SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
CHURCHILL DOWNS INCORPORATED(Exact name of registrant as specified in its charter)
700 Central Avenue, Louisville, KY 40208Address of principal executive offices)(Zip Code)
(502) 636-4400(Registrant's telephone number, including area code)
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____
The number of shares outstanding of registrant’s common stock at August 14, 2001 was 13,097,999 shares.
CHURCHILL DOWNS INCORPORATEDI N D E X
CHURCHILL DOWNS INCORPORATEDCONDENSED CONSOLIDATED STATEMENTS OF EARNINGSfor the six and three months ended June 30, 2001 and 2000(Unaudited)(In thousands, except per share data)
The accompanying notes are an integral part of the condensed consolidated financial statements.
CHURCHILL DOWNS INCORPORATEDCONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTSfor the six months ended June 30, 2001 and 2000 (Unaudited)($ in thousands, except per share data)
1. Basis of Presentation
2. Long-Term Debt
4. Acquisitions and Other Transactions
5. Earnings Per Share The following is a reconciliation of the numerator and denominator of the basic and diluted per share computations:
6. Segment Information
6. Segment Information (cont'd)
CHURCHILL DOWNS INCORPORATEDITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information set forth in this discussion and analysis contain various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Private Securities Litigation Reform Act of 1995 ( the “Act”) provides certain “safe harbor” provisions for forward-looking statements. All forward-looking statements made in this Quarterly Report on Form 10-Q are made pursuant to the Act. These statements represent our judgment concerning the future and are subject to risks and uncertainties that could cause our actual operating results and financial condition to differ materially. Forward-looking statements are typically identified by the use of terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “predict,” “project,” “should,” “will,” and similar words, although some forward-looking statements are expressed differently. Although we believe that the expectations reflected in such forward-looking statements are reasonable we can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from our expectations include: the financial performance of our racing operations; the impact of gaming competition (including lotteries and riverboat, cruise ship and land-based casinos) and other sports and entertainment options in those markets in which we operate; a substantial change in law or regulations affecting our pari-mutuel activities; a substantial change in allocation of live racing days; litigation surrounding the Rosemont, Illinois, riverboat casino; changes in Illinois law that impact revenues of racing operations in Illinois; a decrease in riverboat admissions subsidy revenue from our Indiana operations; the impact of an additional racetrack near our Indiana operations; our continued ability to effectively compete for the country’s top horses and trainers necessary to field high-quality horse racing; our continued ability to grow our share of the interstate simulcast market; the impact of interest rate fluctuations; our ability to execute our acquisition strategy and to complete or successfully operate planned expansion projects; the economic environment; our ability to adequately integrate acquired businesses; market reaction to our expansion projects; the loss of our totalisator companies or their inability to keep their technology current; our accountability for environmental contamination; the loss of key personnel and the volatility of our stock price.
You should read this discussion with the financial statements included in this report and the Company’s Form 10-K for the period ended December 31, 2000, for further information.
We conduct pari-mutuel wagering on live Thoroughbred, Quarter Horse and Standardbred horse racing and simulcast signals of races. Additionally, we offer racing services through our other interests.
We own and operate the Churchill Downs racetrack in Louisville, Kentucky, which has conducted Thoroughbred racing since 1875 and is internationally known as the home of the Kentucky Derby. We also own and operate Hollywood Park, a Thoroughbred racetrack in Inglewood, California; Arlington Park, a Thoroughbred racetrack in Arlington Heights, Illinois; Calder Race Course, a Thoroughbred racetrack in Miami, Florida; and Ellis Park, a Thoroughbred racetrack in Henderson, Kentucky. Additionally, we are the majority owner and operator of Hoosier Park in Anderson, Indiana, which conducts Thoroughbred, Quarter Horse and Standardbred horse racing. We conduct simulcast wagering on horse racing at nine off-track betting (OTB) facilities in Kentucky, Indiana and Illinois, as well as at our six racetracks.
CHURCHILL DOWNS INCORPORATEDITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Because of the seasonal nature of our business and recent acquisitions and merger activity, revenues and operating results for any interim quarter are likely not indicative of the revenues and operating results for the year and are not necessarily comparable with results for the corresponding period of the previous year. We normally earn a substantial portion of our net earnings in the second and third quarters of each year during which all our operations are open for some or all of this period and the Kentucky Derby and the Kentucky Oaks are run.
Our revenues are generated from commissions on pari-mutuel wagering at our racetracks and OTB facilities, plus simulcast fees, Indiana riverboat admissions subsidy revenue, admissions, concessions revenue, sponsorship revenues, licensing rights and broadcast fees, lease income and other sources.
Pari-mutuel wagering information, including intercompany transactions, for our six live racing facilities and nine separate OTBs, which are included in their respective racetracks, during the six months ended June 30, 2001 and 2000 is as follows ($ in thousands):
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Net Revenues
Net revenues during the six months ended June 30, 2001 increased $36.9 million (23%) from $158.1 million in 2000 to $195.0 million in 2001. Arlington Park contributed $27.7 million to 2001 net revenues due to the timing of the September 8, 2000 merger. Churchill Downs racetrack revenues increased $3.5 million primarily due to increased pari-mutuel wagering, corporate sponsor event ticket prices and admissions and seat revenue for Kentucky Oaks and Kentucky Derby days. Hollywood Park revenues increased $4.0 million primarily as a result of increased pari-mutuel revenues due to an increase in the number of live racing days.
Operating expenses increased $32.2 million (26%) from $121.9 million in 2000 to $154.1 million in 2001 primarily as a result of Arlington Park’s 2001 operating expenses of $24.9 million. Hollywood Park operating expenses increased $2.7 million primarily due to an increase in purses, consistent with the increase in pari-mutuel revenues.
Gross profit increased $4.7 million from $36.2 million in 2000 to $40.9 million in 2001. The increase in gross profit was primarily the result of the merger with Arlington Park and the increase in gross profit for Churchill Downs racetrack and Hollywood Park as a result of the revenue increases described above.
Selling, general and administrative (“SG&A”) expenses increased by $3.6 million (30%) from $12.3 million in 2000 to $15.9 million in 2001. This is primarily the result of the 2000 merger with Arlington Park resulting in SG&A expenses of $2.9 million.
Interest expense decreased $0.7 million from $7.7 million in 2000 to $7.0 million in 2001 primarily due to the use of available cash to pay down our line of credit, as well as a reduction in the interest rate spread charged within the revolving loan facility resulting from the improvement in leverage ratios.
Income Tax Provision
The increase in the income tax provision of $0.6 million for the six months ended June 30, 2001 as compared to June 30, 2000 is primarily a result of an increase in pre-tax earnings off-set by a decline in the Company’s effective income tax rate from 41.5% in 2000 to 40.5% in 2001.
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
Net revenues during the three months ended June 30, 2001 increased $31.1 million (24%) from $132.2 million in 2000 to $163.3 million in 2001. Arlington Park contributed $21.3 million in net revenues for the quarter. Churchill Downs racetrack revenues increased $3.8 million primarily due to $1.3 million of increased pari-mutuel wagering, and an increase in corporate sponsor event ticket prices and admissions revenue on Kentucky Oaks and Kentucky Derby days. Hollywood Park revenues increased $4.3 million primarily as a result of increased pari-mutuel revenues due to an increase in the number of live racing days.
Operating expenses increased $24.3 million (27%) from $90.5 million in 2000 to $114.8 million in 2001. Arlington Park incurred 2001 operating expenses of $19.1 million. Churchill Downs racetrack and Hollywood Park operating expenses increased $1.3 million and $2.8 million, respectively, primarily due to increases in purses, consistent with increases in pari-mutuel wagering revenues.
Gross profit increased $6.8 million from $41.7 million in 2000 to $48.5 million in 2001. The increase in gross profit was primarily the result of the inclusion of Arlington Park and the increase in gross profit for Churchill Downs racetrack and Hollywood Park as a result of the revenue increases described above.
SG&A expenses increased by $1.8 million (30%) from $6.2 million in 2000 to $8.0 million in 2001 primarily due to SG&A expenses of $1.3 million for Arlington Park.
Interest expense decreased $0.5 million from $3.9 million in 2000 to $3.4 million in 2001 primarily due to the use of available cash to pay down our line of credit, as well as a reduction in the interest rate spread charged within the revolving loan facility resulting from the improvement in leverage ratios.
Our income tax provision increased by $2.2 million for the three months ended June 30, 2001 as compared to June 30, 2000 primarily as a result of an increase in pre-tax earnings off-set by a decline in the Company’s effective income tax rate from 41.5% in 2000 to 41.0% in 2001.
Restricted cash increased $9.4 million as a result of an increase in deposit amounts due to horsemen for purses, stakes and awards due to the timing of live racing at Calder Race Course and Hollywood Park.
Account Receivable increased $10.5 million primarily due to the timing of payments received related to Churchill Downs racetrack, Hollywood Park and Arlington Park’s live race meets.
Accounts payable increased $38.6 million at June 30, 2001 primarily due to increases in purses payable and other expenses related to the operation of live racing at Churchill Downs racetrack, Hollywood Park, Arlington Park and Hoosier Park.
Dividends payable decreased $6.5 million at June 30, 2001 as a result of the payment of dividends of $6.5 million (declared in 2000) in the first quarter of 2001.
Income taxes payable increased by $5.4 million at June 30, 2001 representing the estimated income tax expense attributed to income generated in the six months of 2001.
Deferred revenue decreased $7.3 million at June 30, 2001, primarily due to the significant amount of admission and seat revenue that was received prior to December 31, 2000 recognized as income in May 2001 for the Kentucky Derby and Kentucky Oaks race days.
The long-term debt decrease of $12.7 million was the result of the application of current cash flow to reduce borrowings under our bank line of credit during 2001.
Accounts receivable increased $18.9 million at June 30, 2001. The merger with Arlington Park increased accounts receivable by $4.7 million. The remaining increase was primarily due to the timing of payments received for simulcast receivables for Churchill Downs racetrack, Hollywood Park and Calder Race Course.
Net plant and equipment increased $67.7 million primarily as a result of the merger with Arlington Park. Additional increases were due to capital spending at the other operating units offset by depreciation.
The accounts payable increase of $23.0 million was primarily due to the merger with Arlington Park which represents $15.6 million of the increase. The additional $7.4 million increase was primarily due to the timing of payments for horsemen-related and simulcast payables for Churchill Downs racetrack and Calder Race Course live racing meets.
Accrued expenses increased $12.8 million primarily due to the merger with Arlington Park, which represents $11.2 million of the increase.
The long-term debt net decrease of $23.6 million was the result of the application of current cash flow to reduce borrowings under our bank line of credit during 2001.
Common stock increased by $52.9 million primarily due to the issuance of 3.15 million shares of common stock to complete the merger with Arlington Park during the third quarter of 2000.
The change in working capital between June 30, 2001 and 2000 is a result of the Arlington Park merger as well as the use of internally generated funds to reduce long-term debt. Cash flows provided by operations were $39.0 million and $18.2 million for the six months ended June 30, 2001 and 2000, respectively. The net increase in cash provided by operations as compared to 2000 is primarily a result of the separate classification of restricted assets since the second quarter of 2000. Restricted assets represent refundable deposits and amounts due to horsemen for purses, stakes and awards. Management believes cash flows from operations and available borrowings during 2001 will be sufficient to fund our cash requirements for the year, including capital improvements and future acquisitions.
Cash flows used in investing activities were $9.5 million and $8.5 million for the six months ended June 30, 2001 and 2000, respectively. Capital spending of $9.5 million in 2001 is $4.0 million less than 2000 and is primarily the result of the expansion of Churchill Downs’ main entrance and corporate offices completed during 2000.
Cash flows used in financing activities were $17.8 million and $16.8 million for the six months ended June 30, 2001 and 2000, respectively. We borrowed $121.7 million and repaid $134.3 million on our line of credit during 2001.
We have a $250 million line of credit under a revolving loan facility, of which $140.6 million was outstanding at June 30, 2001. This line of credit is secured by substantially all of our assets and matures in 2004. This credit facility is intended to meet working capital and other short-term requirements and to provide funding for future acquisitions.
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 (FAS No. 141), “Business Combinations,” which provides that all business combinations should be accounted for using the purchase method of accounting and establishes criteria for the initial recognition and measurement of goodwill and other intangible assets recorded in connection with a business combination. The provisions of FAS 141 apply to all business combinations initiated after June 30, 2001 and to all business combinations accounted for by the purchase method that are completed after June 30, 2001, or later. The Company will apply the provisions of FAS 141 to any future business combinations.
In addition, the FASB issued Statement of Financial Accounting Standards No. 142 (FAS 142), “Goodwill and Other Intangible Assets,” which establishes the accounting for goodwill and other intangible assets following their recognition. FAS 142 applies to all goodwill and other intangible assets whether acquired singly, as part of a group, or in a business combination. FAS 142 provides that goodwill should not be amortized but should be tested for impairment annually using a fair-value based approach. In addition, FAS 142 provides that other intangible assets other than goodwill should be amortized over their useful lives and reviewed for impairment in accordance with Statement of Financial Accounting Standards No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” FAS 142 is effective for the Company beginning on January 1, 2002. Upon adoption, the Company will be required to perform a transitional impairment test under FAS 142 for all goodwill recorded as of January 1, 2002. Any impairment loss recorded as a result of completing the transitional impairment test will be treated as a change in accounting principle. The impact of the adoption of FAS 142 on the Company’s results of operations for all periods beginning on or after January 1, 2002 will be to eliminate amortization of goodwill. Management of the Company is currently analyzing the impact of FAS 142 and cannot estimate the impact of the adoption of FAS 142 as of January 1, 2002 at this time.
CHURCHILL DOWNS INCORPORATED
PART II. OTHER INFORMATION
EXHIBIT INDEX