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Churchill Downs
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๐Ÿ‡บ๐Ÿ‡ธ United States
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Entertainment
Categories
  1. Churchill Downs
  2. Quarterly Reports (10-Q)
  3. Submitted on 2004-08-06

Churchill Downs - 10-Q quarterly report FY


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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

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

(Exact name of registrant as specified in its charter)

Kentucky
(State or other jurisdiction of incorporation or organization)		61-0156015
(IRS Employer 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____

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YesX No__

The number of shares outstanding of registrant’s common stock at August 5, 2004 was 13,298,006 shares.

 
 
Page 1

CHURCHILL DOWNS INCORPORATED
INDEX TO QUARTERLY REPORT ON FORM 10-Q

Part 1Page
Item 1.

Financial Statements

Condensed Consolidated Balance Sheets, June 30, 2004, December 31, 2003,
and June 30, 2003		3

Condensed Consolidated Statements of Net Earnings for the six months ended
June 30, 2004 and 2003		4

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003		5
 
Notes to Condensed Consolidated Financial Statements		6

Item 2.		Management's Discussion and Analysis of Financial Condition and Results of Operations12

Item 3.		Quantitative and Qualitative Disclosures About Market Risk21

Item 4.		Controls and Procedures21
 
Part II

Item 1.		Legal Proceedings (Not applicable)22 
 
Item 2.Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
(Not applicable)		22 

Item 3.		Defaults Upon Senior Securities (Not applicable)22 

Item 4.		Submission of Matters to a Vote of Security Holders22 

Item 5.		Other Information (Not applicable)23 

Item 6.		Exhibits and Reports on Form 8-K23 

Signatures		 24 

Exhibit Index		25 
 
Page 2

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CHURCHILL DOWNS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)

June 30, 2004
(unaudited)		December 31, 2003June 30, 2003
(unaudited)
ASSETS  
Current assets:      
     Cash and cash equivalents $   39,587  $   18,053  $   41,353 
     Accounts receivable, net of allowance for doubtful accounts 
          of $1,147 at June 30, 2004 and $1,141 at December 31, 2003
         and $975 at June 30, 2003  49,717  36,693  45,695 
     Deferred income taxes 3,349  3,767  3,043 
     Other current assets 6,261  4,120  5,564 
         Total current assets 98,914  62,633  95,655 
 
Other assets 15,474  15,941  11,962 
Plant and equipment, net 403,191  367,229  347,699 
Goodwill, net 52,239  52,239  52,239 
Other intangible assets, net 7,178  7,464  7,313 
  $ 576,996  $ 505,506  $ 514,868 
LIABILITIES AND SHAREHOLDERS' EQUITY

  
Current liabilities: 
     Accounts payable $   76,040  $   34,466  $   64,435 
     Accrued expenses 43,918  38,491  35,853 
     Dividends payable -   6,625   -  
     Income taxes payable 7,062  1,016  8,510 
     Deferred revenue 4,478  18,050  7,653 
     Long-term debt, current portion -   5,740  472 
         Total current liabilities 131,498  104,388  116,923 
 
Long-term debt, due after one year 146,079  121,096  119,811 
Other liabilities 13,627  11,719  14,053 
Deferred income taxes 13,318  13,327  13,103 
         Total liabilities 304,522  250,530  263,890 
 
Commitments and contingencies -  -  - 
Shareholders' equity: 
     Preferred stock, no par value; 
         250 shares authorized; no shares issued -  -  - 
     Common stock, no par value; 50,000 shares 
         authorized; issued: 13,295 shares June 30, 
         2004, 13,250 shares December 31, 2003, and 
         13,183 shares June 30, 2003 129,789  128,583  126,725 
     Retained earnings 142,436  126,754  125,770 
     Accumulated other comprehensive earnings (loss) 249   (361) (1,517)
  272,474  254,976  250,978 
  $ 576,996  $ 505,506  $ 514,868 
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
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CHURCHILL DOWNS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF NET EARNINGS
for the six and three months ended June 30, 2004 and 2003
(Unaudited)
(in thousands, except per share data)

Six Months Ended June 30,Three Months Ended June 30,
2004200320042003
 
Net revenues  $ 228,797 $ 224,718 $ 191,068 $ 188,999 
Operating expenses   181,079  177,524  133,586  131,984 
 
     Gross profit   47,718  47,194  57,482  57,015 
 
Selling, general and administrative expenses   19,163  16,839  10,085  8,731 
 
     Operating income   28,555  30,355  47,397  48,284 
 
Other income (expense):  
          Interest income   201  135  85  73 
          Interest expense   (2,558) (3,306) (1,174) (1,479)
          Miscellaneous, net   840  643  504  173 
    (1,517) (2,528) (585) (1,233)
 
Earnings before provision for income taxes   27,038  27,827  46,812  47,051 
 
Provision for income taxes   (11,356) (11,298) (19,384) (19,026)
 
Net earnings  $ 15,682 $ 16,529 $ 27,428 $ 28,025 
 
Net earnings per common share data:  
     Basic     $1.18   $1.26   $2.06   $2.13 
     Diluted    $1.17   $1.24   $2.04   $2.09 
Weighted average shares outstanding:  
     Basic   13,272  13,167  13,287  13,174 
     Diluted   13,460  13,367  13,473  13,380 


The accompanying notes are an integral part of the condensed consolidated financial statements.
 
 
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CHURCHILL DOWNS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended June 30,
(Unaudited)
($ in thousands)

20042003
Cash flows from operating activities:   
     Net earnings $  15,682 $  16,529  
     Adjustments to reconcile net earnings to 
          net cash provided by operating activities: 
     Depreciation and amortization 10,819 10,171 
     Increase (decrease) in cash resulting from 
        changes in operating assets and liabilities: 
        Accounts receivable (13,024)(11,260)
        Other current assets (2,141)424  
        Accounts payable 39,272 34,928  
        Accrued expenses 10,035  1,891  
        Income taxes payable 6,046 7,783 
        Deferred revenue (13,572)(7,223)
        Other assets and liabilities 2,406 1,857 
          Net cash provided by operating activities 55,523 55,100 
 
Cash flows from investing activities:
     Additions to plant and equipment, net (47,828)(19,074)
          Net cash used in investing activities (47,828)(19,074)
 
Cash flows from financing activities:
 
     Repayments of revolving loan facility for refinancing -   (120,929)
     Proceeds from senior notes, net of expenses -  98,229 
     Borrowings on bank line of credit 196,295 172,453 
     Repayments of bank line of credit (175,434)(154,310)
     Decrease in long-term debt, net (1,618)(279)
     Change in book overdraft 15  (1,915)
     Proceeds from note receivable for common stock -  65 
     Payment of dividends (6,625)(6,578)
     Common stock issued 1,206 682 
          Net cash provided by (used in) financing activities 13,839 (12,582)
 
Net increase in cash and cash equivalents 21,534  23,444  
Cash and cash equivalents, beginning of period 18,053 17,909 
Cash and cash equivalents, end of period $ 39,587 $ 41,353 
 
Supplemental cash flow disclosures:
    Interest $   2,960 $   3,398 
    Income tax  $   3,009 $   3,442 
Schedule of non-cash activities:
    Plant and equipment additions included in accounts payable $   5,915 $      233 
 
The accompanying notes are an integral part of the condensed consolidated financial statements.
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CHURCHILL DOWNS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the six months ended June 30, 2004 and 2003 (Unaudited)
($ in thousands, except per share data)

1. Basis of Presentation
 
 The accompanying condensed 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 accounting principles generally accepted in the United States of America or those normally made in Churchill Downs Incorporated's (the "Company") annual report on Form 10-K. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Accordingly, the reader of this Form 10-Q may wish to refer to the Company's Form 10-K, as amended by Form 10-K/A, for the period ended December 31, 2003 for further information. The accompanying condensed consolidated financial statements have been prepared in accordance with the registrant's customary accounting practices and have not been audited.

Certain prior-period financial statement amounts have been reclassified to conform to the current-period presentation. 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.

Our revenues and earnings are significantly influenced by our racing calendar. Therefore, revenues and operating results for any interim quarter are generally not indicative of the revenues and operating results for the year and may not be comparable with results for the corresponding period of the previous year. We historically have very few live racing days during the first quarter, with a majority of our live racing occurring in the second, third and fourth quarters, including the running of the Kentucky Derby and Kentucky Oaks in the second quarter.
 
2. Stock-Based Compensation
 
 The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees." Had the compensation cost for our stock-based compensation plans been determined consistent with Statement of Financial Accounting Standards ("SFAS") No. 123 "Accounting for Stock-based Compensation" the Company's net earnings and net earnings per common share for the six and three months ended June 30, 2004 and 2003 would approximate the pro forma amounts presented below:

Six Months Ended June 30, 
   2004  2003 
         Net earnings $ 15,682 $ 16,529 
         Pro forma stock-based compensation expense,  
           net of tax benefit  (869) (922)
         Pro forma net earnings $ 14,813 $ 15,607 
 
         Pro forma net earnings per common share:  
             Basic  $1.12  $1.19 
             Diluted  $1.10  $1.17 
 
Three Months Ended June 30, 
   2004  2003 
         Net earnings $ 27,428 $ 28,025 
         Pro forma stock-based compensation expense, 
           net of tax benefit  (681) (539)
         Pro forma net earnings $ 26,747 $ 27,486 
         Pro forma net earnings per common share:  
             Basic  $2.01  $2.09 
             Diluted  $1.99  $2.05 
 
 
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CHURCHILL DOWNS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the six months ended June 30, 2004 and 2003 (Unaudited)
($ in thousands, except per share data)

 The effects of applying SFAS No. 123 in this pro forma disclosure are unlikely to be representative of the effects on pro forma net earnings for future years since variables such as option grants, exercises, and stock price volatility included in the disclosures may not be indicative of future activity. We anticipate making awards in the future under stock-based compensation plans.
 
3. Long-Term Debt
 
  The following table presents our long-term debt, including current portion:
 
As of As of As of
June 30, 2004 December 31, 2003 June 30, 2003
Long-term debt, current portion:                 
  Other notes payable $           -     $    5,740   $       472  
 
Long-term debt, due after one year:                        
  $100 million variable rate senior notes 100,000 100,000 100,000
  $200 million revolving credit facility 40,861 20,000 13,214
  Other notes payable 5,218 1,096 6,597
    Total long-term debt $146,079 $126,836 $120,283
 
  In April 2003, the Company refinanced its $250 million revolving credit facility to meet funding needs for working capital, capital improvements and potential acquisitions. The refinancing included a new $200.0 million revolving line of credit through a bank syndicate with a five-year term and $100.0 million in variable rate senior notes with a seven-year term. Both debt facilities are collateralized by substantially all of the assets of the Company and its wholly owned subsidiaries. The interest rate on the line of credit is based upon LIBOR plus a spread of 125 to 225 basis points, determined by certain Company financial ratios. The current interest rate on the senior notes is equal to three month LIBOR plus 155 basis points. The weighted average interest rate on outstanding borrowings for the $200.0 million revolving line of credit was 2.44% and 2.51% at June 30, 2004 and 2003, respectively. The weighted average interest rate on outstanding borrowings for the $100.0 million senior notes was 2.71% and 2.66% at June 30, 2004 and 2003, respectively. These interest rates are partially hedged by the interest rate swap contracts entered into by the Company as described in Note 4. The senior notes require interest only payments during their term with principal due at maturity. Both debt facilities contain financial and other covenant requirements, including specific fixed charge and leverage ratios, as well as minimum levels of net worth.
 
4. Financial Instruments
 
  In order to mitigate a portion of the market risk on variable rate debt, the Company has entered into interest rate swap contracts with major financial institutions. Under terms of these contracts the Company receives a three-month LIBOR-based variable interest rate and pays a fixed interest rate on notional amounts totaling $100.0 million. As a result of these contracts, the Company will pay a fixed interest rate of approximately 3.68% on $100.0 million of the variable rate debt described in Note 3. The interest rate received on the contracts is determined based on LIBOR near the end of each calendar quarter, which is consistent with the variable rate determination on the underlying debt. Terms of the swaps are as follows:
 
  Notional AmountTermination DateFixed Rate
$20 million July 2006 3.24% (1)  
$20 million March 20083.54%
$15 million March 20083.55%
$25 million March 20083.54%
$20 million March 20104.55% (1)
 
   (1) The two interest rate swap contracts noted above were entered into during June 2004.
 
 
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CHURCHILL DOWNS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the six months ended June 30, 2004 and 2003 (Unaudited)
($ in thousands, except per share data)

  The Company has designated its interest rate swaps as cash flow hedges of anticipated interest payments under its variable rate agreements. Gains and losses on these swaps that are recorded in other comprehensive earnings will be reclassified into net earnings as interest expense in the periods in which the related variable interest is paid.

  Comprehensive earnings consist of the following:
Six months ended June 30,
20042003  
Net Earnings $ 15,682 $ 16,529 
Cash flow hedging (net of related tax provision 
   of $417 in 2004 and tax benefit of $885 in 2003) 610 (1,295)
Comprehensive earnings $ 16,292 $ 15,234 
 
Three months ended June 30,
  2004 2003 
Net Earnings $ 27,428 $ 28,025 
Cash flow hedging (net of related tax provision 
   of $902 in 2004 and tax benefit of $530 in 2003) 1,320 (763)
Comprehensive earnings $ 28,748 $ 27,262 
5.Earnings Per Share
 
The following is a reconciliation of the numerator and denominator of the earnings per common share computations:
 
Six months ended
June 30,		Three months ended
June 30,
2004200320042003
 
Numerator for basic and diluted earnings per share: $15,682 $16,529 $27,428 $28,025 
 
 
Denominator for weighted average shares of common     
      stock outstanding per share:     
           Basic 13,272 13,167 13,287 13,174 
           Plus dilutive effect of stock options 188 200 186 206 
 
           Diluted 13,460 13,367 13,473 13,380 
 
Earnings per common share:     
           Basic $1.18 $1.26 $2.06 $2.13 
           Diluted $1.17 $1.24 $2.04 $2.09 
 
  Options to purchase 145 and 178 shares for the periods ended June 30, 2004 and 2003, respectively, were not included in the computation of earnings per common share assuming dilution because the options’ exercise prices were greater than the average market price of the common shares.
 
6. Goodwill and Other Intangible Assets
 
There has been no change to the carrying value of the Company’s net goodwill since January 1, 2002. Net goodwill at June 30, 2004 and 2003 for Kentucky Operations, Calder Race Course and CDSN was $4.8 million, $36.4 million and $11.0 million, respectively.
 
 
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CHURCHILL DOWNS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the six months ended June 30, 2004 and 2003 (Unaudited)
($ in thousands, except per share data)

  The Company’s other intangible assets are comprised of the following:

  As of
June 30, 2004		 As of
December 31, 2003		 As of
June 30, 2003
Illinois Horse Race Equity fund$3,307  $3,307  $3,307 
Indiana racing license 2,085    2,085    2,085 
Other various intangible assets 4,093    4,133    3,790 
  9,485    9,525    9,182 
Accumulated amortization(2,307) (2,061) (1,869)
  $7,178    $7,464    $7,313 
 
  Amortization expense for other intangibles of approximately $246 and $182 for the six months ended June 30, 2004 and 2003, respectively, are classified in operating expenses. Other intangible assets, which are being amortized, are recorded at approximately $3.9 million and $4.0 million at June 30, 2004 and 2003, respectively, which are net of accumulated amortization of $2.3 million and $1.9 million at June 30, 2004 and 2003, respectively.

  The Illinois Horse Race Equity fund intangible represents a future right to participate in a state provided subsidy, and has not been amortized since the Arlington Park merger.

  Future estimated aggregate amortization expense on other intangible assets for each of the five fiscal years are as follows:

 Estimated
Amortization Expense
2004$472 
2005$472 
2006$472 
2007$472 
2008$437 
 
7. Segment Information

  The Company has determined that it currently operates in the following seven segments: (1) Kentucky Operations, including Churchill Downs racetrack, Louisville Trackside and Ellis Park racetrack and its on-site simulcast facility; (2) Hollywood Park racetrack and its on-site simulcast facility; (3) Calder Race Course; (4) Arlington Park and its eight off-track betting facilities ("OTBs"); (5) Hoosier Park racetrack and its on-site simulcast facility and three Indiana OTBs; (6) CDSN, the simulcast product provider of the Company; and (7) other investments, including Churchill Downs Simulcast Productions and the Company's various equity interests which are not material. Eliminations include the elimination of management fees and other intersegment transactions, primarily between CDSN and the racetracks.

  The accounting policies of the segments are the same as those described in the "Summary of Significant Accounting Policies" in the Company's Form 10-K, as amended by Form 10-K/A, for the year ended December 31, 2003. The Company uses revenues and EBITDA (defined as earnings before interest, taxes, depreciation and amortization) as key performance measures of results of operations for purposes of evaluating performance internally. Furthermore, management believes that the use of these measures enables management and investors to evaluate and compare from period to period, our operating performance in a meaningful and consistent manner. Because the Company uses EBITDA as a key performance measure of financial performance, the Company is required by accounting principles generally accepted in the United States of America to provide the information in this footnote concerning EBITDA. However, these measures should not be considered as an alternative to, or more meaningful than, net earnings (as determined in accordance with accounting principles generally accepted in the United States of America) as a measure of our operating results or cash flows (as determined in accordance with accounting principles generally accepted in the United States of America) or as a measure of our liquidity.
 
 
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CHURCHILL DOWNS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the six months ended June 30, 2004 and 2003 (Unaudited)
($ in thousands, except per share data)

  The table below presents information about reported segments for the six months ended June 30, 2004 and 2003:

Six Months Ended June 30,Three Months Ended June 30,
20042003 20042003
Net revenues from external customers:          
  Kentucky Operations  $ 61,625 $ 57,852 $ 56,892 $ 52,954 
  Hollywood Park   45,527  44,234  40,428  39,265 
  Arlington Park   40,062  37,996  24,007  24,072 
  Calder Race Course   23,675  24,003  22,160  22,876 
  Hoosier Park   20,603  20,451  11,193  11,021 
  CDSN   36,043  37,988  35,164  37,145 
      Total racing operations   227,535  222,524  189,844  187,333 
  Other investments   238  1,253  200  725 
  Corporate revenues   1,024  941  1,024  941 
   $ 228,797 $ 224,718 $ 191,068 $ 188,999 
Intercompany net revenues:  
  Kentucky Operations  $ 15,559 $ 16,229 $ 15,559 $ 16,229 
  Hollywood Park   6,918  6,906  6,914  6,902 
  Arlington Park   2,200  2,732  2,200  2,732 
  Calder Race Course   3,276  3,585  2,992  3,337 
  Hoosier Park   50  37  43  33 
      Total racing operations   28,003  29,489  27,708  29,233 
  Other investments   845  899  700  755 
  Corporate expenses   544  552  266  269 
  Eliminations   (29,392) (30,940) (28,674) (30,257)
     $ -  $-  $-  $-  
EBITDA:  
  Kentucky Operations  $ 23,927 $ 23,270 $ 30,103 $ 28,417 
  Hollywood Park   5,447  7,339  8,636  9,554 
  Arlington Park   3,344  958  2,940  2,427 
  Calder Race Course   808  1,462  3,460  4,129 
  Hoosier Park   1,228  1,219  554  545 
  CDSN   8,613  9,363  8,746  9,144 
      Total racing operations   43,367  43,611  54,439  54,216 
  Other investments   647  466  632  431 
  Corporate expenses   (3,794) (2,908) (1,707) (1,081)
  Eliminations   (6) -   (6) -  
   $ 40,214 $ 41,169 $ 53,358 $ 53,566 
 
 
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CHURCHILL DOWNS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for the six months ended June 30, 2004 and 2003 (Unaudited)
($ in thousands, except per share data)

  Following is a reconciliation of total EBITDA to net earnings:

Six Months Ended June 30,Three Months Ended June 30,
2004 200320042003
Total EBITDA  $ 40,214 $ 41,169 $ 53,358 $ 53,566 
Depreciation and amortization   (10,819) (10,171) (5,457) (5,109)
Interest income (expense), net   (2,357) (3,171) (1,089) (1,406)
Provision for income taxes   (11,356) (11,298) (19,384) (19,026)
Net earnings  $ 15,682 $ 16,529 $ 27,428 $ 28,025 
 
  The table below presents total asset information about reported segments:
 
  Total assets:
As of
June 30, 2004		As of
December 31, 2003		As of
June 30, 2003
Kentucky Operations  $ 475,338 $ 438,608 $ 416,327 
Hollywood Park   174,077  148,379  175,619 
Arlington Park   88,634  83,725  83,640 
Calder Race Course   88,164  88,675  86,438 
Hoosier Park   37,911  34,940  35,444 
CDSN   11,018  11,018  11,018 
Other investments   101,929  90,735  89,558 
    977,071  896,080  898,044 
Eliminations   (400,075) (390,574) (383,176)
   $ 576,996 $ 505,506 $ 514,868 
 
 
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Information set forth in this discussion and analysis contains 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. The reader is cautioned that such forward-looking statements are based on information available at the time and/or management’s good faith belief with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Forward-looking statements speak only as of the date the statement was made. We assume no obligation to update forward-looking information to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information. 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 effect of global economic conditions; the effect (including possible increases in the cost of doing business) resulting from future war and terrorist activities or political uncertainties; the economic environment; the impact of increasing insurance costs; the impact of interest rate fluctuations; 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; the impact of live racing day competition with other Florida and California racetracks within those respective markets; costs associated with our efforts in support of alternative gaming initiatives; costs associated with our Customer Relationship Management initiatives; 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 Indiana racetrack and its wagering facilities near our 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; our ability to execute our acquisition strategy and to complete or successfully operate planned expansion projects; our ability to adequately integrate acquired businesses; market reaction to our expansion projects; any business disruption associated with our facility renovations; 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, as amended by Form 10-K/A, for the year ended December 31, 2003, for further information.

Overview

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 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, and Ellis Park Race Course, Inc., a thoroughbred racing operation in Henderson, Kentucky (collectively referred to as “Kentucky Operations”). We also own and operate Hollywood Park, a thoroughbred racing operation in Inglewood, California; Arlington Park, a thoroughbred racing operation in Arlington Heights, Illinois; and Calder Race Course, a thoroughbred racing operation in Miami, Florida. 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 twelve simulcast wagering facilities in Kentucky, Indiana and Illinois, as well as at our six racetracks.

The Churchill Downs Simulcast Network (“CDSN”) provides the principal oversight of our interstate and international simulcast and wagering opportunities, as well as the marketing, sales, operations and data support efforts related to the Company-owned racing content.

 
 
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Our revenues and earnings are significantly influenced by our racing calendar. Therefore, revenues and operating results for any interim quarter are not generally indicative of the revenues and operating results for the year, and may not be comparable with results for the corresponding period of the previous year. We historically have very few live racing days during the first quarter of each year, with a majority of our live racing occurring in the second, third and fourth quarters, including the running of the Kentucky Derby and Kentucky Oaks in the second quarter.

Our pari-mutuel revenues include commissions on pari-mutuel wagering at our racetracks and off-track betting facilities (net of state pari-mutuel taxes), plus simulcast host fees from other wagering sites and source market fees generated from contracts with our in-home wagering providers. In addition to the commissions earned on pari-mutuel wagering, we earn pari-mutuel related streams of revenues from sources that are not related to wagering. These other revenues are primarily derived from statutory racing regulations in some of the states where our facilities are located and can fluctuate materially year-to-year. Non-wagering revenues are primarily generated from admissions, sponsorships, licensing rights and broadcast fees, Indiana riverboat admissions subsidy, concessions, lease income and other sources.

Greater than 70% of our annual revenues are generated by pari-mutuel wagering on live and simulcast racing content and in-home wagering. Live racing handle includes patron wagers made on live races at our live tracks and also wagers made on imported simulcast signals by patrons at our racetracks during our live meets. Import simulcasting handle includes wagers on imported signals at our racetracks when the respective tracks are not conducting live race meets and at our off-track betting facilities (“OTBs”) throughout the year. Export handle includes all patron wagers made on our live racing signals sent to other tracks, OTBs and in-home wagering. In-home wagering, or account wagering, consist of patron wagers through an advance deposit account.

Legislative and Regulatory Changes

During the first half of 2004, the Indiana Horse Racing Commission (“IHRC”) considered whether to prevent any Indiana betting facility from accepting wagers on thoroughbred horse races run at Kentucky racetracks, including Churchill Downs racetrack and Ellis Park, unless all Indiana betting facilities were offered the opportunity to accept wagers on such races. Pursuant to its statutory right under the Federal Interstate Horseracing Act of 1978, the Kentucky Horsemen’s Benevolent and Protective Association withheld its consent and thereby prevented the Evansville OTB and Clarksville OTB, both owned by Indiana Downs, from accepting wagers on thoroughbred horse races run at Kentucky racetracks. To assist the IHRC in reaching a determination on the matter, the IHRC asked the Indiana Department of Gaming Research (“IDGR”) to estimate the impact of simulcast wagering on live horse racing in Kentucky and Indiana. The IDGR issued a report in June 2004, which concluded the racing industry in both states would lose money if none of Indiana’s pari-mutuel facilities received Kentucky’s racing signals. As a result, at its July 1, 2004 meeting the IHRC decided not to ban Kentucky simulcast signals at Indiana racetracks. Indiana Downs has requested the IHRC to reconsider its decision.

In Florida, Yes for Local Control (formerly known as The Floridians for a Level Playing Field), a coalition of pari-mutuel facilities, including Calder Race Course, has successfully gathered the necessary petition signatures to place a question on the ballot for the November 2004 general election to allow Dade and Broward counties to hold a referendum on the installation of slot machines at existing pari-mutuel sites in those respective counties. The Florida Supreme Court upheld the constitutionality of this initiative in May, 2004. The ballot question was officially certified as initiative number 4 by the Florida Secretary of State on July 21, 2004. On July 23, 2004, a suit was filed against the Florida Division of Elections challenging the format of the initiative petition. Calder Race Course is committed to fund a pro-rata share of the initiative costs.

In California, Hollywood Park is part of a coalition of racetracks and card clubs behind the Gaming Revenue Act of 2004, which is slated for the November 2004 ballot. If passed, this initiative would direct the governor to re-negotiate all existing compacts with Native American tribes in California. If the tribes decline to renegotiate the existing compacts, then five racetracks, including Hollywood Park, and 11 card clubs would be allowed to operate electronic gaming devices. The California Secretary of State certified the initiative, titled Proposition 68, for the ballot on June 2, 2004. Two lawsuits filed to challenge the constitutionality of the initiative have now been dismissed. However, the initiative faces opposition from Governor Schwarzenegger and numerous Indian tribes. Gov. Schwarzenegger recently signed new state compacts with five Native American tribes estimated to provide over $1 billion to the state budget while allowing tribes to expand their slot operations.


 
 
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In addition to Proposition 68 noted above, Proposition 70 also known as The Indian Gaming Fair-Share Revenue Act of 2004, will be on the November ballot. Proposition 70 would permit an unlimited expansion of Native American gaming and call for tribes to pay an 8.8% tax on gaming revenue. Proposition 70 has been endorsed by members of the California Nations Indian Gaming Association. However, the initiative also faces opposition from Governor Schwarzenegger. If both Proposition 68 and Proposition 70 pass, then the proposition with the most votes would become effective.

Also in California, legislation recently passed which is estimated to generate approximately $10 million annually from a .5% increase in the commission or take out rate on exotic wagers placed on California races. The revenue will be used to pay the cost of workers compensation insurance for backstretch workers and to provide a starter participation bonus. Governor Schwarzenegger signed AB1835 on May 14, 2004.

In 1999, the state of Illinois enacted legislation that provides for pari-mutuel tax relief and related tax credits for Illinois racetracks, as well as legislation providing for subsidies to Illinois horse racing tracks from revenues generated by the relocation of a license to operate a riverboat casino gaming facility. Arlington Park’s share of subsidies from the relocation of the license under the 1999 legislation would range from $4.6 million to $8.0 million annually, based on publicly available sources. In the event Arlington Park receives such subsidies, additional shares of common stock would be issued to Duchossois Industries, Inc., to a maximum of 1.25 million shares, under our merger agreement with Arlington Park. In January 2001, the Illinois Gaming Board (“IGB”) denied a license application of Emerald Casino, Inc. to relocate the license to operate the Rosemont casino. During 2002, Emerald Casino, Inc. filed for bankruptcy and was attempting to sell its license rights subject to the approval of the IGB and the bankruptcy court. In April 2004, the IGB conducted an auction of the license and awarded that license to Isle Capri Casinos, Inc., which announced plans to locate the license to operate in Rosemont, Illinois. Both the Governor of Illinois and the Attorney General of Illinois have convened investigations of the award by the IGB. The date for final approval by the bankruptcy court of the auction and issuance of the license by the IGB is not known at this time.

As anticipated, bills were filed in the 2004 session of the Illinois legislature to eliminate the statutory right of Arlington Park and the other Illinois racetracks to recapture amounts from their purse accounts. However none of those bills advanced during the session. Since 2000, the Illinois General Assembly has appropriated money to reimburse each racetrack’s purse account for the amounts not recaptured from horsemen through reductions in future purses. However, the appropriation was vetoed by Illinois’s governor during 2002 and the General Assembly did not make the appropriations in 2003. Illinois horsemen unsuccessfully petitioned the Illinois Racing Board (“IRB”) to prevent the tracks from recapturing purse amounts in any year where Illinois does not appropriate funds for reimbursement. Illinois horsemen filed a lawsuit against the IRB and the Illinois racetracks, including Arlington Park, challenging the recapture of purse account amounts and seeking reimbursement for the amounts recaptured, and the lawsuit was dismissed in favor of the Illinois racetracks during April 2004. The case was dismissed during July 2004, and plaintiffs have until August 2004 in which to file their appeal. Additionally, Illinois horsemen have filed a new lawsuit challenging the 2004 recapture amount. We have elected to continue to recapture amounts from purses due to horsemen while the litigation is pending.

In Kentucky, racetracks with on-track average daily handle of $1.2 million or more pay an excise tax equal to 3.5% of on-track handle while tracks with on-track average daily handle that does not meet the $1.2 million threshold pay an excise tax of 1.5% of on-track handle. To mitigate the disparity of treatment between larger tracks such as Churchill Downs and other Kentucky racetracks we successfully pursued legislation creating an excise tax credit for racetracks as part of the 2002-2004 state budget. The measure resulted in a $12,000 credit against our excise tax liability for each day of live racing starting July 1, 2003 and ending June 30, 2004. However, average daily wagering at Churchill Downs racetrack fell below the $1.2 million threshold for the state’s fiscal year ended June 30, 2004, which resulted in a drop in our excise tax rate from 3.5% to 1.5% for the year. As a result, the excise tax credit did not apply to Churchill Downs racetrack and a refund of tax payments has been requested of the Kentucky Revenue Cabinet.

We are currently pursuing the excise tax credit in the 2004-2006 state budget but due to revenue shortfalls in Kentucky, it is not anticipated that the excise tax credit will be included in the 2004-2006 Kentucky state budget. The Kentucky General Assembly adjourned in April 2004 without passing a budget. The future status of the excise tax credit will not be determined until a final budget is approved.


 
 
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Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our most significant estimates relate to the valuation of property and equipment, receivables, goodwill and other intangible assets, which may be significantly affected by changes in the regulatory environment in which the company operates, and to the aggregate costs for self-insured liability and worker’s compensation claims. Our significant accounting policies are described in Note 1 to the consolidated financial statements included in Item 8 of the Company’s Form 10-K, as amended by Form 10-K/A for the year ended December 31, 2003.

Our business can be impacted positively and negatively by legislative and regulatory changes and from alternative gaming competition. A significant negative impact from these activities could result in a significant impairment of our property and equipment and/or our goodwill and intangible assets in accordance with generally accepted accounting standards.

For our business insurance renewals in 2003 and 2002, we assumed more risk than in the prior years, primarily through higher retentions and higher maximum losses for stop-loss insurance for certain coverages. Our March 1, 2004 business insurance renewals included substantially the same coverages and retentions as in previous years. Based on our historical loss experience, management does not anticipate that this increased risk assumption will materially impact our results of operations. Our ability to obtain insurance coverage at acceptable costs in future years under terms and conditions comparable to the current years is uncertain.


 
 
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RESULTS OF OPERATIONS

Pari-mutuel wagering information, including intercompany transactions, for our CDSN segment and five live racing segments including on-site simulcast facilities and separate OTBs, which are included in their respective segments, during the six months ended June 30, 2004 and 2003, is as follows ($ in thousands):
 

Kentucky
Operations 		Hollywood
Park 		Calder Race
Course 		Arlington
Park (1)		 Hoosier
Park 		CDSN
Pari-mutuel wagering:       
On-track Live 
    2004 handle $  69,342 $  54,956 $  20,951 $  17,654 $    2,634 -  
    2004 no. of days 48 51 49 35 60 -  
    2003 handle $  76,995 $  58,178 $  22,139 $  19,469 $    2,208 -  
    2003 no. of days 47 50 51 39 50 - 
 
On-track Import
    2004 handle $  15,231 $  34,156 $  40,081 $  25,379 $    5,335 -  
    2004 no. of days 48 51 49 87 60 -  
    2003 handle $  12,667 $  34,843 $  42,421 $  22,084 $    4,837 -  
    2003 no. of days 47 50 51 69 50 -   
 
Import Simulcasting 
    2004 handle $  51,157 $  96,231 -  $247,840 $  57,740 -  
    2004 no. of days 279 129 -  1,408 612 -  
    2003 handle $  54,691 $102,039 -  $220,593 $  59,616 -  
    2003 no. of days 259 130 -  1,099 620 -  
    Number of Trackside/OTBs 1 -  -  8 3 -  
 
Intrastate Export 
    2004 handle $  21,710 $  81,705 $  13,016 $  12,534 $       451 -  
    2004 no. of days 48 51 49 35 60 - 
    2003 handle $  20,892 $  83,192 $  14,715 $  14,599 $       278 -  
    2003 no. of days 47 50 51 39 50 -  
 
Interstate Export (2) 
    2004 handle -  -  -  -  $  37,128 $910,545 
    2004 no. of days -  -  -  -  60 183 
    2003 handle -  -  -  -  $  26,506 $991,099 
    2003 no. of days -  -  -  -  50 187 
 
Other Wagering 
    2004 handle $  36,537 $108,587 $  72,191 -  -  -  
    2003 handle $  33,401 $100,831 $  70,823 -  -  -  
 
Totals 
    2004 handle $193,977 $375,635 $146,239 $303,407 $103,288 $910,545 
    2003 handle $198,646 $379,083 $150,098 $276,745 $  93,445 $991,099 
 
 
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Kentucky
Operations 		Hollywood
Park 		Calder Race
Course 		Arlington
Park (1)		 Hoosier
Park 		CDSN
Pari-mutuel revenues: (3)       
  2004 Revenues 
    On-track Live $  10,711 $    8,563 $    4,157 $    3,261 $       486 -  
    On-track Import 2,805 4,368 7,157 4,604 300 -  
    Import Simulcasting 4,526 1,925 -  21,797 10,818 -  
    Intrastate Export 1,863 7,735 1,564 1,040 14 -  
    Interstate Export -  -  -  -  1,067 $  34,578 
    Other Revenue 4,757 14,503 9,845 4,338 644 -  
    Total 2004 Revenue $  24,662 $  37,094 $  22,723 $  35,040 $  13,329 $  34,578 
 
  2003 Revenues 
    On-track Live $  10,965 $    8,955 $    4,416 $    3,605 $       403 -  
    On-track Import 2,127 4,407 7,590 3,824 289 -  
    Import Simulcasting 5,745 2,250 -  20,332 11,048 -  
    Intrastate Export 1,415 7,811 1,803 1,191 8 $  36,486 
    Interstate Export -  -  -  -  764 
    Other Revenue 4,196 12,441 9,130 4,474 383 -  
    Total 2003 Revenue $  24,448 $  35,864 $  22,939 $  33,426 $  12,895 $  36,486 

(1)  

Arlington Park’s eighth OTB opened during February 2004 and the seventh OTB opened during June 2003.


(2)  

CDSN export simulcasting includes all interstate handle activity at our live racing segments except Hoosier Park.


(3)  

Pari-mutuel revenues for live racing, export simulcasting and import simulcasting include commissions from wagering (net of state pari-mutuel taxes) and simulcast host fees from other wagering sites. Other revenues include source market fees from in-home wagering and other statutory racing revenues.


Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003

Net Revenues

Net revenues during the six months ended June 30, 2004 increased $4.1 million from $224.7 million in 2003 to $228.8 million in 2004. Kentucky Operations increased $3.1 million primarily due to incremental Jockey Club luxury suite sales for Kentucky Derby and Oaks days partially offset by a decrease in pari-mutuel revenues attributable to inclement weather and reduced attendance resulting from the impact of the Churchill Downs racetrack facility renovation project, referred to as the “Master Plan” project. During January and February when there is no live racing in Illinois, the Illinois Racing Board (“IRB”) appoints a thoroughbred racetrack as the host track in Illinois. The IRB appointed Arlington Park as the host track in Illinois for 52 days during portions of January and February 2004 compared to 30 days during January 2003. Additionally, Arlington Park pari-mutuel revenues improved in 2004 as a result of the 2003 Illinois horsemen’s strike which negatively affected wagering in 2003. The decrease at Calder Race Course was primarily attributable to two fewer live race days during 2004 compared to 2003. Hollywood Park revenues increased primarily due to one additional day of live racing in 2004 compared to 2003 plus incremental source market revenues. CDSN revenues also decreased $1.9 million primarily due to fewer live race days at Arlington Park and Calder Race Course as well as the impact of inclement weather at our Kentucky Operations and Arlington Park. CDSN revenues also decreased during 2004 resulting from CDSN's unusually strong activity during 2003 compared to New York Racing Association ("NYRA") activity, which experienced poor weather conditions during 2003.
 
 
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Operating Expenses

Operating expenses increased $3.6 million from $177.5 million in 2003 to $181.1 million in 2004. Kentucky Operations increased $2.9 million primarily due to temporary facilities expense associated with our infield hospitality tent to accommodate patrons during the Kentucky Oaks and Derby days plus increased expense associated with our Personal Seats Licensing activity. Hollywood Park increased $2.0 million resulting from purse and racing related expense increases consistent with increases in pari-mutuel revenues as well as increased insurance costs and property taxes and the timing of special events costs early in the 2004 Spring Meet. CDSN expenses decreased $1.5 million consistent with decreases in pari-mutuel revenues noted above.

Gross Profit

Gross profit increased $0.5 million from $47.2 million in 2003 to $47.7 million in 2004 primarily due to incremental Jockey Club luxury suite sales and revenue growth during 2004 as discussed above.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses increased by $2.4 million from $16.8 million in 2003 to $19.2 million in 2004 primarily as a result of costs related to the California voter initiative for alternative gaming and corporate expenses related to the Customer Relationship Management (“CRM”) project.

Other Income and Expense

Interest expense decreased $0.7 million in 2004 primarily due to a first quarter 2003 expense of $0.6 million for unamortized loan issuance cost written-off as a result of the refinancing of the credit facility in April 2003.

Income Tax Provision

Our income tax provision increased $0.1 million as a result of an increase in our currently estimated effective income tax rate from 40.6% in 2003 to 42.0% in 2004 partially offset by a decrease in pre-tax earnings.

Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003

Net Revenues

Net revenues during the three months ended June 30, 2004 increased $2.1 million from $189.0 million in 2003 to $191.1 million in 2004. Kentucky Operations increased primarily due to incremental Jockey Club luxury suite sales for Kentucky Derby and Oaks days. Hollywood Park revenues increased $1.2 million due to one additional day of live racing in 2004 compared to 2003 as well as incremental source market revenues. Arlington Park pari-mutuel revenues decreased $1.0 million due to four fewer live racing days during the three months ended June 30, 2004 compared to 2003, which was partially offset by increased group sales and sponsorship revenues. Calder Race Course had a decrease of two live racing days resulting in a decrease in revenues of $1.1 million. CDSN revenues also decreased $2.0 million due to fewer live race days at Arlington Park and Calder Race Course and decreased wagering at our Kentucky Operations and Arlington Park from inclement weather. CDSN revenues also decreased during 2004 resulting from CDSN's unusually strong activity during 2003 compared to NYRA activity, which experienced poor weather conditions during 2003.

Operating Expenses

Operating expenses increased $1.6 million from $132.0 million in 2003 to $133.6 million in 2004 resulting from increased expenses of $1.8 million at our Kentucky Operations primarily due to temporary facilities expense associated with infield hospitality and other related expenses from the Master Plan project. Hollywood Park’s operating expenses increased $1.4 million resulting from one additional day of live racing, increased insurance costs and property taxes and the timing of special events costs early in the 2004 Spring Meet. Calder Race Course and Arlington Park operating expenses decreased resulting from the decreased number of live racing days as noted above.

 
 
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Gross Profit

Gross profit increased $0.5 million from $57.0 million in 2003 to $57.5 million in 2004 primarily due to the increase in revenues for the three months ended June 30, 2004 discussed above.

Selling, General and Administrative Expenses

SG&A expenses increased by $1.4 million primarily as a result of costs related to the California voter initiative for alternative gaming and corporate expenses related to the CRM project.

Other Income and Expense

Although there was an increase in our overall debt balances resulting in increased interest expense for the three months ended June 30, 2004, the increase was offset by capitalized interest related to our Master Plan project.

Income Tax Provision

Our income tax provision increased $0.4 million as a result of an increase in our currently estimated effective income tax rate from 40.4% in 2003 to 41.4% in 2004. The increase in the estimated effective income tax rate is a result of increased non-deductible legislative expenses in California and Florida.

Significant Changes in the Balance Sheet June 30, 2004 to December 31, 2003

Accounts receivable balances increased by $13.0 million in 2004 primarily due to the timing of payments received related to the 2004 live meets for Kentucky Operations, Arlington Park and Hollywood Park with increases in accounts receivable balances of $1.6 million, $5.3 million and $4.4 million, respectively. Hoosier Park also had an increase of $2.0 million due to timing of Indiana riverboat admissions subsidy collections.

Net plant and equipment increased $36.0 million primarily as a result of capital expenditures of $38.3 million related to the Master Plan project. Additional increases were due to routine capital spending at our operating units offset by depreciation of $10.6 million.

Accounts payable increased $41.6 million primarily due to the timing of payments for horsemen accounts, purses payable and other expenses related to the operation of live racing at all of our racetracks.

Accrued expenses increased $5.4 million as a result of Arlington Park, Calder Race Course and Hollywood Park live racing expenses.

Dividends payable decreased $6.6 million at June 30, 2004 due to the payment of dividends in the first quarter of 2004.

Income taxes payable increased $6.0 million representing the estimated income tax expense attributed to income generated in the six months of 2004 and the increase in our effective income tax rate.

Deferred revenue decreased $13.6 million at June 30, 2004, primarily due to the significant amount of admissions and seat revenue that was received prior to December 31, 2003 recognized as income in May 2004 for the Kentucky Derby and Oaks days.

The current portion of long-term debt decreased due to the extended maturity date on the Hoosier Park loan to November 2014. The increase in total long-term debt is primarily a result of capital spending related to the Master Plan project offset by the use of current cash flows to reduce borrowings under our revolving line of credit.

 
 
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Significant Changes in the Balance Sheet June 30, 2004 to June 30, 2003

Net plant and equipment increased $55.5 million primarily as a result of capital expenditures of $54.0 million related to the Master Plan project. Additional increases were due to routine capital spending at our operating units offset by depreciation expense of $20.7 million.

Accounts payable increased $11.6 million primarily due to timing of settlements and purse payments at Arlington Park, Calder Race Course, Kentucky Operations and Hoosier Park.

Accrued expenses increased $8.1 million primarily due to costs related to our Master Plan project and worker’s compensation accruals at Hollywood Park.

Long-term debt increase of $26.3 million is primarily a result of capital spending related to the Master Plan project and dividends paid during the period offset by the use of current cash flows to reduce borrowings under our revolving line of credit.

Liquidity and Capital Resources

Cash flows provided by operations were $55.5 million and $55.1 million for the six months ended June 30, 2004 and 2003, respectively. Cash provided by operations increased slightly as compared to 2003 consistent with results from operations offset by timing of accrued expenses related to our Master Plan project and timing of the recognition for Derby and Oaks revenues.

Cash flows used in investing activities were $47.8 million and $19.1 million for the six months ended June 30, 2004 and 2003, respectively. During the six months ended June 30, 2004 we used $36.0 million in cash for the Master Plan project. We are planning capital expenditures of approximately $97.0 million in 2004 including $74.0 million for the Master Plan project.

Cash flows provided by (used in) financing activities were $13.8 million and ($12.6) million for the six months ended June 30, 2004 and 2003, respectively, reflecting the funding of our Master Plan project and the use of cash flows from operations to minimize net borrowings on our debt facilities.

During April 2003, we refinanced our $250 million revolving loan facility to meet our needs for funding future working capital, capital improvements and potential future acquisitions. The refinancing included a new $200.0 million revolving line of credit through a syndicate of banks with a five-year term and $100.0 million in variable rate senior notes issued by us with a seven-year term, of which $140.9 million was outstanding at June 30, 2004. Both debt facilities are collateralized by substantially all of our assets. The interest rate on the bank line of credit is based upon LIBOR plus a spread of 125 to 225 basis points, determined by certain Company financial ratios. The interest rate on our senior notes is equal to LIBOR plus 155 basis points. These notes require interest only payments during their term with principal due at maturity. Both debt facilities contain financial and other covenant requirements, including specific fixed charge, leverage ratios and maximum levels of net worth. We repaid our previously existing revolving line of credit during the second quarter of 2003 with proceeds from the new facilities. Management believes cash flows from operations and borrowings under our current financing facility will be sufficient to fund our cash requirements for the year.

Recent Developments

During June 2004, it was announced that we would be the opening bidder in the bankruptcy auction of Fair Grounds Corporation’s racetrack and off-track betting assets. Our anticipated role in the auction process was included as part of Fair Grounds Corporation’s proposed plan of reorganization. The opening bid for the assets under the proposed plan of reorganization is expected to be $45 million at the auction currently scheduled for mid-August 2004. The auction and bid are subject to certain conditions and there is no assurance that we will be the successful bidder in the auction or that any agreement between the parties would be consummated.

 
 
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CHURCHILL DOWNS INCORPORATED

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At June 30, 2004, we had $140.9 million of total debt outstanding under our revolving credit facility and senior note facility, which bear interest at LIBOR based variable rates. We are exposed to market risk on variable rate debt due to potential adverse changes in the LIBOR rate. Assuming the outstanding balance on the debt facilities remains constant, a one-percentage point increase in the LIBOR rate would reduce annual pre-tax earnings, recorded fair value and cash flows by $1.4 million.

In order to mitigate a portion of the market risk associated with our variable rate debt, we entered into interest rate swap contracts with major financial institutions. Under terms of the contracts we received a LIBOR based variable interest rate and pay a fixed interest rate on notional amounts totaling $100.0 million. Assuming the June 30, 2004, notional amounts under the interest rate swap contracts remain constant, a one percentage point increase in the LIBOR rate would increase annual pre-tax earnings and cash flows by $1.0 million.

ITEM 4.CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our president and Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report, and, based on their evaluation, our CEO and CFO have concluded that these controls and procedures are effective. There were no significant changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 
 
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PART II. OTHER INFORMATION

ITEM 1.Legal Proceedings

 Not applicable

ITEM 2.Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

 Not applicable

ITEM 3.Defaults Upon Senior Securities

 Not applicable

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

 The registrant's 2004 Annual Meeting of Shareholders was held on June 17, 2004. 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:

 
Class II DirectorVotes ForVotes Withheld          
Richard L. Duchossois12,298,086 90,857   
J. David Grissom12,319,726 69,216 
Seth W. Hancock10,675,591 1,713,351 
Thomas H. Meeker12,324,099 64,844 
Susan Elizabeth Packard12,305,297 83,645 
 

A proposal (Proposal No. 2) to approve the Churchill Downs Incorporated 2004 Restricted Stock Plan was approved by a vote of the majority of the shares of the registrant's common stock represented at the meeting: 8,887,084 shares were voted in favor of the proposal; 389,084 shares were voted against; 3,033,702 shares were broker non-votes; and 79,073 shares abstained.

  A proposal (Proposal No. 3) to approve an amendment to the Churchill Downs Incorporated 2000 Employee Stock Purchase Plan to add 100,000 Shares of Common Stock by increasing the number of shares of Common Stock, no Par Value, reserved for issuance thereunder from 68,581 to 168,581 was approved by a vote of the majority of the shares of the registrant's common stock represented at the meeting: 8,918,605 shares were voted in favor of the proposal; 354,599 shares were voted against; 3,033,701 shares were broker non-votes; and 82,038 shares abstained.

 A proposal (Proposal No. 4) to approve the performance goal and the payment of compensation under non-qualified stock options granted to Thomas H. Meeker by the Compensation Committee of the Board of Directors under certain stock option agreements was approved by a vote of the majority of the shares of the registrant's common stock represented at the meeting: 8,981,148 shares were voted in favor of the proposal; 278,238 shares were voted against; 3,033,701 shares were broker non-votes; and 95,856 shares abstained.

 A proposal (Proposal No. 5) to approve the minutes of the 2003 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: 11,251,613 shares were voted in favor of the proposal; 1,115,418 shares were voted against; and 21,911 shares abstained.

 The total number of shares of common stock outstanding as of April 24, 2004, the record date of the Annual Meeting of Shareholders, was 13,283,983.

 
 
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ITEM 5.Other Information

 Not Applicable

ITEM 6.Exhibits and Reports on Form 8-K

 A.Exhibits

  

   See exhibit index.

  B. Reports on Form 8-K filed or furnished with the Securities and Exchange Commission

   (1)On June 30, 2004, Churchill Downs Incorporated furnished a Current Report on Form 8-K, under Items 7 and 9, “Financial Statements and Exhibits” and “Regulation FD Disclosure,” respectively, furnishing our press release dated June 25, 2004 announcing the registrant as the opening bidder in the bankruptcy auction for Fair Grounds Corporation’s racetrack and off-track betting assets.

   (2)On May 14, 2004, Churchill Downs Incorporated furnished a Current Report on Form 8-K, under Items 7 and 12, “Financial Statements and Exhibits” and “Results of Operations and Financial Condition,” respectively, furnishing our first quarter 2004 earnings press release conference call transcript dated May 5, 2004.

   (3)On May 10, 2004, Churchill Downs Incorporated furnished a Current Report on Form 8-K, under Items 7 and 12, “Financial Statements and Exhibits” and “Results of Operations and Financial Condition,” respectively, furnishing the reporting effect of the registrant’s classification of host fee expenses incurred on fiscal periods 2001, 2002 and 2003.

   (4)On May 5, 2004, Churchill Downs Incorporated furnished a Current Report on Form 8-K, under Item 12, “Results of Operations and Financial Condition,” furnishing our first quarter 2004 earnings release dated May 4, 2004.
 
 
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SIGNATURES

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

CHURCHILL DOWNS INCORPORATED

          August 5, 2004/s/ Thomas H. Meeker
Thomas H. Meeker
President and Chief Executive Officer
(Principal Executive Officer)


          August 5, 2004/s/ Michael E. Miller
Michael E. Miller
Executive Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)
 
 
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EXHIBIT INDEX

NumbersDescription By Reference To

10(a)Agreement Regarding Participation Agreement between Churchill Downs Management Company and Centaur Racing, LLC dated May 6, 2004

 Report on Form 10-Q for the fiscal quarter ended June 30, 2004
10(b)First Amendment to the Partnership Interest Purchase Agreement by and among Anderson Park, Inc., Churchill Downs Management Company and Centaur Racing, LLC dated May 6, 2004

 Report on Form 10-Q for the fiscal quarter ended June 30, 2004
10(c)2004A Amendment to Loan Documents among Churchill Downs Incorporated and Bank One, NA dated June 1, 2004 Report on Form 10-Q for the fiscal quarter ended June 30, 2004


10(d)Churchill Downs Incorporated 2004 Restricted Stock Plan Exhibit 4.5 to the Registrant's Registration Statement on Form S-8 dated June 22, 2004 (No. 333-116734)

10(e)Letter agreements between Churchill Downs Incorporated and Fair Grounds Corporation dated June 25, 2004 and June 29, 2004


 Report on Form 10-Q for the fiscal quarter ended June 30, 2004
31(a)Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Report on Form 10-Q for the fiscal quarter ended June 30, 2004
31(b)Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 Report on Form 10-Q for the fiscal quarter ended June 30, 2004
32Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant to Rule 13a - 14(b)) Report on Form 10-Q for the fiscal quarter ended June 30, 2004
 
 
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