls in excess of fifty percent of the voting power of Gaming.

 

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NOTE 9 – Commitments and Contingencies

As of March 31, 2008, we have purchase obligations related to the construction of site improvements and fan amenities at our Dover International Speedway facility. Construction began in the fourth quarter of 2007 and is expected to be completed by May of 2008. The estimated cost of the construction is approximately $6,700,000, of which approximately $2,100,000 was paid through March 31, 2008, and approximately $1,700,000 is included in accounts payable in the consolidated balance sheet.

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 March 31, 2008. 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.

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 March 31, 2008 and December 31, 2007, $379,000 and $535,000, 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 officer’s 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.

 

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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 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 $56,000 and $14,000 of total revenues for the three months ended March 31, 2008 and 2007, 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. Our expenses include prize and point fund monies and sanction fees paid to various sanctioning bodies, including NASCAR, labor, advertising, cost of goods sold for merchandise and souvenirs, and other expenses associated with the promotion of our racing events.

Results of Operations

Three Months Ended March 31, 2008 vs. Three Months Ended March 31, 2007

Revenues increased $1,630,000 in the first quarter of 2008 as compared to the first quarter of 2007. We promoted a NASCAR Nationwide Series event at our Nashville facility during the first quarter of 2008. This event was held in the second quarter of 2007. Partially offsetting this increase was a decrease in revenues from track rentals and weekly drag-strip events due mainly to inclement weather at our Memphis Motorsports Park facility in the first quarter of 2008. Our revenues for the first quarter of 2007 were derived from track rentals and weekly drag-strip events.

Operating and marketing expenses were $4,610,000 in the first quarter of 2008 as compared to $2,394,000 in the first quarter of 2007. The $2,216,000 increase primarily related to the change in our motorsports event calendar discussed above, higher payroll and related benefit costs and utility expenses.

General and administrative expenses remained consistent between the first quarter of 2008 and the first quarter of 2007 at $3,167,000 and $3,171,000, respectively.

Depreciation and amortization expense was $1,662,000 in the first quarter of 2008 as compared to $1,529,000 in the first quarter of 2007. The increase was due primarily to assets placed in service during the second quarter of 2007 related to our Monster Makeover project in Dover, Delaware.

Net interest expense was $1,070,000 in the first quarter of 2008 as compared to $886,000 in the first quarter of 2007. The increase resulted primarily from higher average outstanding borrowings on our credit facilities and an $86,000 increase in our interest expense for potential taxes in accordance with FASB Interpretation No. 48, partially offset by a decrease in our average interest rate.

We reported a loss before income tax benefit of $7,997,000 in the first quarter of 2008 as compared to $7,098,000 in the first quarter of 2007. The loss increased in 2008 primarily as a result of the aforementioned decrease in our operating results on our track rentals and weekly drag-strip events, higher depreciation and amortization and interest expenses.

 

14


Our effective income tax rates for the first quarter of 2008 and 2007 were 48.1% and 49.8%, respectively. The decrease in the effective income tax rate from the prior year rate was primarily the result of a reduction in our combined effective state income tax rate.

Liquidity and Capital Resources

Our operations are seasonal in nature with a majority of our motorsports events occurring during the second and third quarters. However, our cash flows from operating activities are more evenly spread throughout the year, primarily due to the impact of advance ticket sales and other event-related cash receipts, such as sponsorship and luxury suite rentals.

Net cash provided by operating activities was $2,624,000 for the three months ended March 31, 2008 as compared to $2,095,000 for the three months ended March 31, 2007. The increase in 2008 was primarily due to the change in our major motorsports event calendar. We promoted a NASCAR Nationwide Series event at our Nashville facility during the first quarter of 2008. This event was held in the second quarter of 2007.

Net cash used in investing activities was $1,252,000 for the three months ended March 31, 2008 as compared to $1,910,000 for the three months ended March 31, 2007. Capital expenditures were $1,598,000 in the first three months of 2008 compared to $3,004,000 in the first three months of 2007, and related primarily to our Monster Makeover project described below. The 2008 additions related primarily to the construction of a new entranceway, fan zone and medical center to be placed in service in the second quarter of 2008, and the renovation and construction of other fan amenities at our Dover facility. The 2007 additions related primarily to the construction of new luxury skybox suites which were completed in the second quarter of 2007, and the renovation of other fan amenities at our Dover facility.

Net cash used in financing activities was $743,000 for the three months ended March 31, 2008 as compared to net cash provided by financing activities of $829,000 for the three months ended March 31, 2007. We had no net change in borrowings on our line of credit in the first three months of 2008 as compared to a $2,100,000 increase in the first three months of 2007. Repayments of our outstanding SWIDA bonds were $111,000 for the first quarter of 2008 as compared to $699,000 for the first quarter of 2007. We paid $546,000 in cash dividends in the first three months of 2008 as compared to $544,000 in the first three months of 2007. During the first three months of 2008 and 2007, we purchased and retired 14,445 and 4,850 shares of our common stock at an average purchase price of $6.60 and $5.15 per share, respectively, not including nominal brokerage commissions.

On April 24, 2008, our Board of Directors declared a quarterly cash dividend on both classes of common stock of $0.015 per share. The dividend is payable on June 10, 2008 to shareholders of record at the close of business on May 10, 2008.

At March 31, 2008, 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 (175 basis points at March 31, 2008) 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 (0 basis points at March 31, 2008) 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 March 31, 2008, 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 March 31, 2008, at a weighted average interest rate of 5.64%. After consideration of stand-by letters of credit outstanding, borrowings of

 

15


$7,416,000 were available pursuant to the facility at March 31, 2008. 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.

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. 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.

Cash provided by operating activities is expected to substantially fund our capital expenditures and maintenance of a dividend in 2008. Based on current business conditions, we expect to spend between $7,500,000 and $8,500,000 on capital expenditures during 2008. These expenditures primarily relate to the construction of a new entranceway, fan zone and medical center at our Dover facility and other fan amenities. On May 24, 2006, we announced plans for a five-year capital improvement project, referred to as the “Monster Makeover,” that will provide new offerings and upgraded amenities for fans, competitors and the media. The project is expected to take up to five years to complete at an estimated total cost of approximately $25,000,000, of which approximately $14,700,000 was spent as of March 31, 2008. We continue to review the amount and timing of capital expenditures in light of our current earnings level. Additionally, we expect to contribute between $250,000 and $750,000 to our pension plans in 2008, none of which was contributed during the three months ended March 31, 2008. We expect continued cash flows from operating activities and funds available from our credit agreement to provide for our working capital needs and capital spending requirements at least through the next twelve months, as well as any cash dividends our Board of Directors may declare, and also provide for our long-term liquidity.

Contractual Obligations

At March 31, 2008, we had the following contractual obligations and other commercial commitments:

 

          Payments Due by Period
     Total    2008    2009 – 2010    2011 – 2012    Thereafter

Revolving line of credit

   $ 42,300,000    $ —      $ —      $ 42,300,000    $ —  

SWIDA bonds

     4,098,000      —        2,365,000      1,733,000      —  
                                  

Total debt

     46,398,000      —        2,365,000      44,033,000      —  

Estimated interest payments on revolving line of credit

     7,754,000      1,789,000      4,772,000      1,193,000      —  

Interest payments on SWIDA bonds

     852,000      189,000      545,000      118,000      —  

Operating leases

     4,542,000      263,000      518,000      356,000      3,405,000

Pension contributions

     500,000      500,000      —        —        —  

Purchase obligations

     4,600,000      4,600,000      —        —        —  
                                  

Total contractual cash obligations

   $ 64,646,000    $ 7,341,000    $ 8,200,000    $ 45,700,000    $ 3,405,000
                                  

We have a $73,000,000 revolving line of credit agreement. At March 31, 2008, $42,300,000 was outstanding under the facility.

The future interest payments on our revolving credit agreement were estimated using the current outstanding principal as of March 31, 2008 and related interest rates.

In 1996, Midwest Racing entered into an agreement with 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 $4,098,000 was outstanding at March 31, 2008. 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. 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

 

16


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 March 31, 2008, $3,823,000 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 a rate of 9.2%. Interest expense related to the SWIDA bonds was $96,000 and $102,000 for the three months ended March 31, 2008 and 2007, respectively. 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.

Although we have no required minimum contribution related to our pension plans for 2008, we expect to contribute between $250,000 and $750,000 into the plans, none of which was contributed in the first three months of 2008.

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 March 31, 2008. 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 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 March 31, 2008 and December 31, 2007, $379,000 and $535,000, 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.

As of March 31, 2008, we have purchase obligations related to the construction of site improvements and fan amenities at our Dover International Speedway facility. Construction began in the fourth quarter of 2007 and is expected to be completed by May of 2008. The estimated cost of the construction is $6,700,000, of which approximately $2,100,000 was paid through March 31, 2008, and the remainder is expected to be paid during 2008.

We have not included our non current income taxes payable of $9,686,000 which is classified in accordance with FASB Interpretation No. 48 in the contractual obligations disclosure since we cannot reasonably estimate the period of potential cash settlement for unrecognized tax benefits.

Related Party Transactions

See NOTE 8 – Related Party Transactions of the consolidated financial statements included elsewhere in this document.

 

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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 March 31, 2008, our valuation allowance net of federal income taxes was $7,515,000, which increased by $150,000 in the first three months of 2008, on deferred tax assets related to state net operating loss carry-forwards. 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 5 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. Generally, fair value is determined using valuation techniques such as the present value of future cash flows.

Recent Accounting Pronouncements

See NOTE 3 — Summary of Significant Accounting Policies of the consolidated financial statements included elsewhere in this document for a description of recent accounting pronouncements including the respective expected dates of adoption and effects on results of operations, financial condition and cash flows.

Factors That May Affect Operating Results; Forward-Looking Statements

In addition to historical information, this Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, relating to our financial condition, profitability, liquidity, resources, business outlook, proposed acquisitions, market forces, corporate strategies, consumer preferences, contractual commitments, legal matters, capital requirements and other matters. Documents incorporated by reference into this Annual Report may also contain forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. To comply with the terms of the safe harbor, we note that a variety of factors could cause our actual results and experience to differ substantially from the anticipated results or other expectations expressed in our forward-looking statements. When words and expressions such as: “believes,” “expects,” “anticipates,” “estimates,” “plans,” “intends,” “objectives,” “goals,” “aims,” “projects,” “forecasts,” “possible,” “seeks,” “may,” “could,” “should,” “might,” “likely,” “enable” or similar words or expressions are used in this document, as well as statements containing phrases such as “in our view,” “there can be no assurance,” “although no assurance can be given” or “there is no way to anticipate with certainty,” forward-looking statements are being made.

 

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Various risks and uncertainties may affect the operation, performance, development and results of our business and could cause future outcomes to differ materially from those set forth in our forward-looking statements, including the following factors:

 

   

stability and viability of sanctioning bodies;

 

   

success of or changes in our growth strategies;

 

   

development and potential acquisition of new facilities;

 

   

anticipated trends in the motorsports industry;

 

   

patron demographics;

 

   

obtaining favorable contracts relative to sponsorships, event sanctions and broadcast rights;

 

   

relationships with sanctioning bodies, sponsors, broadcast media, drivers and teams;

 

   

general market and economic conditions, including consumer and corporate spending sentiment;

 

   

ability to finance future business requirements;

 

   

the availability of adequate levels of insurance;

 

   

ability to successfully integrate acquired companies and businesses;

 

   

management retention and development;

 

   

changes in Federal, state and local laws and regulations, including environmental regulations;

 

   

the effect of weather conditions on outdoor event attendance;

 

   

military or other government actions;

 

   

availability of air travel; and

 

   

national or local catastrophic events.

The above risks and uncertainties and the cautionary statements below should be considered in connection with any future forward-looking statements we make. We undertake no obligation to publicly update or revise any forward-looking statements as a result of future developments, events or conditions. New risk factors emerge from time to time and it is not possible for us to predict all such risk factors, nor can we assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ significantly from those forecast in any forward-looking statements. Given these risks and uncertainties, stockholders should not overly rely or attach undue weight to our forward-looking statements as an indication of our actual future results.

Our Relationships With and the Success of Various Sanctioning Bodies Is Vital To Our Success In Motorsports

Our continued success in motorsports is dependent upon the success of various governing bodies of motorsports that sanction national racing events and our ability to secure favorable contracts with and maintain a good working relationship with these sanctioning bodies, including NASCAR, IRL and NHRA. Sanctioning bodies regularly issue and award sanctioned events and their issuance depends, in large part, on maintaining good working relationships with the sanctioning bodies. Many events are sanctioned on an annual basis with no contractual obligation to renew, including our agreements with NASCAR. By awarding a sanctioned event or a series of

 

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sanctioned events, the sanctioning bodies do not warrant, nor are they responsible for, the financial success of any sanctioned event. Our success is directly tied to our ability to negotiate favorable terms to our sanction agreements, including the amount of the sanction fee and purse, and our ability to continue to derive economic benefits from such agreements, such as our share of live broadcast revenues.

Our ability to obtain additional sanctioned events in the future and to negotiate favorable terms to our sanction agreements and the success of a particular sanctioning body in attracting drivers and teams, signing series sponsors and negotiating favorable television and/or radio broadcast rights is dependent on many factors which are largely outside of our control. As our success depends on the terms of our sanction agreements and the success of each event or series that we are promoting, a material change in the terms of a sanction agreement or a material adverse effect on a sanctioning body, such as the loss or defection of top drivers, the loss of significant series sponsors, or the failure to obtain favorable broadcast coverage or to properly advertise the event or series could result in a reduction in our revenues from live broadcast coverage, admissions, luxury suite rentals, sponsorships, hospitality, concessions and merchandise, which could have a material adverse effect on our business, financial condition and results of operations.

We Rely On Sponsorship Contracts To Generate Revenues

We receive a portion of our annual revenues from sponsorship agreements, including the sponsorship of our various events and our permanent venues, such as “title,” “official product” and “promotional partner” sponsorships, billboards, signage and skyboxes. Loss of our existing title sponsors or other major sponsorship agreements or failure to secure such sponsorship agreements in the future could have a material adverse effect on our business, financial condition and results of operations.

We are in negotiations with various potential sponsors for our 2008 events, including title sponsors for one of our NASCAR Sprint Cup Series events at Dover International Speedway, our NASCAR Craftsman Truck Series event at Gateway International Raceway and our NASCAR Nationwide Series event at Memphis Motorsports Park.

Our Motorsports Events Face Intense Competition For Attendance, Television Viewership And Sponsorship

We compete with other auto speedways for the patronage of motor racing spectators as well as for sponsorships. Moreover, racing events sanctioned by different organizations are often held on the same dates at different tracks. The quality of the competition, type of racing event, caliber of the event, sight lines, ticket pricing, location and customer conveniences, among other things, distinguish the motorsports facilities. In addition, all of our events compete with other sports and recreational events scheduled on the same dates. As a result, our revenues and operations are affected not only by our ability to compete in the motorsports promotion market, but also by the availability of alternative spectator sports events, forms of entertainment and changing consumer preferences.

The Sales Tax And Property Tax Revenues To Service The Revenue Bonds For Infrastructure Improvements At Nashville May Be Inadequate

In September 1999, the Sports Authority of the County of Wilson (Tennessee) issued $25,900,000 in revenue bonds to build local infrastructure improvements which benefit the operation of Nashville Superspeedway, of which $22,900,000 was outstanding on March 31, 2008. Debt service on the bonds is payable solely from sales taxes and incremental property taxes generated from the facility. As of March 31, 2008 and December 31, 2007, $379,000 and $535,000, 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. These bonds are direct obligations of the Sports Authority and are therefore not recorded on our consolidated balance sheet. In the event the sales taxes and incremental property taxes are insufficient to cover 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. 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. In the event we were unable to make the payments, they would be made under a $23,302,000 irrevocable direct-pay letter of credit issued by our bank group. We would be responsible to reimburse

 

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the banks for any drawings made under the letter of credit. Such an event could have a material adverse effect on our business, financial condition and results of operations.

The Seasonality Of Our Motorsports Events Increases The Variability Of Quarterly Earnings

Our business has been, and is expected to remain, seasonal given that it depends on our outdoor events for a substantial portion of revenues. We derive a substantial portion of our motorsports revenues from admissions and event-related revenue attributable to six NASCAR-sanctioned events at Dover, Delaware which are currently held in June and September. This has been offset to some degree by our other motorsports events, but quarterly earnings will vary.

Our Insurance May Not Be Adequate To Cover Catastrophic Incidents

We maintain insurance policies that provide coverage within limits that are sufficient, in the opinion of management, to protect us from material financial loss incurred in the ordinary course of business. We also purchase special event insurance for motorsports events to protect against race-related liability. However, there can be no assurance that this insurance will be adequate at all times and in all circumstances. If we are held liable for damages beyond the scope of our insurance coverage, including punitive damages, our business, financial condition and results of operations could be materially and adversely affected.

Bad Weather Can Have An Adverse Financial Impact On Our Motorsports Events

We sponsor and promote outdoor motorsports events. Weather conditions affect sales of tickets, concessions and souvenirs, among other things at these events. Although we sell many tickets well in advance of the outdoor events and these tickets are issued on a non-refundable basis, poor weather conditions may adversely affect additional ticket sales and concessions and souvenir sales, which could have an adverse effect on our business, financial condition and results of operations.

We do not currently maintain weather-related insurance for major events. Due to the importance of clear visibility and safe driving conditions to motorsports racing events, outdoor racing events may be significantly affected by weather patterns and seasonal weather changes. Any unanticipated weather changes could impact our ability to stage events. This could have a material adverse effect on our business, financial condition and results of operations.

Postponement And/Or Cancellation Of Major Motorsports Events Could Adversely Affect Us

If one of our events is postponed because of weather or other reasons such as, for example, the general postponement of all major sporting events in this country following the September 11, 2001 terrorism attacks, we could incur increased expenses associated with conducting the rescheduled event, as well as possible decreased revenues from tickets, food, drinks and merchandise at the rescheduled event. If such an event is cancelled, we could incur the expenses associated with preparing to conduct the event as well as losing the revenues, including live broadcast revenues associated with the event.

If a cancelled event is part of the NASCAR Sprint Cup Series or NASCAR Nationwide Series, we could experience a reduction in the amount of money received from television revenues for all of our NASCAR-sanctioned events in the series that experienced the cancellation. This would occur if, as a result of the cancellation, and without regard to whether the cancelled event was scheduled for one of our facilities, NASCAR experienced a reduction in broadcast revenues greater than the amount scheduled to be paid to the promoter of the cancelled event.

Due to Our Concentrated Stock Ownership, Stockholders May Have No Effective Voice In Our Management

We have elected to be treated as a "controlled corporation" as defined by New York Stock Exchange Rule 303A. We are a controlled corporation because a single person, Henry B. Tippie, the Chairman of our Board of Directors, controls in excess of fifty percent of our voting power. This means that he has the ability to determine the outcome of the election of directors at our annual meetings and to determine the outcome of many significant corporate transactions, many of which only require the approval of a majority of our voting power. Such a

 

21


concentration of voting power could also have the effect of delaying or preventing a third party from acquiring us at a premium. In addition, as a controlled corporation, we are not required to comply with certain New York Stock Exchange rules.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to financial market risk resulting from changes in interest rates. We do not engage in speculative or leveraged transactions, nor hold or issue financial instruments for trading purposes.

At March 31, 2008, we have marketable securities of $477,000. These securities, which consist of mutual funds, are classified as available-for-sale and reported at fair-value in our consolidated balance sheet. Fair-value is determined based on the current market values.

At March 31, 2008, there was $42,300,000 outstanding under our revolving credit agreement. The credit agreement bears interest at our option, upon LIBOR plus a margin that varies between 125 and 200 basis points depending on 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. Therefore, we are subject to interest rate risk on the variable component of the interest rate. Historically, we managed our mix of fixed and variable-rate debt by structuring the terms of our debt agreements. Effective October 21, 2005, we entered into a $37,500,000 interest rate swap agreement that effectively converted this portion of the outstanding variable-rate borrowings under the revolving credit agreement to fixed-rate securities, thereby hedging against the impact of potential interest rate changes. 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. 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. As of March 31, 2008, the interest rate swap had a negative fair value of $571,000. An increase in interest rates of one percent would result in the interest rate swap having a negative fair value of approximately $369,000 at March 31, 2008. A decrease in interest rates of one percent would result in the interest rate swap having a negative fair value of approximately $773,000 at March 31, 2008. A change in interest rates will have no impact on the interest expense associated with the $20,000,000 of borrowings under the revolving credit agreement that are subject to the interest rate swap agreement. A change in interest rates of one percent on the outstanding borrowings under the revolving credit agreement at March 31, 2008 not subject to the interest rate swap would cause a change in total annual interest costs of $223,000. The borrowings under our revolving credit agreement bear interest at the variable rate described above and therefore approximate fair value at March 31, 2008.

At March 31, 2008, our outstanding balance of the SWIDA bonds had a carrying value of $4,098,000 and an estimated fair value of $4,266,000. The fair value was determined through the use of a discounted cash flow methodology applying interest rates which we believe would be available to us for issues with similar terms at March 31, 2008.

In September 1999, the Sports Authority of the County of Wilson (Tennessee) issued $25,900,000 in Variable Rate Tax Exempt Infrastructure Revenue Bonds, of which $22,900,000 was outstanding at March 31, 2008. These bonds are direct obligations of the Sports Authority and are therefore not recorded on our consolidated balance sheet; however, we are exposed to market risks related to fluctuations in interest rates for these bonds. A significant increase in interest rates could result in our being responsible for debt service payments not covered by the sales and incremental property taxes generated from the facility.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure that relevant, material information is made known to the officers who certify our financial reports and to other members of senior management and the Board of Directors.

 

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Based on their evaluation as of March 31, 2008, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information we are required to disclose in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the fiscal quarter ended March 31, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II – Other Information

 

Item 1. Legal Proceedings

We are a party to ordinary routine litigation incidental to our business. Management does not believe that the resolution of any of these matters is likely to have a material adverse effect on our results of operations, financial condition or cash flows.

 

Item 1A. Risk Factors

Disclosure regarding the most significant factors that may adversely affect our business, operations, industry or financial position or our future financial performance is set forth under the section entitled, “Factors That May Affect Operating Results; Forward-Looking Statements,” beginning on page 18.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

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. No purchases of our equity securities were made pursuant to this authorization during the three months ended March 31, 2008.

During the three months ended March 31, 2008, we purchased and retired 14,445 shares of our outstanding common stock at an average purchase price of $6.60 per share. 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.

The following table details our purchases of equity securities for the three months ended March 31, 2008 (the average price paid per share does not include nominal brokerage commissions):

 

Period

   Total Number
of Shares
Purchased
   Average
Price
Paid Per
Share
   Total Number of
Shares Purchased
as Part of Publicly

Announced Plans
or Programs
   Maximum
Number

of Shares that
May Yet Be
Purchased

Under the Plans
or Programs

January 1, 2008 – January 31, 2008

   14,445    $ 6.60    —      1,634,607

February 1, 2008 – February 29, 2008

   —        —      —      1,634,607

March 1, 2008 – March 31, 2008

   —        —      —      1,634,607
               

Total

   14,445    $ 6.60    —      1,634,607
               

 

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Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Submission of Matters to a Vote of Security Holders

At the Annual Meeting of Stockholders held on April 23, 2008, Denis McGlynn, Jeffrey W. Rollins, and Kenneth K. Chalmers were re-elected as directors by our stockholders. Directors whose terms of office continued after the meeting were Henry B. Tippie, John W. Rollins, Jr., R. Randall Rollins and Patrick J. Bagley.

 

     Votes For    Votes
Withheld
   Shares
Not Voted

Election of Denis McGlynn

   209,406,417    873,201    1,714,120

Election of Jeffrey W. Rollins

   209,431,995    847,623    1,714,120

Election of Kenneth K. Chalmers

   209,373,322    906,296    1,714,120

 

Item 5. Other Information

None.

 

Item 6. Exhibits

 

  31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)

 

  31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)

 

  32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Sec. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

  32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Sec. 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

DATED: May 2, 2008     Dover Motorsports, Inc.
    Registrant
   

/s/ Denis McGlynn

    Denis McGlynn
    President, Chief Executive Officer and Director
   

/s/ Timothy R. Horne

    Timothy R. Horne
    Senior Vice President-Finance and Chief Financial Officer

 

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