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 March 31, 1998 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 May 14, 1998 was 7,516,934 shares. Page 1 of 31
CHURCHILL DOWNS INCORPORATED I N D E X PAGES PART I. FINANCIAL INFORMATION ITEM 1. Condensed Consolidated Financial Statements (Unaudited) Condensed Consolidated Balance Sheets, March 31, 1998, December 31, 1997 and March 31, 1997 3 Condensed Consolidated Statements of Operations for the three months ended March 31, 1998 and 1997 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1998 and 1997 5 Condensed Notes to Consolidated Financial Statements 6-8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-20 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk (Not Applicable) 21 PART II. OTHER INFORMATION AND SIGNATURES ITEM 1. Legal Proceedings (Not applicable) 21 ITEM 2. Changes in Securities and Use of Proceeds(Not applicable)21 ITEM 3. Defaults Upon Senior Securities(Not applicable) 21 ITEM 4. Submission of Matters to a Vote of Security Holders (Not applicable) 21 ITEM 5. Other Information (Not applicable) 21 ITEM 6. Exhibits and Reports on Form 8-K 21 Signatures 22 Exhibit Index 23 Exhibits 24-32 2
<TABLE> <CAPTION> CHURCHILL DOWNS INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) March 31 December 31 March 31 ASSETS 1998 1997 1997 <S> <C> <C> <C> Current assets: Cash and cash equivalents $11,803,389 $9,280,233 $ 7,084,056 Accounts receivable 5,925,377 7,086,889 3,918,264 Prepaid income taxes 969,185 - 870,792 Other current assets 847,493 540,489 1,180,439 ---------- ---------- --------- Total current assets 19,545,444 16,907,611 13,053,551 Other assets 5,563,557 5,778,430 3,634,018 Plant and equipment 105,348,975 104,554,196 101,086,691 Less accumulated depreciation (42,203,103) (41,391,429) (38,158,464) ----------- ----------- ----------- 63,145,872 63,162,767 62,928,227 ----------- ----------- ----------- $88,254,873 $85,848,808 $79,615,796 =========== =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $9,960,311 $5,732,783 $9,392,124 Accrued expenses 5,000,182 7,937,575 4,828,996 Dividends payable - 3,658,468 - Income taxes payable - 186,642 - Deferred revenue 13,718,956 7,344,830 11,477,348 Long-term debt, current portion 79,805 79,805 73,893 ---------- ---------- ---------- Total current liabilities 28,759,254 24,940,103 25,772,361 Long-term debt, due after one year 2,633,164 2,633,164 2,752,969 Outstanding mutuel tickets (payable after one year) 1,767,991 1,625,846 2,011,092 Deferred compensation 893,898 880,098 830,580 Deferred income taxes 2,377,100 2,377,100 2,316,600 Stockholders' equity: Preferred stock, no par value; authorized, 250,000 shares; issued, none - - - Common stock, no par value; authorized, 20 million shares, issued 7,316,934 shares, March 31, 1998 and December 31, 1997 and 7,308,526 shares, March 31, 1997 3,614,567 3,614,567 3,493,042 Retained earnings 48,273,899 49,842,930 42,504,152 Note receivable for common stock (65,000) (65,000) (65,000) ----------- ----------- ----------- 51,823,466 53,392,497 45,932,194 ----------- ----------- ----------- $88,254,873 $85,848,808 $79,615,796 =========== =========== =========== The accompanying notes are an integral part of the financial statements. </TABLE> 3
CHURCHILL DOWNS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSSES) (Unaudited) Three Months Ended March 31 1998 1997 ------------ ----------- Net revenues $15,385,151 $13,278,864 Operating expenses 15,999,128 14,484,447 ----------- ----------- Gross loss (613,977) (1,205,583) Selling, general and administrative expenses 2,155,754 1,929,840 --------- --------- Operating loss (2,769,731) (3,135,423) Other income (expense): Interest income 189,270 66,380 Interest expense (104,524) (80,216) Miscellaneous income 117,054 130,573 ---------- --------- 201,800 116,737 Loss before income tax benefit (2,567,931) (3,018,686) Federal and state income tax benefit 998,900 1,170,000 ----------- ----------- Net loss $(1,569,031) $(1,848,686) =========== =========== Basic and diluted net loss per share $ (.21) $ (.25) Basic and diluted weighted average shares outstanding 7,316,934 7,308,526 The accompanying notes are an integral part of the financial statements. 4
CHURCHILL DOWNS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended March 31 1998 1997 ------------ -------------- Cash flows from operating activities: Net loss $(1,569,031) $(1,848,686) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,159,106 1,143,522 Deferred compensation 13,800 5,369 Increase (decrease) in cash resulting from changes in operating assets and liabilities: Accounts receivable 1,161,512 1,299,972 Prepaid income taxes (969,185) (870,792) Other current assets (307,004) (501,218) Accounts payable 4,227,528 3,989,124 Accrued expenses (2,937,393) (3,192,491) Income taxes payable (186,642) (2,510,508) Deferred revenue 6,374,126 4,965,446 Other assets and liabilities 335,118 25,972 --------- --------- Net cash provided by operating activities 7,301,935 2,505,710 --------- --------- Cash flows from investing activities: Additions to plant and equipment, net (1,120,311) (1,083,468) ---------- ---------- Net cash used in investing activities (1,120,311) (1,083,468) ---------- ---------- Cash flows from financing activities: Decrease in long-term debt, net - (172,329) Dividends paid (3,658,468) (2,375,271) ---------- ---------- Net cash used in financing activities (3,658,468) (2,547,600) ---------- ---------- Net increase (decrease) in cash and cash equivalents 2,523,156 (1,125,358) Cash and cash equivalents, beginning of period 9,280,233 8,209,414 ----------- ----------- Cash and cash equivalents, end of period $11,803,389 $ 7,084,056 =========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $250,000 $92,300 Income taxes $18,000 $2,190,000 The accompanying notes are an integral part of the financial statements. 5
CHURCHILL DOWNS INCORPORATED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the three months ended March 31, 1998 and 1997 (Unaudited) 1. 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 generally accepted accounting principles 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 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, 1997 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. 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. 2. Because of the seasonal nature of the Company's business, revenues and operating results for any interim quarter are not indicative of the revenues and operating results for the year and are not necessarily comparable with results for the corresponding period of the previous year. The accompanying condensed consolidated financial statements reflect a disproportionate share of annual net earnings (loss) as the Company normally earns a substantial portion of its net earnings in the second quarter of each year during which the Kentucky Derby and Kentucky Oaks are run. The Kentucky Derby and Kentucky Oaks are run on the first weekend in May. During the three months ended March 31, 1998 and 1997, the Company conducted simulcast receiving wagering for 367 and 360 location days, respectively, which includes simulcast wagering at its Sports Spectrum site in Louisville, Kentucky for 75 days in 1998 compared to 72 days in 1997. Through its subsidiary, Hoosier Park L.P. ("Hoosier Park"), the Company conducted simulcast wagering at its racetrack in Anderson, Indiana and at three simulcast wagering facilities located in Merrillville, Ft. Wayne and Indianapolis, Indiana for a total of 292 days in 1998 compared to 288 days in 1997. Additionally, the Company conducts simulcast wagering on-track during its Churchill Downs and Hoosier Park live race meets. 3. On March 19, 1998 the Company obtained a commitment from its principal lender to increase its unsecured bank line of credit from $20 million to $50 million. The interest rate is based upon LIBOR plus 50 to 100 additional basis points which is determined by certain Company financial ratios. The line of credit expires March 19, 2000. There were no borrowings outstanding on the line of credit at March 31, 1998, December 31, 1997 or March 31, 1997. 4. Certain prior period financial statement amounts have been reclassified to conform to the current period presentation. 6
CHURCHILL DOWNS INCORPORATED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the three months ended March 31, 1998 and 1997 (continued) (Unaudited) 5. Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). Currently, there are no amounts to be included in the computation of comprehensive income of the Company that are required to be disclosed under the provisions of SFAS 130. As such, total comprehensive income and net income are the same for the three months ended March 31, 1998 and 1997, respectively. 6. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). The Company will adopt SFAS 131 during the fourth quarter of 1998 as required. 7. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and other Post-retirement Benefits" (SFAS 132). This statement revises employers' disclosures about pensions and other post-retirement plans without changing the measurement or recognition of those plans. The Company will include SFAS 132 disclosures in its 1998 annual report. 8. On March 28, 1998, the Company entered into a stock purchase agreement with TVI Corp., ("TVI") for the purchase of 100% of the stock of Racing Corporation of America ("RCA") for a purchase price of $22.0 million in a combination of cash and common stock of the Company. RCA owns and operates Ellis Park Race Course in Henderson, Kentucky, and the Kentucky Horse Center, a training facility located in Lexington, Kentucky. The sale closed on April 21, 1998 upon final approval from the Kentucky Racing Commission. As part of the transaction, TVI received 200,000 shares of the Company's common stock. The remaining balance of $17.15 million was paid from cash on hand and a draw on the Company's bank line of credit. The acquisition will be accounted for by the Company under purchase method of accounting and will be consolidated during the second quarter of 1998. The results of operations of RCA subsequent to April 20, 1998 will be included in the Company's consolidated results of operations. The purchase is not anticipated to have any material effect on the Company's earnings in 1998. 7
CHURCHILL DOWNS INCORPORATED CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the three months ended March 31, 1998 and 1997 (continued) (Unaudited) 9. The following is a reconciliation of the numerator and denominator of the basic and diluted per share computations: Three months ended March 31, 1998 1997 ------------ ------------ Loss (numerator) amounts used for basic and diluted per share computations: $(1,569,031) $(1,848,686) Basic and diluted weighted average shares (denominator) of common stock outstanding per share 7,316,934 7,308,526 Basic and diluted net loss per share $(.21) $(.25) Options to purchase 130,500 and 66,500 shares at March 31, 1998 and 1997 which equate to common stock equivalents of 12,041 and 1,919, respectively, are excluded from the computation since their effect is antidilutive because of the net loss for the periods. In addition, options to purchase 296,032 and 290,500 shares for the quarters ended March 31, 1998 and 1997 were not included in the computation of loss per share common share-assuming dilution because the options' exercise prices were greater than the average market price of the common shares. 8
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS This discussion and analysis includes a forecast of future results of operations. Such a forecast is a "forward-looking statement" under the federal securities laws. Actual results could differ materially from this forecast and there can be no assurance that such forecast of future results will be achieved. Important factors that could cause actual results to differ materially from the presently estimated amounts include: the continued ability of the Company to effectively compete for the country's top horses and trainers necessary to field high-quality horse racing; the continued ability of the Company to grow its share of the interstate simulcast market; a substantial change in allocation of live racing days; the impact of competition from alternative gaming ( including riverboat casinos and lotteries) and other sports and entertainment options in those markets in which the Company operates; a decrease in riverboat admissions revenue from the Company's Indiana operations; and the Company's success in its pursuit of strategic initiatives designed to attract new patrons and generate additional revenue for purses and capital investment. The Company primarily conducts pari-mutuel wagering on Thoroughbred and Standardbred horse racing at its facilities in Kentucky and Indiana. The Company owns and operates Churchill Downs racetrack in Louisville, Kentucky ("Churchill Downs"). Churchill Downs has conducted Thoroughbred racing continuously since 1875, and is internationally known as home of the Kentucky Derby. The Company is also majority owner and operator of Hoosier Park in Anderson, Indiana, which conducts Thoroughbred, Quarter Horse and Standardbred horse racing. The Company conducts simulcast wagering on horse racing year-round at its four Churchill Downs Sports Spectrum facilities ("Sports Spectrum") in Kentucky and Indiana, as well as its racetracks. 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 and the Kentucky Oaks are run. The Kentucky Derby and the Kentucky Oaks are run on the first weekend in May. The Company's primary sources of income are commissions and fees earned from pari-mutuel wagering on live and simulcast horse races. Other sources of income include admissions and seating, concession commissions (primarily for the sale of food and beverages), riverboat admission tax supplement, license, rights and broadcast fees and sponsorship revenues. 9
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Kentucky's racetracks, including Churchill Downs and Ellis Park Race Course ("Ellis Park"), which was acquired by the Company during the second quarter of 1998, are subject to the licensing and regulation of the Kentucky Racing Commission ("KRC"), which consists of 11 members appointed by the governor of Kentucky. Licenses to conduct live Thoroughbred race meetings and to participate in simulcasting are approved annually by the KRC based upon applications submitted by the racetracks in Kentucky. Although to some extent Churchill Downs and Ellis Park compete with other racetracks in Kentucky for the awarding of racing dates, the KRC is required by state law to consider and seek to preserve each racetrack's usual and customary live racing dates. Generally, there is no substantial change from year to year in the racing dates awarded to each racetrack. Churchill Downs conducted live racing on 77 days during the year ended December 31, 1997. For 1998, Churchill Downs has received a license to conduct live racing for a total of 71 racing days on approximately the same dates as the prior year's Spring and Fall race meetings. For 1998, Ellis Park has received a license to conduct live racing for a total of 55 racing days. The total number of days on which Churchill Downs and Ellis Park conduct live racing fluctuates annually according to the calendar year. A substantial change in the allocation of live racing days at Churchill Downs or Ellis Park could impact the Company's operations and earnings in future years. The purchase of Ellis Park is not anticipated to have any material effect on earnings in 1998. Churchill Downs will host Breeders' Cup Day on November 7, 1998. Breeders' Cup Day is sponsored by Breeders' Cup Limited, a tax-exempt organization chartered to promote Thoroughbred racing and breeding. The Breeders' Cup Day races are held annually, featuring $12 million in purses, for the purpose of determining Thoroughbred champions in seven different events. Racetracks across the United States compete for the privilege of hosting the Breeders' Cup Day races each year and the 1998 Breeders' Cup will be the Company's fourth time hosting this event, the most of any racetrack. The Breeders' Cup Day races were held in California in November 1997. Hosting the event in 1998 is expected to have a positive impact on the Company's 1998 results. In Indiana, licenses to conduct live Standardbred and Thoroughbred race meetings, including Quarter Horse races, and to participate in simulcasting are approved annually by the Indiana Horse Racing Commission ("IHRC"), which consists of 5 members appointed by the governor of Indiana. Licenses are approved annually by the IHRC based upon applications submitted by the Company. Currently, the Company is the only facility in Indiana licensed to conduct live Standardbred, Quarter Horse or Thoroughbred racing and to participate in simulcasting. In 1997, the Company conducted 142 days of live racing, including 85 days of Standardbred racing and 57 days of Thoroughbred racing. Quarter Horse races were also conducted during some Thoroughbred race days. The Company has received a license to conduct live racing in 1998 for a total of 152 racing days, including 94 days of Standardbred racing, and 58 days of Thoroughbred racing (which also includes Quarter Horse races). A substantial change in the allocation of live racing days at Hoosier Park could impact the Company's operations and earnings in future years. 10
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The Company employs approximately 340 full-time employees. Due to the seasonal nature of the Company's live racing business, the number of seasonal and part-time persons employed will vary throughout the year, with peak employment occurring Kentucky Derby week when the Company employs as many as 2,600 persons. During 1997, average employment per pay period was approximately 900 individuals. The Company generally does not directly compete with other racetracks or simulcast facilities for patrons due to geographic separation of such facilities. However, the Company competes with other sports, entertainment and gaming options, including riverboat casinos and lotteries, for patrons for both live racing and simulcasting. The Company attempts to attract patrons by providing the highest quality racing products in attractive entertainment facilities with well-priced, appealing concession services. The Company is the premier racetrack in Kentucky for both live racing and simulcasting, based upon total handle and attendance, and the only facility in Indiana providing live and simulcast racing. The development of riverboat gaming facilities began in Indiana pursuant to authorizing legislation passed by the state of Indiana in 1993. Illinois had previously authorized riverboat gaming. There are currently four riverboat casinos operating on the Ohio River along Kentucky's border -- two in the southeastern Indiana cities of Lawrenceburg and Rising Sun, one in southwestern Indiana in Evansville and one at Metropolis, Illinois. Direct competition with these riverboats has negatively impacted wagering at Churchill Downs and other racetracks in western and northern Kentucky. However, Churchill Downs reversed this trend in 1997 with the increase in attendance and wagering experienced during its 1997 Spring and Fall Meets, due primarily to an aggressive on-track marketing program, and further expansion of interstate simulcasting. One, and possibly two, additional riverboats are anticipated to open along the Indiana shore of the Ohio River. In May 1996, the Indiana Gaming Commission ("IGA")awarded a preliminary license to RDI/Caesars World to operate the world's largest riverboat casino in Harrison County, Indiana, just 10 miles from Louisville. A construction permit was issued to RDI/Caesars World by the U.S. Army Corps of Engineers ("Corps") in February 1998, and they have announced that the riverboat will open in the fall of 1998. However, the U.S. Environmental Protection Agency ("EPA") has conducted a separate review of the Corps' decision, and issued a letter critical of some aspects of the Corps' decision-making process. Also, the environmental groups have filed a lawsuit in U.S. District Court for the western district of Kentucky challenging the Corps' decision to issue a construction permit to RDI/Caesars World ("environmental litigation"). It is not known whether the EPA's letter or the environmental litigation will result in further delays for the project. The IGA voted in May 1998 to consider in September 1998 whether to grant a license to open a fifth Indiana riverboat along the Ohio River in either Crawford County or Switzerland County, within 30 or 70 miles, respectively, of Louisville. Prior to the vote in May, the IGA had voted to postpone indefinitely the granting of a fifth license. 11
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The full impact of riverboat casinos on Kentucky racing cannot be accurately determined until all riverboats are open and the markets are fully matured. Studies project that Churchill Downs could experience a material adverse impact on its wagering and attendance in the Louisville market when the RDI/Caesars World riverboat is open and mature. These same studies projected similar declines in western and northern Kentucky but recent experience at Ellis Park and Turfway Park indicates the impact may not be as severe as these studies projected. In addition to those riverboats operating along the Ohio River, five riverboat casinos have opened along the Indiana shore of Lake Michigan near the Company's Sports Spectrum in Merrillville, Indiana. The Company's pari-mutuel wagering activities at the Merrillville facility have been adversely impacted by the opening of these Lake Michigan riverboats. Additionally, the Potawatomi Indian Tribe has expressed an interest in establishing a land-based casino in northeastern Indiana and they are attempting to negotiate a compact with the state of Indiana. At this time, proposed changes to the Indian Gaming Regulatory Act could have an impact on compact negotiations between the Potawatomi Tribe and the state of Indiana. The Company continues to anticipate that development of such an Indian casino will negatively impact pari-mutuel wagering activities at its Indiana facilities. However, the extent of the impact is unknown at this time due, in part, to the uncertain geographic distances between the Company's operations and the potential casino sites. The Company continues to pursue legislation to allow video lottery terminals at its racetrack facilities in Kentucky and Indiana. The integration of alternative gaming products is one of four core business strategies developed by the Company to position itself to compete in this changing environment. Implementing these strategies, the Company has successfully grown its live racing product by strengthening its flagship operations, increasing its share of the interstate simulcast market, and geographically expanding its racing operations in Kentucky and into Indiana. Alternative gaming in the form of video lottery terminals and slot machines should enable the Company to more effectively compete with Indiana riverboat casinos, and provide new revenue for purse money and capital investment. Currently, the Company is working with members of the Kentucky horse industry to establish a consensus for a plan to operate video lottery terminals exclusively at Kentucky's racetracks. The horse industry in Indiana presently receives $.65 per $3 admission to riverboats in the state to compensate for the effect of riverboat competition. Riverboat admissions revenue from the Company's Indiana operations increased $1.6 million as a result of the opening of additional riverboats along Lake Michigan since March 31, 1997. The net increase in riverboat admissions revenue, after required purse and marketing expense increases of approximately $1.0 million, is $.6 million. Legislation challenging the allocation of the $.65 subsidy was introduced to the Senate Finance Committee in the recent session of the Indiana General Assembly, but the bill did not pass out of the committee. A change in Hoosier Park's share of the tax would significantly impact funding for operating expenditures and would in all likelihood reemphasize the need for the integration of alternative gaming products at the racetrack in order for it to effectively compete with riverboat casinos. 12
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The Company owned and operated two live racing facilities and four simulcast wagering facilities during the three month period ended March 31, 1998. There was no live racing conducted during the three month periods ended March 31, 1998 and 1997. The chart below summarizes the results of these operations. <TABLE> <CAPTION> KENTUCKY INDIANA ---------------------------------------- ------------------------------------ Three Months Three Months Three Months Three Months Ended Ended Ended Ended March 31 March 31 Increase March 31 March 31 Increase 1998 1997 (Decrease) 1998 1997 (Decrease) ------------ ------------ -------- ----------- ------------ --------- Intrastate Simulcast Receiving <S> <C> <C> <C> <C> <C> <C> Number of Race Days 58 55 3 - - - Handle $12,269,151 $12,713,530 -3% - - - Average Daily Handle $211,537 $231,155 -8% - - - Interstate Simulcast Receiving* Number of Race Days 75 72 3 292 288 4 Handle $33,967,297 $30,535,383 11% $33,536,353 $32,189,879 4% Average Daily Handle $452,897 $424,103 7% $114,851 $111,770 3% Total handle $46,236,448 $43,248,913 7% $33,536,353 $32,189,879 4% Total average daily handle $347,642 $340,543 2% $114,851 $111,770 3% <FN> * The Company's Indiana operations include four separate simulcast wagering facilities. </FN> </TABLE> Total handle in Kentucky and Indiana increased $3.0 million (7%) and $1.3 million (4%), respectively, primarily as a result of conducting 3 and 4 additional days, respectively, of interstate simulcast receiving wagering at the Louisville and Indiana Sports Spectrums during the quarter ended March 31, 1998. 13
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 TO 1997 REVENUES Net revenues during the three months ended March 31, 1998 increased approximately $2.1 million (16%). Pari-mutuel revenues increased $.5 million primarily as a result of increased interstate receiving revenues generated from the 3 and 4 additional days of wagering conducted at the Louisville and Indiana Sports Spectrums, respectively, during the first quarter of 1998 versus 1997. The net increase in riverboat admissions revenue from the Company's Indiana operations was $.6 million as a result of the opening of two additional riverboats along Lake Michigan since March 31, 1997. The riverboat admissions revenue increase of $1.6 million was partially offset by increases of $1.0 million of required purse and marketing expenses associated with the riverboat admission subsidy which are recorded as operating expenses by the Company. Following is a summary of Net Revenues: <TABLE> <CAPTION> NET REVENUE SUMMARY ---------------------------------------------------------------------- Three Months % to Three Months % to 1998 vs 1997 Ended Total Ended Total $ % March 31, 1998 Revenue March 31, 1997 Revenue Change Change -------------- ------- --------------- ------- ------ ------ <S> <C> <C> <C> <C> <C> <C> Pari-Mutuel Revenue Intrastate Receiving $1,134,465 7% $1,168,309 9% $(33,844) -3% Interstate Receiving 9,319,267 61 8,795,980 66 523,287 6 $10,453,732 68% $9,964,289 75% $489,443 5% Riverboat Admission, Promotion & Purse Revenue 3,810,250 25% 2,181,925 17% 1,628,325 75% Admission & Seat Revenue 178,594 1 259,375 2 (80,781) -31 License, Rights, Broadcast & Sponsorship Fees 120,408 1 50,733 - 69,675 137 Concession Commission 122,950 1 159,686 1 (36,736) -23 Program Revenue 478,888 3 485,262 4 (6,374) -1 Other 220,329 1 177,594 1 42,735 24 ------- - ------- - ------ -- $15,385,151 100% $13,278,864 100% $2,106,287 16% =========== === =========== === ========== == </TABLE> 14
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) OPERATING EXPENSES Total operating expenses increased $1.5 million (10%) during the quarter ended March 31, 1998. The gross loss decreased $.6 million (49%) during the same period. Purse expense increased $.9 million (21%) with riverboat purses contributing $.8 million (65%) to the total increase. In Kentucky and Indiana, all other purse expense varies directly with pari-mutuel revenues and is calculated as a percentage of the related revenue and may change from year to year pursuant to contract or statute. Accordingly, intrastate and interstate simulcast purses reflect changes in direct proportion to changes in pari-mutuel revenues for the same categories. The increase in interstate simulcast receiving of $162,000 is directly related to the increase in net revenue for the same category. Wages and contract labor expenses increased $106,000 (3%). Salary increases resulting from increased business activity and general cost of living increases account for a significant portion of the variance. Simulcast host fees increased $116,000 as a result of the increase in handle on interstate simulcast receiving wagering at the Louisville and Indiana Sports Spectrums. Insurance, taxes and license fees increased $256,000 in 1998 due primarily to higher property taxes and use taxes. Maintenance expenses decreased by $125,000, due primarily to the scheduling of fewer maintenance projects in the first quarter of 1998 versus the first quarter of 1997. 15
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Following is a summary of Operating Expenses: <TABLE> <CAPTION> OPERATING EXPENSE SUMMARY Three Months % to Three Months % to 1998 vs 1997 Ended Total Ended Total $ % March 31, 1998 Expenses March 31, 1997 Expense Change Change -------------- -------- -------------- ------- ------ ------ <S> <C> <C> <C> <C> <C> <C> Purses: Intrastate Receiving $481,877 3% $499,079 4% $(17,202) -3% Interstate Receiving 2,877,808 18 2,715,544 19 162,264 6 Riverboat 2,014,141 13 1,220,257 8 793,884 65 $5,373,826 34% $4,434,880 31% $938,946 21% Wages and Contract Labor 3,196,809 20 3,090,920 21 105,889 3 Simulcast Host Fee 2,193,352 14 2,077,515 14 115,837 6 Advertising, Marketing & Publicity 673,164 4 658,092 5 15,072 2 Racing Relations & Services 63,090 - 73,383 1 (10,293) -14 Totalisator Expense 301,016 2 356,390 2 (55,374) -16 Audio/Video & Signal Distribution Expense 407,207 2 333,301 2 73,906 22 Program Expense 416,293 2 338,967 2 77,326 23 Depreciation & Amortization 1,159,106 7 1,143,522 8 15,584 1 Insurance, Taxes & License Fees 780,159 5 524,526 4 255,633 49 Maintenance 262,383 2 387,854 3 (125,471) -32 Utilities 577,406 4 524,666 4 52,740 10 Facility/Land Rent 189,084 1 187,041 1 2,043 1 Other Meeting Expense 406,233 3 353,390 2 52,843 15 ----------- ---- ----------- ---- ---------- --- $15,999,128 100% $14,484,447 100% $1,514,681 10% =========== === =========== === ========== == </TABLE> 16
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Selling, general and administrative expenses increased by $226,000 (12%) during the three month period ended March 31, 1998 primarily as a result of increased business activity and general cost of living salary increases for the Company's employees. Interest income of $189,000 in 1998 increased by $123,000 as the result of the additional earnings generated by the Company from its short-term cash investments (cash equivalents) as well as the interest earned on notes receivable from a minority-owned investment. Significant Changes in the Balance Sheet December 31, 1997 to March 31, 1998 Accounts receivable at March 31, 1998 were $1.2 million lower than at December 31, 1997 primarily due to the collection of 1997 Fall meet simulcasting receivables and purse supplements due from the Commonwealth of Kentucky offset partially by an increase in Indiana riverboat admissions tax receivable. Prepaid income taxes increased $1.0 million as a result of the estimated income tax benefit (receivable) associated with the quarterly net loss. Accounts payable increased $4.2 million at March 31, 1998 primarily due to increase in purses payable related to simulcast wagering and riverboat admissions revenue. Purses are paid during the Company's live race meets beginning in the second quarter. Accrued expenses decreased $2.9 million at March 31, 1998 primarily as a result of payments of expenses incurred during the Fall 1997 live race meet. Dividends payable decreased by $3.7 million at March 31, 1998 due to the payment of dividends of $3.7 million (declared in 1997) in the first quarter. Deferred revenue increased by $6.4 million at March 31, 1998 due to advance billings of season box and membership revenue for Kentucky's live race meets and the Derby Expansion Area relating to Kentucky Derby and Oaks races. 17
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) SIGNIFICANT CHANGES IN THE BALANCE SHEET MARCH 31, 1997 TO MARCH 31, 1998 Accounts receivable at March 31, 1998 increased by $2 million due primarily to the increase in the Indiana riverboat admissions tax receivable resulting from two additional Indiana riverboats being open after March 31, 1997. Other assets increased by $1.9 million due primarily to the Company's ownership investment in and loan to BC Racing Group, LLC totaling $2.2 million partially offset by accumulated amortization of organization costs. The cost of plant and equipment increased by approximately $4.3 million due to the construction of a new on-site simulcast facility at Churchill Downs as well as routine capital spending throughout the Company. This was offset by an increase of $4.0 million in accumulated depreciation. Deferred revenue increased by $2.2 million due primarily to increased admission and corporate sponsor event ticket prices associated with the Kentucky Derby and Oaks days. LIQUIDITY AND CAPITAL RESOURCES The working capital deficiency for the three months ended March 31, 1998 decreased by $3.5 million compared to March 31, 1997 as shown below: March 31 1998 1997 ------------ ------------- Working capital deficiency $(9,213,810) $(12,718,810) Working capital ratio .68 to 1 .51 to 1 18
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The working capital deficiency results from the nature and seasonality of the Company's business. Cash flows provided by operations were $7.3 million and $2.5 million for the three months ended March 31, 1998 and 1997, respectively. The increase of $4.8 in 1998 is primarily the result of timing of income taxes payable and deferred revenue. Management believes cash flows from operations and borrowings during 1998 will be substantially in excess of the Company's disbursements for the year, including capital improvements. Cash flows used in investing activities were $1.1 million for both the three months ended March 31, 1998 and 1997. Routine capital spending throughout the Company accounted for the cash used in investing for both years. Cash flows used in financing activities were $3.7 and $2.6 million for the three months ended March 31, 1998 and 1997, respectively. The increase of $1.2 million in 1998 in cash used for financing is primarily the result of an increase in dividends paid of $1.3 million. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130). Currently, there are no amounts to be included in the computation of comprehensive income of the Company that are required to be disclosed under the provisions of SFAS 130. As such, total comprehensive income and net income are the same for the three months ended March 31, 1998 and 1997, respectively. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). The Company will adopt SFAS 131 during the fourth quarter of 1998 as required. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and other Post-retirement Benefits" (SFAS 132). This statement revises employers' disclosures about pensions and other post-retirement plans without changing the measurement or recognition of those plans. The Company will include SFAS 132 disclosures in its 1998 annual report. 19
CHURCHILL DOWNS INCORPORATED ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) SUBSEQUENT EVENTS On March 28, 1998, the Company entered into a stock purchase agreement with TVI Corp., ("TVI") for the purchase of 100% of the stock of Racing Corporation of America ("RCA") for a purchase price of $22.0 million in a combination of cash and common stock of the Company. RCA owns and operates Ellis Park Race Course in Henderson, Kentucky, and the Kentucky Horse Center, a training facility located in Lexington, Kentucky. The sale closed on April 21, 1998 upon final approval from the Kentucky Racing Commission. As part of the transaction, TVI received 200,000 shares of the Company's common stock. The remaining balance of $17.15 million was paid from cash on hand and a draw on the Company's bank line of credit. The acquisition will be accounted for by the Company under purchase method of accounting and will be consolidated during the second quarter of 1998. The results of operations of RCA subsequent to April 20, 1998 will be included in the Company's consolidated results of operations. The purchase is not anticipated to have any material effect on the Company's earnings in 1998. 20
CHURCHILL DOWNS INCORPORATED ITEM 3. Quantitative and Qualitative Disclosures about Market Risk Not Applicable PART II. OTHER INFORMATION ITEM 1. Legal Proceedings Not Applicable ITEM 2. Changes in Securities and Use of Proceeds Not Applicable ITEM 3. Defaults Upon Senior Securities Not Applicable ITEM 4. Submission of Matters to a Vote of Security Holders Not Applicable 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 Churchill Downs Incorporated filed a Current Report on Form 8-K on March 20, 1998 reporting, under Item 5 Other Events, the adoption of a rights plan by Churchill Downs Incorporated. 21
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 May 14, 1998 \s\Thomas H. Meeker ---------------------- Thomas H. Meeker President and Chief Executive Officer (Principal Executive Officer) May 14, 1998 \s\ Robert L. Decker ----------------------- Robert L. Decker Senior Vice President, Finance (Principal Financial Officer) May 14, 1998 \s\Vicki L. Baumgardner ------------------------- Vicki L. Baumgardner Vice President, Finance/Treasurer (Principal Accounting Officer) 22
<TABLE> <CAPTION> EXHIBIT INDEX <S> <C> <C> Numbers Description By Reference To (2) (a) Stock Purchase Agreement dated Exhibit 2.1 to Current Report as of March 28, 1998 between on Form 8-K dated April 21, Churchill Downs Incorporated and 1998 TVI Corp. (2) (b) Agreement and Plan of Merger dated Exhibit 2.2 to Current Report as of April 17, 1998 by and among on Form 8-K dated April 21, TVI Corp., Racing Corporation of 1998 America, Churchill Downs Incorporated and RCA Acquisition Company (3) (d) Restated Bylaws as amended Pages 67 to 76, Report on Form 10-K for the year ended December 31, 1997 (3) (e) Articles of Amendment to Articles of Pages 24-32 Incorporation of Churchill Downs Incorporated (4) Rights Agreement dated as of March Exhibit 4.1 to Current Report 19, 1998 between Churchill Downs on Form 8-K dated March 19, Incorporated and Bank of Louisville 1998 (27) Financial Data Schedule Page 33 </TABLE> 23