THIS DOCUMENT IS A COPY OF THE FORM 10-Q FILED ON AUGUST 15, 1996 PURSUANT TO A RULE 201 TEMPORARY HARDSHIP EXEMPTION. 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, 1996 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 9, 1996 was 3,725,955 shares. Page 1 of 34
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, 1996, December 31, 1995 and June 30, 1995 3 Condensed Consolidated Statements of Operations for the six months ended June 30, 1996 and 1995 4 Condensed Consolidated Statements of Operations for the three months ended June 30, 1996 and 1995 5 Consolidated Statement of Stockholders' Equity for the six month period ended June 30, 1996 6 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1996 and 1995 7 Condensed Notes to Consolidated Financial Statements 8-9 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10-21 PART II. OTHER INFORMATION AND SIGNATURES ITEM 4. Submission of Matters To A Vote of Security Holders 22 ITEM 6. Exhibits and Reports on Form 8-K 22 Signatures 23 Exhibit Index 24 Exhibits 25-34 Page 2 of 34
<TABLE> CHURCHILL DOWNS INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) <CAPTION> JUNE 30, DECEMBER 31, JUNE 30, ASSETS 1996 1995 1995 ----------- ------------- ----------- <S> <C> <C> <C> Current assets: Cash and cash equivalents $14,028,675 $ 5,856,188 $10,272,264 Accounts receivable 5,553,215 2,098,901 4,302,240 Other current assets 207,075 549,820 611,205 ------------ ------------ ------------- Total current assets 19,788,965 8,504,909 15,185,709 Other assets 4,046,354 4,632,044 4,965,548 Property, plant and equipment 98,852,730 97,451,463 95,471,966 Less accumulated depreciation (35,128,935) (33,101,934) (32,027,423) ----------- ----------- ----------- 63,723,795 64,349,529 63,444,543 ----------- ----------- ----------- $87,559,114 $77,486,482 $83,595,800 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 70,097 $ 70,097 $ 444,154 Accounts payable 12,209,115 6,517,508 13,530,601 Accrued expenses 3,540,803 3,310,882 1,876,711 Dividends payable -- 1,892,302 -- Income taxes payable 6,539,508 1,049,508 5,459,008 Deferred revenue 1,200,753 6,098,541 1,028,579 ------------ ------------ ----------- Total current liabilities 23,560,276 18,938,838 22,339,053 Notes payable 2,950,079 6,351,079 4,198,059 Outstanding mutuel tickets (payable to Common-wealth of Kentucky after one year) 3,189,408 2,256,696 2,480,499 Deferred compensation 958,312 871,212 1,082,480 Deferred income taxes 2,415,500 2,415,500 2,248,000 Minority interest 218,390 -- 163,800 Stockholders' equity: Preferred stock, no par value; authorized, 250,000 shares; issued, none Common stock, no par value; authorized, 10 Million shares, outstanding 3,725,955 shares, June 30, 1996 and 3,784,605 shares, December 31, 1995 and 3,784,605 shares, June 30, 1995 3,450,078 3,504,388 3,504,388 Retained earnings 51,018,421 43,486,460 48,053,562 Deferred compensation costs (136,350) (272,691) (409,041) Note receivable for common stock (65,000) (65,000) (65,000) ----------- ----------- ----------- 54,267,149 46,653,157 51,083,909 ----------- ----------- ----------- $87,559,114 $77,486,482 $83,595,800 =========== =========== =========== <FN> The accompanying notes are an integral part of the financial statements. </FN> </TABLE> Page 3 of 34
CHURCHILL DOWNS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS for the six months ended June 30, 1996 and 1995 (Unaudited) SIX MONTHS ENDED JUNE 30 1996 1995 ----------- ------------ Net revenues $66,490,002 $57,947,743 Operating expenses 46,397,876 39,501,703 ----------- ------------ Gross profit 20,092,126 18,446,040 Selling, general and administrative expenses 3,897,874 3,663,323 Operating income 16,194,252 14,782,717 ----------- ----------- Other income and expense: Interest income 94,631 96,943 Interest expense (147,035) (356,732) Miscellaneous, net 81,804 98,007 ------------ ------------ 29,400 (161,782) Earnings before income taxes 16,223,652 14,620,935 Federal and state income taxes (6,400,000) (5,743,000) ----------- ------------ Net earnings $ 9,823,652 $ 8,877,935 =========== ============ Net earnings per share (based on weighted $ 2.61 $ 2.34 ====== ====== average shares outstanding of 3,768,632 and 3,785,180, respectively) The accompanying notes are an integral part of the financial statements. Page 4 of 34
CHURCHILL DOWNS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS for the three months ended June 30, 1996 and 1995 (Unaudited) THREE MONTHS ENDED JUNE 30 1996 1995 ----------- ----------- Net revenues $54,939,249 $49,335,136 Operating expenses 33,198,583 29,555,966 ----------- ------------ Gross profit 21,740,666 19,779,170 Selling, general and administrative expenses 2,103,082 2,133,579 Operating income 19,637,584 17,645,591 ------------ ----------- Other income and expense: Interest income 50,628 66,967 Interest expense ( 50,837) (202,138) Miscellaneous, net 34,490 28,792 ------------ ------------ 34,281 (106,379) Earnings before income taxes 19,671,865 17,539,212 Federal and state income taxes (7,775,000) (6,889,000) ----------- ------------ Net earnings $11,896,865 $10,650,212 =========== =========== Net earnings per share (based on weighted $ 3.17 $ 2.81 ====== ====== average shares outstanding of 3,751,183 and 3,785,525, respectively) The accompanying notes are an integral part of the financial statements. Page 5 of 34
<TABLE> CHURCHILL DOWNS INCORPORATED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the six month period ended June 30,1996 Note Deferred Common Retained Receivable for Compensation Stock Earnings Common Stock Costs Total ---------- ----------- ------------- ----------- ----------- <S> <C> <C> <C> <C> <C> Balances December 31, 1995 $3,504,388 $43,486,460 $(65,000) $ (272,691) $46,653,157 Net earnings 9,823,652 9,823,652 Deferred Compensation Amortization 136,341 136,341 Repurchase of common stock (54,310) (2,291,691) (2,346,001) ---------- ----------- -------- ---------- ----------- Balances June 30, 1996 $3,450,078 $51,018,421 $(65,000) $(136,350) $54,267,149 ========== =========== ========= ========== =========== <FN> The accompanying notes are integral part of the consolidated financial statements. </FN> </TABLE> Page 6 of 34
CHURCHILL DOWNS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS for the six months ended June 30, 1996 and 1995 (Unaudited) SIX MONTHS ENDED JUNE 30 1996 1995 ----------- ------------ Cash flows from operating activities: Net earnings $ 9,823,652 $ 8,877,935 Adjustments to reconcile net earning to net cash provided by operating activities: Depreciation and amortization 2,294,718 2,225,496 Increase (decrease) in cash resulting from changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable (3,454,314) (2,025,022) Other current assets 342,745 130,355 Income taxes payable 5,490,000 5,459,008 Deferred revenue (4,897,788) (5,113,532) Accounts payable and accrued expenses 5,185,377 8,492,251 Minority interest 218,390 -- Other 2,210,277 1,293,684 ---------- --------- Net cash provided by operating activities 17,213,057 19,340,175 ----------- ---------- Cash flows from investing activities: Additions to property, plant and equipment, net (1,401,267) (5,934,265) Net cash used in investing activities (1,401,267) (5,934,265) Cash flows from financing activities: Decrease in bank note payable, net (3,401,000) (3,763,020) Dividend paid (1,892,302) (1,891,659) Common stock repurchased (2,346,001) -- ---------- ----------- Net cash used in financing activities (7,639,303) (5,654,679) ---------- ----------- Net increase in cash and cash equivalents 8,172,487 7,751,231 Cash and cash equivalents, beginning of period 5,856,188 2,521,033 ---------- ----------- Cash and cash equivalents, end of period $14,028,675 $10,272,264 =========== =========== Supplemental Disclosures of cash flow information: Cash paid during the period for: Interest $219,601 $ 301,451 Income taxes $710,000 $ 240,000 The accompanying notes are an integral part of the financial statements. Page 7 of 34
CHURCHILL DOWNS INCORPORATED CONDENSED NOTES TO FINANCIAL STATEMENTS for the six months ended June 30, 1996 and 1995 (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 Company normally earns a substantial portion of its net income in the second quarter of each year during which the Kentucky Derby is run. The Kentucky Derby is run on the first Saturday in May. During the six months ended June 30, 1996 the Company conducted simulcast receiving wagering for 661 location days. The Company operated simulcast wagering at its Sports Spectrum site in Louisville, Kentucky for 84 days during the six month period, compared to 88 days in 1995. Through its subsidiary, Hoosier Park L.P., 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 577 days compared to 332 days in 1995 when only three facilities were operating. 2. The accompanying 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, 1995 for further information. The accompanying 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. On January 26, 1994 the Company through its wholly owned subsidiary Churchill Downs Management Company ("CDMC") purchased Anderson Park, Inc. ("API") for approximately $1,950,000. API owned an Indiana Standardbred racing license and was in the process of constructing a racing facility in Anderson, Indiana. Subsequently, the facility was completed and, contemporaneously with the commencement of operations on September 1, 1994 the net assets of API were contributed to a newly formed partnership, Hoosier Park, L.P. ("HPLP") in return for an 87% general partnership interest. Page 8 of 34
CHURCHILL DOWNS INCORPORATED CONDENSED NOTES TO FINANCIAL STATEMENTS for the six months ended June 30, 1996 and 1995 (continued) (Unaudited) In December 1995, the Company entered into a Partnership Interest Purchase Agreement with Conseco HPLP, L.L.C. ("Conseco") for the sale of 10% of the Company's partnership interest in HPLP to Conseco. This sale was closed on May 31, 1996. The purchase price for the 10% partnership interest was $218,390 and the transaction also included a payment of $2,603,514 for the acquisition of a 10% interest in the debt owed by HPLP to CDMC at face value of debt at the date of the closing. Conseco and Pegasus Group, Inc. ("Pegasus") are limited partners of HPLP and Anderson continues to be the sole general partner of HPLP. This sale is not anticipated to have any material effect on operations in 1996. From May 31, 1996 through December 31, 1998, Conseco has an option to purchase from API an additional 47% partnership interest in HPLP. The purchase price of the additional partnership interest will be $22,156,000 of which approximately $6,222,000 will be allocated to the purchase of the partnership interest and approximately $15,934,000 will be allocated to the acquisition of debt owed by HPLP to CDMC. This purchase is subject to the approval of the Indiana Horse Racing Commission. Following this purchase, Conseco will be the sole general partner of HPLP, and API and Pegasus, will be limited partners of HPLP with partnership interest of 30% and 13% respectively. CDMC will continue to have a long-term management agreement with HPLP pursuant to which CDMC has operational control of the day-to-day affairs of Hoosier Park and its related simulcast operations. 4. During the quarter ended June 30, 1996, the Company acquired 58,650 shares of its common stock at a total cost of $2,346,001. Quarterly earnings per share amounts do not add to year-to-date earnings per share for 1996 because of this change in the number of outstanding shares. 5. 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. Borrowings are payable on January 31, 1997. There were no borrowings outstanding at June 30, 1996 and $3.0 million in borrowings were outstanding at June 30, 1995. 6. 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. All of the $1,000,000 hold back has been utilized as of December 31, 1995. It is not anticipated that the Company will have any liability as a result of compliance with environmental laws with respect to the property. Compliance with environmental laws has not otherwise affected development and operation of the property and the Company is not otherwise subject to any material compliance costs in connection with federal or state environmental laws. 7. Certain balance sheet and statement of operations items have been reclassified in the prior year to conform to current period presentation. Page 9 of 34
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 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, 1995. For many years, the Company has conducted live Spring and Fall race meetings for Thoroughbred horses in Kentucky. In 1988, the Company began to participate in intertrack simulcasting as a host track for all of its live races except those run on Kentucky Derby Day. In 1989, the Company commenced operations as a receiving track for intertrack simulcasting. During November 1991, the Company began interstate simulcasting for all of the live races with the receiving locations participating in the Company's mutuel pool. 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 1995, for the first time, Churchill Downs offered the simulcast of its races on Kentucky Derby Day to racetracks within Kentucky. In 1996, Derby weekend accounted for approximately 30% of total on-track pari-mutuel wagering and 35% of total on-track attendance, for the 1996 Spring Meet. In July 1994, the Company began to participate in whole card simulcasting, whereby the Company began importing whole race cards or programs from host tracks located outside the state for pari-mutuel wagering purposes. Whole card simulcasting has created a major new wagering opportunity for patrons of the Company in both Kentucky and Indiana. Churchill Downs, through its subsidiary, Hoosier Park, L.P., is majority owner and operator of Indiana's only pari-mutuel racetrack, Hoosier Park at Anderson. Start-up costs incurred in Indiana during 1995 included improvements to Hoosier Park in anticipation of the track's inaugural Thoroughbred meet. In addition, Hoosier Park conducted two Harness race meets, as well as simulcast wagering, during its first 16 months of operation. In 1995, the Company opened off-track wagering facilities in Merrillville, Fort Wayne and downtown Indianapolis, Indiana. The license for the Jeffersonville, Indiana facility was surrendered in July 1995 because ownership of the tentative site was in question and resolution was not expected in the near future. The Company is continuing to evaluate sites for the location of a fourth satellite wagering facility. Page 10 of 34
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The Company's principal sources of income are commissions from on-track pari-mutuel wagers, commissions from intertrack and fees from interstate simulcast wagers, admissions and seating, concession commissions (primarily for the sale of food and beverages), and license, rights, broadcast and sponsorship fees. The Company's primary source of income is pari-mutuel wagering. The Company retains the following amounts on specific revenue streams as a percentage of handle: KENTUCKY INDIANA On-track pari-mutuel wagers 14% 18% Intertrack host 8% -- Interstate/simulcast host 3% 3% Intertrack/simulcast receiving 7% 18% 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. In Kentucky, the Company has been granted a license to conduct live racing during the period from April 27, 1996, through June 30, 1996, and from October 27, 1996, through November 30, 1996, for a total of 78 racing days. 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 received a license to conduct live racing for a total of 133 racing days, including 80 days of Standardbred racing from April 25, 1996 through September 2, 1996, and 53 days of Thoroughbred racing from September 20, 1996 through November 30, 1996. The Company operated two live racing facilities and conducted simulcast wagering at four locations during the six month period ended June 30, 1996. The chart below summarizes the results of these operations. Page 11 of 34
<TABLE> CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) <CAPTION> KENTUCKY INDIANA Six Months Six Months Six Months Six Months Ended June 30, Ended June 30, Increase Ended June 30, Ended June 30, Increase 1996 1995 (Decrease) 1996 1995 (Decrease) -------------- -------------- --------- -------------- -------------- --------- <S> <C> <C> <C> <C> <C> <C> ON-TRACK - - -------- Number of Race Days 48 46 2 43 66 (23) Attendance 685,228 686,189 0% 48,974 90,182 (46)% Handle $95,077,056 $88,436,906 8% $ 5,154,518 $8,798,255 (41)% Avg. daily attendance 14,276 14,917 (4)% 1,139 1,366 (17)% Avg. daily handle $1,980,772 $1,922,541 3% $ 119,873 $ 133,307 (10)% Per capita handle $138.75 $128.88 8% $105.25 $ 97.56 8% INTERTRACK/SIMULCAST-HOST (SENDING) Number of Race Days 48 46 2 43 56 (13) Handle $245,018,693 $137,265,922 78% $1,116,593 $1,642,722 (32)% Avg. daily handle $5,104,556 $2,984,042 71% $ 25,967 $ 29,334 (11)% INTERTRACK/SIMULCAST-RECEIVING* Number of Race Days 84 88 (4) 577 332 245 Attendance 195,552 219,065 (11)% ** 157,735 ** Handle $52,340,744 $50,947,048 3% $69,946,803 $44,147,538 58% Avg. daily attendance 2,328 2,489 (6)% ** 475 ** Avg. daily handle $623,104 $578,944 8% $121,225 $132,975 (9)% Per capita handle $267.66 $232.57 15% ** $279.88 ** </TABLE> * The Company's Indiana operations include three separate simulcast wagering facilities. ** Attendance figures are not kept for the off-track wagering facilities in Indianapolis, Fort Wayne or for simulcast-receiving at Hoosier Park. Page 12 of 34
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) With the advent of whole card simulcasting, the Company conducts interstate simulcasting virtually year-round on multiple racing programs each day from around the nation. The number of receiving days is increasing because of additional off-track wagering facilities being opened in Indiana. During 1995, simulcast wagering was being conducted at Hoosier Park in Anderson, Indiana and beginning January 25, 1995 at Merrillville, Indiana. Two additional simulcast facilities were opened during 1995, one in Ft. Wayne, Indiana on April 25, 1995, and the other in Indianapolis, Indiana in October 25, 1995. Simulcast wagering was conducted at all four facilities throughout the first half of 1996. For 1996, the Company has been granted a license to operate simulcast receiving locations in Kentucky and Indiana for any and all possible dates from January 1 through December 31 and intends to receive simulcasting on all possible days. An increase in the number of days is expected to enhance operating results. Hoosier Park may ultimately be supported by a fourth whole card simulcasting facility. 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 live race meetings, as many as 2,600 persons are employed. By the end of the second quarter of 1997, as many as five Indiana riverboats may be operating along the Ohio River, with one of the nation's largest complexes to be located 10 miles from Louisville in Harrison County, Indiana. Studies project that direct competition with these boats could result in as much as a 30% decline in on-track wagering at Churchill Downs and a 20% decline in Sports Spectrum business. In response, the Company's Board of Directors passed a resolution at its June 13 meeting instructing the Company's management to aggressively pursue alternative forms of gaming at its racetrack facilities in Louisville. The integration of alternative gaming products at the racetrack is one of four core business strategies developed by the Company to grow its live racing program. Management has been positioning the Company to compete in this changing environment for the past several years by strengthening its flagship operations, increasing its share of the interstate simulcast market, and geographically expanding its racing operations into Indiana. The Company currently is working to build a consensus within Kentucky's horse industry for a plan to offer alternative gaming products exclusively at state racetracks. On May 7, 1996 the Company purchased 58,650 shares of common stock at a total cost of $2,346,001. The purchase had a positive effect on earnings per share, adding $.02 to earnings per share for the six month period ended June 30, 1996. The Company expects 1996 total earnings per share to benefit by approximately $.03 as a result of the purchase. Page 13 of 34
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) COMPARISON OF SIX MONTHS ENDED JUNE 30, 1996 TO 1995 Net revenue during the six months ended June 30, 1996 increased $8,542,259. Kentucky operations contributed 52%, or $4,461,692 to the total increase, with Simulcast-Host showing the largest increase at $2,389,289. Simulcast-Host represents revenues generated by transmitting the Company's live races at Churchill Downs outside the state of Kentucky to outlets across the nation. The number of outlets increased from 226 in 1995 to 401 in 1996. On-track wagering on the Company's live races at Churchill Downs was 3.19% below 1995. This decrease was offset by an increase in wagering on whole card simulcast races during 41 days of the live meet. During the first half of 1996, Indiana operations contributed $4,080,567 or 48% to the revenue increase. In addition to an increase in Simulcast-Host of $2,262,521, Simulcast-Receiving increased $1,865,149 primarily as a result of the increase in the number of simulcast outlets in 1996. On-track revenue decreased at Hoosier Park by $703,994 when compared to 1995 primarily due to the live racing meet starting three weeks later and having one less race day per week this year, resulting in 23 fewer race days in 1996. Concession commission and program revenue both increased due largely to the Indiana operations. Indiana had four facilities operating in 1996 compared to only three in 1995. The increase in other revenue is due to $527,679 of Indiana riverboat admissions tax that is payable to licensed racetracks facilities in Indiana per Indiana state law. Page 14 of 34
<TABLE> CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) NET REVENUE SUMMARY Six Months Six Months 1996 VS. 1995 Ended % To Ended % To June 30, Total June 30, Total $ % 1996 Revenue 1995 Revenue Change Change ----------- ------- ----------- ------- ---------- ------ <S> <C> <C> <C> <C> <C> <C> Pari-Mutuel Revenue: On-track $13,787,088 21% $14,244,632 24% $ (457,544) -3% Intertrack-Host 4,939,959 7 4,103,517 7 836,442 20 Simulcast-Receiving 14,684,372 22 12,458,047 21 2,226,325 18 Simulcast Host 10,801,151 16 6,149,341 11 4,651,810 76 ------------- --------------- -- ---------- --- 44,212,570 66 36,955,537 63 7,257,033 20 Admission & Seat Revenue 10,322,496 15 10,363,623 18 (41,127) 0 License, Rights, Broadcast & Sponsorship Fees 5,357,850 8 5,326,281 9 31,569 1 Concession Commission 1,798,167 3 1,720,339 3 77,828 5 Program Revenue 1,865,790 3 1,574,783 3 291,007 18 Derby Expansion Area 1,128,270 2 1,015,940 2 112,330 11 Other 1,804,859 3 991,240 2 813,619 82 ------------- ---- ----------- ---- ----------- ---- $66,490,002 100% $57,947,743 100% $ 8,542,259 15% =========== ==== =========== ==== =========== ==== </TABLE> Page 15 of 34
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Operating expenses increased $6,896,173 during the six month period. Gross margin decreased from 31.8% to 30.2% through June 30, 1996. This decrease in gross margin results primarily from a higher percentage of revenue in 1996 coming from lower margin simulcast products. Specifically, due to simulcasting at three satellite wagering facilities and at Hoosier Park in Indiana in 1996, coupled with the increase in whole card simulcasts at the Sports Spectrum in Louisville and during the Churchill Downs live meet. Changes in specific expense categories follow. Purse expense increased $2,933,941 due largely to the increase in Simulcast-Host handle in both Kentucky and Indiana. In addition, Indiana Simulcast-Receiving purse expense increased $611,789. 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. The increase in Wages and Contract Labor of $480,482 can be attributed to an increase in number of mutuel clerks on Oaks and Derby days in Kentucky along with the opening of the third Indiana satellite wagering facility. The $708,381 increase in Advertising, Marketing and Publicity is due largely to the marketing of the wagering facilities in Indiana. Approximately $300,000 was spent as part of an intensive marketing campaign in Indiana with approximately $150,000 being spent in each of the Fort Wayne and Hoosier Park (Anderson, Indiana) areas. Response to the marketing efforts was positive and the goal is to maintain increased handle as marketing support is reduced. Additionally, new marketing programs such as the Twin Spires Club and Winners Circle Sponsorship, along with expenses incurred in conjunction with ESPN's Derby Week coverage, also caused increases during the six month period. Racing Relations and Services increased $195,670 due largely to the end-of-meet state license tax accrual that, for the past three years, has been accrued in the third quarter at the end of the spring race meet. In 1996, the spring race meet ended in the second quarter on June 30,1996. Audio, Video and Signal Distribution expense increased $88,988 due primarily to the additional facility in Indiana. Totalisator and Simulcast Host Fee expenses increased for the six month period $162,962 and $1,109,396, respectively. These expenses are related to the operation of the off-track wagering facilities in both Kentucky and Indiana. Totalisator expense is generated based on total wagers taken at the facilities. Simulcast host fees are paid to the track whose live races are being simulcast at the facilities. As total wagers increase, these expenses, along with purses, increase accordingly. In Kentucky simulcast host fees increased relative to combined handle as a result of a shift in wagering from in-state to out-of-state racing cards. This was primarily the result of winter weather conditions in Kentucky which required racing in the state to be canceled several times throughout the first quarter. This shift translates to slimmer margins because no simulcast fees are paid on in-state racing, and in-state purses are calculated at a slightly lower rate. Page 16 of 34
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Program expenses increased $408,222 for the quarter. This is primarily attributed to higher paper cost in Kentucky, which resulted in an increase of $205,090. The increases in Indiana are attributable to the addition of the third Indiana satellite wagering facility and a higher than expected scrap rate in Indiana. Maintenance and Utilities increased $113,239 and $306,566 respectively. General repairs at the four Indiana facilities account for the increase in maintenance, which includes expenses for winter storm damage and supplies. Utilities increased overall due to the unseasonably cold winter temperatures and the additional facility in Indiana. Increases of $110,474 in Insurance, Taxes and License Fees are derived from a $19,357 decrease in Kentucky operations attributed to savings generated by a change in insurance carriers and a $129,831 increase in Indiana due to the insurance requirements for the additional OTB facility. Facility rent in 1996 is attributable to the Indianapolis simulcast facility. Page 17 of 34
<TABLE> CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) OPERATING EXPENSE SUMMARY Six Months Six Months Ended % To Ended % To 1996 VS. 1995 June 30, Total June 30, Total $ % 1996 Expense 1995 Expense Change Change ---------- ------- ---------- ------- --------- ------ <S> <C> <C> <C> <C> <C> <C> Purses: On-track $7,638,311 16% $7,758,132 20% $(119,821) -2% Intertrack-Host 2,362,120 5 1,997,672 5 364,448 18 Simulcast- Receiving 4,829,253 10 4,108,994 10 720,259 18 Simulcast-Host 4,777,029 10 2,807,974 7 1,969,055 70 ----------- --- ----------- -- ---------- ---- $19,606,713 41 $16,672,772 42 $2,933,941 18 Wages and Contract Labor 8,802,118 19 8,321,636 21 480,482 6 Advertising, Marketing & Publicity 2,134,306 5 1,425,925 4 708,381 50 Racing Relations & Services 782,689 2 587,019 1 195,670 33 Totalisator Expense 662,785 1 499,823 1 162,962 33 Simulcast Host Fee 3,533,463 8 2,424,067 6 1,109,396 46 Audio/Video & Signal Distribution Expense 1,293,837 3 1,204,849 3 88,988 7 Program Expense 1,461,967 3 1,053,745 3 408,222 39 Depreciation & Amortization 2,291,564 5 2,225,496 6 66,068 3 Insurance, Taxes & License Fees 1,373,504 3 1,263,030 3 110,474 9 Maintenance 984,577 2 871,338 2 113,239 13 Utilities 1,264,525 3 957,959 2 306,566 32 Derby Expansion Area 415,915 1 402,713 1 13,202 3 Facility/Land Rent 331,289 1 157,493 1 173,796 100 Other meeting expense 1,458,624 3 1,433,838 4 24,786 2 ----------- ---- ----------- ---- ----------- ---- $46,397,876 100% $39,501,703 100% $ 6,896,173 17% =========== ==== =========== ==== =========== ==== </TABLE> Page 18 of 34
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Selling, general and administrative expenses increased $234,551 during the six month period. This is primarily due to an increase in Salaries and Wages in Indiana relating to the additional simulcast wagering facility. Interest expense was down $209,697 as positive cash flow from operations has allowed the Company to continue paying down its line of credit. As of May 7, 1996 the outstanding balance on the line of credit has been completely retired. COMPARISON OF THREE MONTHS ENDED JUNE 30, 1996 TO THREE MONTHS ENDED JUNE 30, 1995 Net revenue increased $5.6 million due primarily to an increase in Simulcast-Host, with the Company's live races being transmitted to a record number of outlets across the nation. Additionally, Simulcast-Receiving increased due to an extra simulcasting outlet being open in Indiana during 1996. Operating expenses increased by $3.6 million primarily due to the increase in Purse Expense which accompanies an increase in pari-mutuel revenue. Selling, General, and Administrative Expenses remained relatively flat, decreasing $30,497 during the quarter. COMPARISON OF THREE MONTHS ENDED JUNE 30, 1996 TO THREE MONTHS ENDED MARCH 31, 1996 Net revenues increased $43.4 million primarily due to $49.2 million in live racing revenue at Churchill Downs during the second quarter. Churchill Downs' second quarter included 48 live racing days versus no live racing during the three months ended March 31, 1996. Operating expenses increased $20.0 million also due to the live racing days. These increases were offset somewhat by 50 fewer intertrack receiving days at the Sports Spectrum during the quarter. Selling, general and administrative costs for the second quarter of 1996 were $2.1 million, up from $1.8 million in the quarter ended March 31, 1996. This increase is primarily due to costs related to the live race meets at Churchill Downs and Hoosier Park in the second quarter. Page 19 of 34
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, 1995 TO JUNE 30, 1996 The cash balances at June 30, 1996 were $8.2 million higher than December 31, 1995 due to the cash generated during 48 live race days at Churchill Downs, principally Kentucky Derby and Oaks weekend, and 43 live race days at Hoosier Park. Cash balances during May and June are historically at the highest levels of the year. Accounts receivable at June 30, 1996 were $3.5 million higher than December 31, 1995 due primarily to interstate and intrastate simulcasting settlements which were received in July and August, 1996. Racing plant & equipment increased by $1.4 million as a result of routine capital spending throughout the Company. There were no major capital projects during the six month period. Accounts payable at June 30, 1996 were $5.6 million higher than at December 31, 1995 mainly due to horsemen's balances for the live race meeting at Churchill Downs. Such balances for the Fall 1995 race meeting had been paid by December 31, 1995. Deferred revenue was lower at June 30, due to the significant amount of admission and seat revenue that was received in advance at December 31 and recognized as income in May 1996 for the Kentucky Derby and Oaks. Notes payable were $3.4 million lower at June 30, 1996 as positive cash flow has allowed the Company to eliminate its outstanding amount of bank debt. However, Hoosier Park recognized $2.9 million in debt due to the Conseco purchase of 10% of the partnership. Dividends payable decreased by $1.9 million due to the payment of the dividend in January 1996. Income taxes payable at June 30, 1996 relate to the estimated expense due for the six month period. Due to the seasonality of the business related to the Spring race meeting, the second quarter of the year is the highest in earnings and related taxes. SIGNIFICANT CHANGES IN THE BALANCE SHEET JUNE 30, 1995 TO JUNE 30, 1996 Cash balances at June 30, 1996 are $3.7 million above June 30, 1995 principally due to payments in 1995 for construction of the wagering facilities in northern and central Indiana. Accounts receivable at June 30, 1996 were up due to interstate simulcasting and the increased number of outlets for the Churchill Downs spring race meeting. Page 20 of 34
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Property, plant & equipment increased during the year by $3.4 million due to the addition of the third simulcasting facility in Indiana and improvements which allowed Thoroughbred racing at Hoosier Park in September and October 1995, as well as routine capital spending throughout the Company. Accounts payable decreased by $1.4 million primarily due to the amount payable related to the Hoosier Park construction in 1995. LIQUIDITY AND CAPITAL RESOURCES Working capital for the six months ended June 30, 1996 and June 30, 1995 is as follows: June 30 ---------------------------------- 1996 1995 Working capital deficiency $( 3,771,311) $(7,153,344) Working capital ratio .84 to 1 .68 to 1 The working capital deficiency is primarily a result of the nature and seasonality of the Company's business. Cash flows provided by operations were $16.8 million for the six months ended June 30, 1996; $16.5 million for the twelve months ended December 31, 1995; and $19.3 million for the six months ended June 30, 1995. Management believes cash flows from operations during 1996 and funds available under the Company's unsecured line of credit will be sufficient to fund dividend payments (historically about $1.9 million) and additions and improvements to the racing plant and equipment which are expected to be approximately $3.0 million. Included in this figure is the expansion of the general office at Churchill Downs. The Company has a $20,000,000 unsecured line-of-credit available with $20 million available at June 30, 1996 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. Page 21 of 34
CHURCHILL DOWNS INCORPORATED PART II. OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The registrant's 1996 Annual Meeting of Shareholders was held on June 13, 1996. 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 CLASS III DIRECTORS: Charles W. Bidwill, Jr. 2,942,120 5,516 Thomas H. Meeker 2,942,335 5,301 Carl F. Pollard 2,942,550 5,086 Darrell R. Wells 2,941,570 6,066 A proposal (Proposal No. 2) to approve the Churchill Downs Incorporated 1995 Employee Stock Purchase Plan was approved by a vote of the majority of the shares of the registrant's common stock represented at the meeting: 2,720,006 shares were voted in favor of the proposal; 198,973 were voted against; 17,683 abstained; and 10,974 were not voted by beneficial holders. A proposal (Proposal No. 3) to approve the minutes of the 1995 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: 2,818,631 shares were voted in favor of the proposal; 121,521 were voted against; and 7,484 abstained. The total number of shares of common stock outstanding as of April 18, 1995, the record date of the Annual Meeting of Shareholders, was 3,784,605. Item 6. EXHIBITS AND REPORTS ON FORM 8-K. A. See exhibit index B. During the quarter ending June 30, 1996, no Form 8-K's were filed by the Company. Page 22 of 34
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 the registrant has duly caused this amendment to be signed on its behalf by the undersigned hereunto duly authorized. August 14, 1996 /S/THOMAS H. MEEKER ------------------------------- Thomas H. Meeker President August 14, 1996 /S/VICKI L. BAUMGARDNER -------------------------------- Vicki L. Baumgardner, Treasurer ( Principal Financial and Accounting Officer) Page 23 of 34
EXHIBIT INDEX NUMBERS DESCRIPTION BY REFERENCE TO (10)(l) Second Amended Secured Promissory Note Page 25 Dated November 1, 1994, in the original principal amount of $28.7 million made by Hoosier Park, L.P. to Churchill Downs Management Company (10)(m) Participation Agreement between Churchill Page 30 Downs Management Company and Conseco HPLP, L.L.C., dated May 31, 1996 Page 24 of 34