SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: June 30, 1997 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _________________________________to Commission file number 0-1469 CHURCHILL DOWNS INCORPORATED (Exact name of registrant as specified in its charter) KENTUCKY 61-0156015 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 700 CENTRAL AVENUE, LOUISVILLE, KY 40208 (Address 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 8, 1997 was 3,654,264 shares. 1
CHURCHILL DOWNS INCORPORATED I N D E X PAGES PART I. FINANCIAL INFORMATION ITEM 1. Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets, June 30, 1997, December 31, 1996 and June 30, 1996 3 Condensed Consolidated Statements of Operations for the six months ended June 30, 1997 and 1996 4 Condensed Consolidated Statements of Operations for the three months ended June 30, 1997 and 1996 5 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996 6 Condensed Notes to Consolidated Financial Statements 7-8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-20 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk (Not Applicable) 21 PART II. OTHER INFORMATION AND SIGNATURES ITEM 4. Submission of Matters to a Vote of Security Holders 21 ITEM 6. Exhibits and Reports on Form 8-K 21 Signatures 22 Exhibit Index 23 Exhibits 24-35 2
<TABLE> <CAPTION> CHURCHILL DOWNS INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) June 30 December 31 June 30 ASSETS 1997 1996 1996 ----------- ------------- ----------- Current assets: <S> <C> <C> <C> Cash and cash equivalents $16,156,852 $ 8,209,414 $14,028,675 Accounts receivable 12,472,948 5,218,236 5,553,215 Other current assets 698,316 679,221 207,075 ----------- ----------- ----------- Total current assets 29,328,116 14,106,871 19,788,965 Other assets 3,641,979 3,739,906 4,046,354 Plant and equipment 102,842,179 100,025,412 98,852,730 Less accumulated depreciation (39,195,894) (37,143,223) (35,128,935) ----------- ----------- ----------- 63,646,285 62,882,189 63,723,795 ----------- ----------- ----------- $96,616,380 $80,728,966 $87,559,114 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $12,570,920 $ 7,575,573 $12,209,115 Accrued expenses 7,757,233 5,802,330 3,759,193 Dividends payable - 2,375,271 - Income taxes payable 6,839,208 2,510,508 6,539,508 Deferred revenue 1,127,166 6,511,902 1,200,753 Long-term debt, current portion 73,893 73,893 70,097 ----------- ----------- ----------- Total current liabilities 28,368,420 24,849,477 23,778,666 Long-term debt, due after one year 2,781,462 2,925,298 2,950,079 Outstanding mutuel tickets (payable after one year) 3,574,724 2,031,500 3,189,408 Deferred compensation 857,274 825,211 958,312 Deferred income taxes 2,316,600 2,316,600 2,415,500 Stockholders' equity: Preferred stock, no par value; authorized, 250,000 shares; issued, none - - - Common stock, no par value; authorized, 10 million shares, issued 3,654,264 shares, June 30, 1997 and December 31, 1996 and 3,725,955 shares, June 30, 1996 3,493,042 3,493,042 3,450,078 Retained earnings 55,289,858 44,352,838 51,018,421 Deferred compensation costs - - (136,350) Note receivable for common stock (65,000) (65,000) (65,000) ----------- ----------- ----------- 58,717,900 47,780,880 54,267,149 ----------- ----------- ----------- $96,616,380 $80,728,966 $87,559,114 =========== =========== =========== The accompanying notes are an integral part of the condensed consolidated financial statements. </TABLE> 3
CHURCHILL DOWNS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS for the six months ended June 30, 1997 and 1996 (Unaudited) SIX MONTHS ENDED JUNE 30 1997 1996 ----------- ----------- Net revenues $74,058,499 $66,490,002 Operating expenses 51,986,126 46,450,327 ----------- ----------- Gross earnings 22,072,373 20,039,675 Selling, general and administrative expenses 4,392,127 3,845,423 Operating income 17,680,246 16,194,252 ----------- ----------- Other income and expense: Interest income 196,840 94,631 Interest expense (148,710) (147,035) Miscellaneous, net 198,644 81,804 ----------- ----------- 246,774 29,400 ----------- ----------- Earnings before income tax provision 17,927,020 16,223,652 Federal and state income tax provision (6,990,000) (6,400,000) ----------- ------------ Net earnings 10,937,020 9,823,652 Retained earnings, beginning of period 44,352,838 41,194,769 Retained earnings, end of period $55,289,858 $51,018,421 =========== =========== Net earnings per share (based on weighted average shares outstanding of 3,655,899 and 3,768,632 respectively) $2.99 $2.61 ===== ===== The accompanying notes are an integral part of the condensed consolidated financial statements. 4
CHURCHILL DOWNS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS for the three months ended June 30, 1997 and 1996 (Unaudited) THREE MONTHS ENDED JUNE 30 1997 1996 ----------- ----------- Net revenues $60,779,635 $54,939,249 Operating expenses 37,562,122 33,230,109 ----------- ----------- Gross earnings 23,217,513 21,709,140 Selling, general and administrative expenses 2,401,844 2,071,556 Operating income 20,815,669 19,637,584 ----------- ----------- Other income and expense: Interest income 130,460 50,628 Interest expense (68,494) ( 50,837) Miscellaneous, net 68,071 34,490 ----------- ----------- 130,037 34,281 ----------- ----------- Earnings before income tax provision 20,945,706 19,671,865 Federal and state income tax provision (8,160,000) (7,775,000) ----------- ----------- Net earnings 12,785,706 11,896,865 Retained earnings, beginning of period 42,504,152 39,121,556 Retained earnings, end of period $55,289,858 $51,018,421 =========== =========== Net earnings per share (based on weighted average shares outstanding of 3,655,952 and 3,751,183 respectively) $3.50 $3.17 ===== ===== The accompanying notes are an integral part of the condensed consolidated financial statements. 5
CHURCHILL DOWNS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS for the six months ended June 30, 1997 and 1996 (Unaudited) SIX MONTHS ENDED JUNE 30 1997 1996 ----------- ----------- Cash flows from operating activities: Net earnings $10,937,020 $ 9,823,652 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 2,248,616 2,294,718 Increase (decrease) in cash resulting from changes in operating assets and liabilities: Accounts receivable (7,254,712) (3,454,314) Other current assets (19,095) 342,745 Income taxes payable 4,328,700 5,490,000 Deferred revenue (5,384,736) (4,897,788) Accounts payable, accrued expenses, and other 8,449,708 7,614,044 ----------- ----------- Net cash provided by operating activities 13,305,501 17,213,057 Cash flows from investing activities: Additions to plant and equipment, net (2,838,956) (1,401,267) Net cash used in investing activities (2,838,956) (1,401,267) Cash flows from financing activities: Decrease in long-term debt, net (143,836) (3,401,000) Dividend paid (2,375,271) (1,892,302) Common stock repurchased - (2,346,001) ----------- ----------- Net cash used in financing activities (2,519,107) (7,639,303) ----------- ----------- Net increase in cash and cash equivalents 7,947,438 5,856,188 Cash and cash equivalents, beginning of period 8,209,414 5,856,188 Cash and cash equivalents, end of period $16,156,852 $14,028,675 Supplemental Disclosures of cash flow information: Cash paid during the period for: Interest $115,290 $219,601 Income taxes $2,640,000 $710,000 The accompanying notes are an integral part of the condensed consolidated financial statements. 6
CHURCHILL DOWNS INCORPORATED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the six months ended June 30, 1997 and 1996 (Unaudited) 1. Because of the seasonal nature of the Company's business, revenues and operating results for any interim quarter are 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. The accompanying consolidated financial statements reflect a disproportionate share of annual net income as the Company normally earns a substantial portion of its net earnings in the second quarter of each year during which the Kentucky Derby and Kentucky Oaks are run. The Kentucky Derby and Kentucky Oaks are run on the first weekend in May. During the six months ended June 30, 1997 and 1996 the Company conducted simulcast receiving wagering for 682 and 661 location days, respectively, which includes simulcast wagering at its Sports Spectrum site in Louisville, Kentucky for 92 days in 1997 compared to 84 days in 1996. Through its subsidiary, Hoosier Park L.P. ("Hoosier Park"), the Company conducted simulcast wagering at its racetrack in Anderson, Indiana and at three simulcast wagering facilities located in Merrillville, Ft. Wayne and Indianapolis, Indiana for a total of 590 days during the six month period compared to 577 days in 1996. Additionally, the Company conducts simulcast wagering on-track during its Churchill Downs and Hoosier Park live race meets. 2. The accompanying consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by generally accepted accounting principles or those normally made in the Company's annual report on Form 10-K. The year end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Accordingly, the reader of this Form 10-Q may wish to refer to the Company's Form 10-K for the period ended December 31, 1996 for further information. The accompanying consolidated financial statements have been prepared in accordance with the registrant's customary accounting practices and have not been audited. In the opinion of management, all adjustments necessary for a fair presentation of this information have been made and all such adjustments are of a normal recurring nature. 3. The Company has an unsecured $20,000,000 bank line of credit with various options for the interest rate, none of which are greater than the bank's prime rate. The line of credit expires January 31, 1998. There were no borrowings outstanding at June 30, 1997, December 31, 1996 and June 30, 1996. 4. Certain balance sheet and statement of operations items have been reclassified in the prior year to conform to current period presentation. 7
CHURCHILL DOWNS INCORPORATED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the six months ended June 30, 1997 and 1996 (continued) (Unaudited) 5. On January 22, 1992, the Company acquired certain assets of Louisville Downs, Incorporated for $5,000,000. In conjunction with this purchase, the Company withheld $1,000,000 from the amount due to the sellers to offset certain costs related to the remediation of environmental contamination associated with underground storage tanks at the site. Substantially, all of the $1,000,000 hold back has been utilized as of June 30, 1997. The Company awaits a ruling from the Commonwealth of Kentucky on whether the remediation is complete. It is not anticipated that the Company will have any material liability as a result of compliance with environmental laws with respect to any of the Company's property. Compliance with environmental laws has not otherwise affected development and operation of the Company's property and the Company is not otherwise subject to any material compliance costs in connection with federal or state environmental laws. 6. In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). SFAS 128 is designed to improve the EPS information provided in financial statements by simplifying the existing computational guidelines. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997. The Company does not expect adoption of this standard will have a material impact on its future or previously reported earnings per share. 7. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS 130 is effective for financial statements issued for periods ending after December 15, 1997. The Company does not expect adoption of this standard will have a material impact on its financial statements. 8. In July 1997, BC Racing Group, LLC (BC), of which the Company is a 24% owner, purchased Dueling Grounds racecourse for $11 million at a Federal Bankruptcy Court sale after having purchased underlying mortgage notes to the property from the mortgagee at a discount. Located in Franklin, Kentucky, just north of Nashville, Tennessee, Dueling Grounds opened in 1991, conducting short race meets and year-round simulcasting. The Company has one seat on the four-person Management Committee of BC. The Company will account for its investment in BC of $2,187,500 under the equity method of accounting. 8
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) RESULTS OF OPERATIONS This discussion and analysis contains both historical and forward-looking information. The forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements regarding riverboat competition and alternative gaming legislation may be significantly impacted by certain risks and uncertainties described herein, and in the Company's annual report on Form 10-K for the year ended December 31, 1996. The Company's principal business is conducting pari-mutuel wagering on Thoroughbred and Standardbred horse races. The Kentucky Derby and Kentucky Oaks, which are run on the first weekend in May of each year, continue to be the Company's outstanding attractions. In the second quarter of 1997, the Company again offered the simulcast of its races on Kentucky Derby Day to racetracks within Kentucky. In 1997, Derby weekend accounted for approximately 30% of total on-track pari-mutuel wagering and 34% of total on-track attendance for the 1997 Spring Meet at Churchill Downs compared to 30% and 35%, respectively, in 1996. The Company, through its subsidiary, Hoosier Park, L.P. ("Hoosier Park"), is majority owner and operator of Indiana's only pari-mutuel racetrack, Hoosier Park in Anderson, Indiana. The Company conducted live harness racing in the second quarter beginning April 24, 1997 through the end of June 1997 and will continue the harness meet through August 24, 1997. Average daily attendance and daily handle figures were down by 10 and 8 percent, respectively, compared to the 1996 harness race meet. The Company is continuing to evaluate sites for a fourth satellite wagering facility in Indiana. Because of the seasonal nature of the Company's business, revenues and operating results for any interim quarter are 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. During the second quarter of 1997, the Company earned a substantial portion of its expected net income for the year from the running of the Kentucky Derby and the Kentucky Oaks. The Company's primary sources of income are commissions and fees earned from pari-mutuel wagering on live and simulcast horse races. Other significant sources of income include admissions and seating, concession commissions (primarily for the sale of food and beverage items), riverboat admission tax supplement, and license, rights and broadcast and sponsorship fees. 9
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) In Kentucky, licenses to conduct Thoroughbred race meetings and to participate in simulcasting are approved annually by the Kentucky Racing Commission based upon applications submitted by the racetracks in Kentucky, including the Company. Based on gross figures for on-track pari-mutuel wagering and attendance, the Company is the leading Thoroughbred racetrack in Kentucky. The Company conducted live racing from April 26 through June 29, 1997, and has been granted a license to conduct live racing during the period October 26 through November 29, 1997 for a total of 77 racing days in Kentucky compared to 78 racing days in 1996. During the second quarter, the company has submitted an application to the Kentucky Racing Commission to conduct live racing in Kentucky from April 25, 1998 through June 28, 1998 (Spring Meet) and from November 1, 1998 through November 28, 1998 (Fall Meet). In Indiana, licenses to conduct live Standardbred and Thoroughbred race meetings and to participate in simulcasting are approved annually by the Indiana Horse Racing Commission based upon applications submitted by the Company. Currently, the Company is the only facility in Indiana licensed to conduct live Standardbred or Thoroughbred race meetings and to participate in simulcasting. In Indiana the Company has been granted a license to conduct live racing in 1997 for a total of 143 racing days, including 85 days of Standardbred racing from April 24 through August 24, 1997, and 58 days of Thoroughbred racing from September 12 through November 29, 1997. In 1996, the Company conducted live racing for a total of 132 racing days, including 80 days of Standardbred racing and 52 days of Thoroughbred racing. With the advent of whole card simulcasting, the Company conducts interstate simulcasting year-round on multiple racing programs each day from around the nation. For 1997, the Company has been granted a license to operate simulcast receiving locations in Kentucky and Indiana for all dates from January 1 through December 31 and intends to receive simulcasting on all days it is economically feasible. The number of receiving days in Kentucky and Indiana has increased eight and thirteen days, respectively, in 1997 compared to 1996. Hoosier Park may ultimately be supported by a fourth whole card simulcasting facility. An increase in the number of days or facilities would be expected to enhance operating results. Because the business of the Company is seasonal, the number of persons employed will vary throughout the year. Approximately 600 individuals are employed on a permanent year-round basis. During the second quarter, as many as 2,600 persons were employed. In the first six months of 1996, two riverboat casinos were operating on the Ohio River along Kentucky's border -- one in southwestern Indiana and one at Metropolis, Illinois. In the Fall of 1996, two additional riverboats opened in southeastern Indiana. Direct competition with these riverboats negatively impacted wagering at racetracks in western and northern Kentucky in 1996. 10
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company implemented an aggressive on-track marketing program in 1997 which management believes was a primary reason for the increased attendance and handle during its 1997 Spring meet in spite of the increasing riverboat competition. During the next two years, a fifth riverboat may be operating along the Ohio River. One of the nation's largest riverboat complexes is proposed to be located 10 miles from Louisville in Harrison County, Indiana. Studies project that once all five riverboats are open and mature, Churchill Downs could experience as much as a 30% decline in on-track wagering and a 20% decline in the Louisville, Kentucky, Sports Spectrum business. The Company's Board of Directors passed a resolution in June 1996, instructing the Company's management to aggressively pursue alternative forms of gaming at its racetrack facilities in Louisville as an additional means of combating the negative effects of riverboat competition. The integration of alternative gaming products at the racetrack is one of four core business strategies developed by the Company to position itself to compete in this changing environment. Implementing these strategies, the Company has successfully grown its live racing product by strengthening its flagship operations, increasing its share of the interstate simulcast market, and geographically expanding its racing operations into Indiana. Alternative gaming in the form of video lottery terminals and slot machines would enable Churchill Downs to better compete with Indiana riverboat casinos, and provide new revenue for purse money and capital investment. In Indiana, licenses allowing up to five riverboat casinos on Lake Michigan near the Company's Merrillville Sports Spectrum have been granted by the Indiana Gaming Commission. Three riverboats opened on Lake Michigan in June 1996, while a fourth opened in April 1997. The fifth Lake Michigan riverboat is scheduled to open in August 1997. The Company's pari-mutuel wagering activities at the Merrillville facility have been adversely impacted by the opening of these Lake Michigan riverboats. Additionally, the Potawatomi Indian Tribe has expressed an interest in establishing land-based casino operations in southwestern Michigan and northeastern Indiana, while the Miami Indian Tribe has expressed an interest in establishing a land-based casino near the Company's Merrillville Sports Spectrum. The Company continues to anticipate that such operations will negatively impact pari-mutuel wagering activities at its Indiana facilities. The extent of the impact is unknown at this time due, in part, to the uncertain geographic distances between the Company's operations and the number of potential casino sites. 11
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) In May, 1997 the Indiana General Assembly convened in special session and passed a budget bill, which did not include provisions similar to those included in House Bill 1135 which would have materially reduced Hoosier Park's share of a riverboat admissions tax. There is no assurance that a similar bill will not be introduced in the future. The Company owned and operated two live racing facilities and four simulcast wagering facilities during the six month periods ended June 30, 1997 and 1996. The chart below summarizes attendance and wagering handle for the operations in 1997 and 1996 for the six month periods: <TABLE> <CAPTION> KENTUCKY INDIANA -------------------------------------------------------------------- Six Months Six Months Six Months Six Months Ended Ended Ended Ended June 30 June 30 Increase June 30 June 30 Increase 1997 1996 (DECREASE) 1997 1996 (DECREASE) ----------- ----------- -------- ---------- ---------- -------- ON-TRACK <S> <C> <C> <C> <C> <C> <C> Number of Race Days 47 48 (1) 45 43 2 Attendance 687,533 685,228 - 46,117 48,974 -6% Handle $96,580,365 $95,077,056 2% $4,944,802 $5,154,518 -4% Average Daily Attendance 14,628 14,276 2% 1,025 1,139 -10% Average Daily Handle $2,054,901 $1,980,772 4% $109,884 $119,873 -8% Per Capita Handle $140.47 $138.75 1% $107.22 $105.24 2% INTERTRACK/SIMULCAST-HOST (SENDING) Number of Race Days 47 48 (1) 45 43 2 Handle $269,226,795 $245,018,693 10% $3,964,102 $1,116,693 255% Average Daily Handle $5,728,230 $5,104,556 12% $88,091 $25,969 239% INTERTRACK/SIMULCAST-RECEIVING* Number of Race Days 92 84 8 590 577 13 Attendance 186,596 195,552 -5% ** ** ** Handle $57,185,249 $52,340,744 9% $65,761,722 $69,946,803 -6% Average Daily Attendance 2,028 2,328 -13% ** ** ** Average Daily Handle $621,579 $623,104 - $111,461 $121,225 -8% Per Capita Handle $306.47 $267.66 14% ** ** ** Total Handle $422,992,409 $392,436,493 8% $74,670,626 $74,880,342 - <FN> * The Company's Indiana operations include four separate simulcast wagering facilities. ** Attendance figures are not kept for the off-track wagering facilities in Indiana. </FN> </TABLE> 12
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Total handle in Kentucky increased approximately $30.6 million (8%) primarily as a result of a 10% increase in simulcast-host handle. The Company's live races at Churchill Downs were transmitted to a record number of outlets across the nation for the 1997 Spring Meet. In Indiana, total handle remained relatively flat decreasing approximately $210,000. Increased simulcast-host handle of 255% was more than offset by decreases in both on-track and simulcast-receiving handle of 4% and 6 %, respectively, as a result of increased riverboat competition. On-track average daily attendance and average daily handle figures decreased by 10% and 8%, respectively. COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 TO 1996 NET REVENUES Net revenues during the six months ended June 30, 1997 increased approximately $7.6 million (11%). Approximately $2.2 million of the total net revenue increase was the result of increased simulcast-receiving pari-mutuel revenues at Churchill Downs generated from Kentucky operations. The construction of an on-site simulcast wagering facility used during live racing in Kentucky as well as growth at the Sports Spectrum wagering facility during non-live racing times generated the positive variance for Kentucky operations. This increase was partially offset by a $300,000 decline in simulcast-receiving revenues in Indiana. Simulcast-host revenues also contributed to the increase in total net revenues, with the Company's live races being transmitted to a record number of outlets across the nation. Admission and seat revenue increased $360,000 primarily due to increases in admission prices on Kentucky Oaks and Derby days. License, rights, broadcast and sponsorship revenues increased due to new corporate sponsors during the Spring Meet at Churchill Downs which included new sponsors for three steeplechase races held for the first time since the late 1800's. Concession revenues declined as a result of concession price reductions as part of the Company's aggressive on-track marketing program. Derby expansion area revenues increased as additional space was added for corporate sponsors for the Kentucky Derby and Oaks days. Riverboat admissions revenue from the Company's Indiana operations increased $4.9 million primarily as a result of the opening of additional riverboats along the Ohio River and Lake Michigan since June 30, 1996. The net increase in riverboat admissions revenue, after required purse and marketing expenses of approximately $3 million, is $1.9 million. 13
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Following is a summary of Net Revenues: <TABLE> <CAPTION> NET REVENUE SUMMARY ---------------------------------------------------------------- Six Months % of Six Months % of 1997 VS. 1996 Ended Net Ended Net $ % June 30, 1997 Revenue June 30, 1996 Revenue Change Change ------------- ------- ------------- ------- ------ ------ Pari-Mutuel Revenue: <S> <C> <C> <C> <C> <C> <C> On-track 13,356,239 18% $13,636,521 20% ($280,282) -2% Intertrack-Host 4,410,467 6 4,906,386 7 (495,919) -10 Simulcast-Receiving 19,233,141 26 17,278,345 26 1,954,796 11 Simulcast Host 9,191,211 12 8,391,321 13 799,890 10 ----------- ---- ----------- ---- ---------- ---- $46,191,058 62% $44,212,573 66% $1,978,485 4% Admission & Seat Revenue 10,681,419 15 10,322,496 15 358,923 3 License, Rights, Broadcast & Sponsorship Revenue 5,833,765 8 5,432,850 8 400,915 7 Concession Commission 1,531,761 2 1,798,167 3 (266,406) -15 Program Revenue 1,696,010 2 1,865,790 3 (169,780) -9 Riverboat Admissions Revenue 5,430,462 7 527,679 1 4,902,783 929 Derby Expansion Area 1,337,350 2 1,128,270 2 209,080 19 Other 1,356,674 2 1,202,177 2 154,497 13 ----------- ---- ----------- ---- ---------- ---- $74,058,499 100% $66,490,002 100% $7,568,497 11% =========== ==== =========== ==== ========== ==== </TABLE> 14
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) OPERATING EXPENSES In Kentucky and Indiana, purse expense varies directly with pari-mutuel revenues and is calculated as a percentage of the related revenue and may change from year to year pursuant to contract or statute. Accordingly, on-track, intertrack and simulcast purses reflect changes in direct proportion to changes in pari-mutuel revenues for the same categories. The increase in riverboat purses of $2.6 million is directly related to the $4.9 million increase in riverboat admissions revenue. Wages and contract labor increased $890,000. General wage increases, including a new pari-mutuel clerks union contract in Kentucky which increased mutuel clerks' wages, account for a significant portion of the variance. Advertising, marketing & publicity expenses increased $606,000 which includes an increase in the Churchill Downs direct marketing expenses as part of the aggressive marketing plan initiated during the live racing meet. Simulcast host fees increased primarily as a result of expansion of whole-card wagering during the Spring live racing meet. Audio, video and signal distribution expense increases of $269,000 represents costs associated with the greater number of sites being sent the Company's live racing products and additional equipment for enhanced and expanded areas for whole-card wagering in Kentucky. The insurance, taxes & license fees decrease of $203,000 was achieved by lower insurance costs in both Kentucky and Indiana. Derby expansion area expenses increased in relation to increased space sold Derby weekend. Other Meeting Expenses rose $217,000 due primarily to increases in meet related printing expenses. 15
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Following is a summary of Operating Expenses: <TABLE> <CAPTION> OPERATING EXPENSE SUMMARY ----------------------------------------------------------- Six Months % of Six Months % of 1997 VS. 1996 Ended Net Ended Net June 30 Operating June 30 Operating $ % 1997 Expenses 1996 Expenses Change Change ---------- -------- ---------- -------- -------- ------ Purses: <S> <C> <C> <C> <C> <C> <C> On-track $7,267,307 14% $7,374,473 16% ($107,166) -1% Intertrack-Host 2,078,509 4 2,262,832 5 (184,323) -8 Simulcast- Receiving 6,269,524 12 5,554,331 12 715,193 13 Simulcast-Host 4,594,141 9 4,151,239 9 442,902 11 Riverboat 2,863,606 6 263,838 - 2,599,768 985 ----------- --- ----------- --- ---------- --- $23,073,087 45% $19,606,713 42% $3,466,374 18% Wages and Contract Labor 9,798,634 19 8,909,004 19 889,630 10 Advertising, Marketing & Publicity 2,689,438 5 2,083,656 4 605,782 29 Racing Relations & Services 1,068,113 2 1,035,281 2 32,832 3 Totalisator Expense 789,877 2 770,321 2 19,556 3 Simulcast Host Fee 3,919,550 8 3,822,315 8 97,235 3 Audio/Video & Signal Distribution Expense 1,088,597 2 819,133 2 269,464 33 Program Expense 1,251,719 2 1,271,430 3 (19,711) -2 Depreciation & Amortization 2,248,616 4 2,291,564 5 (42,948) -2 Insurance, Taxes & License Fees 1,269,905 2 1,473,076 3 (203,171) -14 Maintenance 1,075,505 2 977,415 2 98,090 10 Utilities 1,214,189 2 1,263,477 3 (49,288) -4 Derby Expansion Area 592,658 1 415,915 1 176,743 42 Facility/Land Rent 397,958 1 419,641 1 (21,683) -5 Other meeting expense 1,508,280 3 1,291,386 3 216,894 17 ----------- ---- ----------- ---- ---------- ---- $51,986,126 100% $46,450,327 100% $5,535,799 12% =========== ==== =========== ==== ========== ==== </TABLE> 16
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Selling, general and administrative expenses increased by $547,000 during the six month period ended June 30, 1997, which represents only a slight increase as a percentage of revenues from 5.8% to 5.9%. The interest income increase of $102,000 represents the additional earnings generated by the Company from its short-term cash investments. Miscellaneous income increased by $117,000 primarily as a result of a dividend payment received on annuity contracts related to a terminated pension plan. COMPARISON OF THREE MONTHS ENDED JUNE 30, 1997 TO THREE MONTHS ENDED JUNE 30, 1996 Net earnings for the three months ended June 30, 1997 increased by approximately $890,000 compared to the same three months last year as a result of an increase in the Company's net revenues offset partially by lower profit margins associated with simulcasting revenues. Additional interest income also contributed to the increase. COMPARISON OF THREE MONTHS ENDED JUNE 30, 1997 TO THREE MONTHS ENDED MARCH 31, 1997 The increase in net earnings for the three months ended June 30, 1997 from the net loss for the three months ended March 31, 1997 is primarily the result of live racing income generated at Churchill Downs during the Kentucky Derby and the Kentucky Oaks weekend and the rest of the 1997 Spring meet. Live racing in Kentucky begins in the second quarter during which the Company earns a substantial portion of it net earnings. 17
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) SIGNIFICANT CHANGES IN THE BALANCE SHEET DECEMBER 31, 1996 TO JUNE 30, 1997 The cash and cash equivalent balances at June 30, 1997 were $7.9 million higher than December 31, 1996 due to the cash generated during 47 live race days at Churchill Downs, principally the Kentucky Derby and Oaks weekend. Cash and cash equivalent balances during May and June are historically at the highest levels of the year. Accounts receivable at June 30, 1997 were $7.3 million higher than December 31, 1996 due primarily to interstate and intrastate simulcasting settlements relating to the 1997 Spring race meet. Plant and equipment increased by $2.8 million due to the construction of a new on-site simulcast facility as well as routine capital spending throughout the Company. This was offset by approximately $2 million in depreciation expense. Accounts payable at June 30, 1997 were $5.0 million higher than December 31, 1996 as a result of simulcast settlements due other racetracks and additional payables relating to the Company's 1997 Spring Meet including horsemen's payable balances. Live-meet payable balances for the 1996 Fall Meet had substantially been paid prior to December 31, 1996. Accrued expenses increased by $2.0 million at June 30, 1997 as a result of expenses generated during the 1997 Spring Meet. Dividends payable decreased by $2.4 million at June 30, 1997 due to the payment of dividends (declared in 1996) in the first quarter of 1997. Income taxes payable increased by $4.3 million at June 30, 1997 representing the estimated income tax expense attributed to the income generated in the second quarter of 1997. Deferred revenue was $5.4 million lower at June 30, 1997 due to the significant amount of admission and seat revenue that was received in advance at December 31 and recognized as income in May 1997 for the Kentucky Derby and Kentucky Oaks. Outstanding mutuel tickets increased by $1.5 million at June 30, 1997 as a result of unclaimed mutuel tickets relating to the 1997 Spring Meet. 18
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) SIGNIFICANT CHANGES IN THE BALANCE SHEET JUNE 30, 1996 TO JUNE 30, 1997 Cash and cash equivalents increased $2.1 million in 1997 over 1996 based upon the increased earnings of the Company. The accounts receivable increase of $6.9 million includes an increase in the Indiana riverboat admissions tax receivable of $3.4 million and an increase in simulcast settlement receivables from other racetracks. Plant and equipment increased by approximately $4 million due to the construction of a new on-site simulcast facility as well as routine capital spending throughout the Company during the past twelve months. Plant and equipment additions were offset by approximately $4 million in depreciation expense. Accounts payable and accrued expenses increased $4.4 million at June 30, 1997 due primarily to the timing of payments of live meet-related expenses and horsemen's payable balances. LIQUIDITY AND CAPITAL RESOURCES The working capital surplus for the six months ended June 30, 1997 increased by approximately $4.9 million compared to June 30, 1996 as shown below: JUNE 30 ---------------------------- 1997 1996 ---- ---- Working capital surplus (deficiency) $ 959,696 $( 3,989,701) Working capital ratio 1.03 to 1 .83 to 1 The increase in the surplus reflects the improved liquidity of the Company consistent with its continually improving financial performance. 19
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Cash flows provided by operations were $13,306,000 for the six months ended June 30, 1997 compared to $17,213,000 for the six months ended June 30, 1996. The decrease of $3,908,000 is primarily the result of increased short-term accounts receivable. Management believes cash flows from operations during 1997 will be substantially in excess of the Company's disbursements for the year. The Company has a $20,000,000 unsecured line-of-credit available with $20 million available at June 30, 1997 to meet working capital and other short-term requirements. Management believes that the Company has the ability to obtain additional long-term financing should the need arise. RECENT ACCOUNTING DEVELOPMENTS In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). SFAS 128 is designed to improve the EPS information provided in financial statements by simplifying the existing computational guidelines. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997. The Company does not expect adoption of this standard will have a material impact on its future or previously reported earnings per share. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. SFAS 130 is effective for financial statements issued for periods ending after December 15, 1997. The Company does not expect adoption of this standard will have a material impact on its financial statements. SUBSEQUENT EVENT In July 1997, BC Racing Group, LLC (BC), of which the Company is a 24% owner, purchased Dueling Grounds racecourse for $11 million at a Federal Bankruptcy Court sale after having purchased underlying mortgage notes to the property from the mortgagee at a discount. Located in Franklin, Kentucky, just north of Nashville, Tennessee, Dueling Grounds opened in 1991, conducting short race meets and year-round simulcasting. The Company has one seat on the four-person Management Committee of BC. The Company will account for its investment in BC of $2,187,500 under the equity method of accounting. 20
CHURCHILL DOWNS INCORPORATED ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not Applicable PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The registrant's 1997 Annual Meeting of Shareholders was held on June 19, 1997. Proxies were solicited by the registrant's board of directors pursuant to Regulation 14 under the Securities Exchange Act of 1934. There was no solicitation in opposition to the board's nominees as listed in the proxy statement, and all nominees were elected by vote of the shareholders. Voting results for each nominee were as follows: VOTES FOR VOTES WITHHELD DIRECTORS: William S. Farish 2,570,163 11,659 G. Watts Humphrey, Jr. 2,570,271 11,551 Arthur B. Modell 2,229,842 351,980 Dennis D. Swanson 2,565,965 15,857 A proposal (Proposal No. 2) to approve amending Churchill Downs' Articles of Incorporation to increase the percentage of shareholders required to call a special meeting of the Company's shareholders was approved by a vote of the majority of the shares of the registrant's common stock represented at the meeting: 1,782,022 shares were voted in favor of the proposal; 437,753 were voted against; and 10,547 abstained. A proposal (Proposal No. 3) to approve the minutes of the 1996 Annual Meeting of Shareholders was approved by a vote of the majority of the shares of the registrant's common stock represented at the meeting: 2,550,994 shares were voted in favor of the proposal; 19,568 were voted against; and 10,260 abstained. The total number of shares of common stock outstanding as of April 18, 1997, the record date of the Annual Meeting of Shareholder, was 3,654,264. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. A. See exhibit index. B. During the quarter ending June 30, 1997, no Form 8-Ks were filed by the Company. 21
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized. CHURCHILL DOWNS INCORPORATED August 13, 1997 \S\THOMAS H. MEEKER ------------------------------------- Thomas H. Meeker President and Chief Executive Officer August 13, 1997 \S\ ROBERT L. DECKER ------------------------------------- Robert L. Decker Senior Vice President, Finance (Chief Financial Officer) August 13, 1997 \S\VICKI L. BAUMGARDNER ------------------------------------- Vicki L. Baumgardner, Vice President and Treasurer (Principal Accounting Officer) 22
EXHIBIT INDEX NUMBERS DESCRIPTION BY REFERENCE TO 2 Restated Bylaws of Churchill Downs Page 24-35 Incorporated 23