Back to GetFilings.com

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 September 30, 2002

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)

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 November 13, 2002 was 13,134,681 shares.

CHURCHILL DOWNS INCORPORATED
I N D E X

CHURCHILL DOWNS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
for the nine and three months ended September 30, 2002 and 2001
(Unaudited)
(In thousands, except per share data)

       The accompanying notes are an integral part of the condensed consolidated financial statements.

CHURCHILL DOWNS INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Information set forth in this discussion and analysis contain various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Private Securities Litigation Reform Act of 1995 ( the "Act") provides certain "safe harbor" provisions for forward-looking statements. All forward-looking statements made in this Quarterly Report on Form 10-Q are made pursuant to the Act. These statements represent our judgment concerning the future and are subject to risks and uncertainties that could cause our actual operating results and financial condition to differ materially. Forward-looking statements are typically identified by the use of terms such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "might," "plan," "predict," "project," "should," "will," and similar words, although some forward-looking statements are expressed differently. Although we believe that the expectations reflected in such forward-looking statements are reasonable we can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from our expectations include: the 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 impact of increasing insurance costs; the financial performance of our racing operations; the impact of gaming competition (including lotteries and riverboat, cruise ship and land-based casinos) and other sports and entertainment options in those markets in which we operate; a substantial change in law or regulations affecting our pari-mutuel activities; a substantial change in allocation of live racing days; litigation surrounding the Rosemont, Illinois, riverboat casino; changes in Illinois law that impact revenues of racing operations in Illinois; a decrease in riverboat admissions subsidy revenue from our Indiana operations; the impact of an additional racetrack near our Indiana operations; our continued ability to effectively compete for the country's top horses and trainers necessary to field high-quality horse racing; our continued ability to grow our share of the interstate simulcast market; the impact of interest rate fluctuations; our ability to execute our acquisition strategy and to complete or successfully operate planned expansion projects; the economic environment; our ability to adequately integrate acquired businesses; market reaction to our expansion projects; the loss of our totalisator companies or their inability to keep their technology current; our accountability for environmental contamination; the loss of key personnel and the volatility of our stock price.

You should read this discussion with the financial statements included in this report and the Company's Form 10-K for the period ended December 31, 2001, 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 own and operate the Churchill Downs racetrack in Louisville, Kentucky, which has conducted Thoroughbred racing since 1875 and is internationally known as the home of the Kentucky Derby, 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 nine simulcast wagering facilities in Kentucky, Indiana and Illinois, as well as at our six racetracks.

CHURCHILL DOWNS INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The Churchill Downs Simulcast Network ("CDSN") segment was designed to increase focus on the distribution of the Company's simulcast signal. CDSN will oversee national and international simulcast and wagering opportunities, as well as the marketing, sales, operations and data support efforts related to the Company-owned racing content.

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 are not necessarily 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.

Our revenues are generated from commissions on pari-mutuel wagering at our racetracks and off-track betting facilities, plus simulcast fees, Indiana riverboat admissions subsidy, admissions, concessions, sponsorships, licensing rights and broadcast fees, lease income and other sources.

As a result of the controversy surrounding a Breeders' Cup Ultra Pick 6 wager, placed on October 26, 2002, we have established, along with the National Thoroughbred Racing Association, Inc. ("NTRA"), the NTRA Wagering Technology Group. The objective of the group is to ensure the security of pari-mutuel wagering systems and to eliminate concerns of racing patrons as to the integrity of such systems. Inasmuch as the controversy involves a vendor of the Company, the concerns and rigorous actions are grounded in our interest to protect our patrons.

In addition to the steps taken above, we have also taken action on a separate matter related to wagering. In an effort to ensure bettors that the odds do not change after the start of the race, effective November 13, 2002, wagering at all of our facilities, excluding Hollywood Park, will be halted at zero minutes to post - or approximately one minute before horses are loaded into the starting gate for each race. The California Horse Racing Board ("CHRB") regulations currently prevent us from implementing these changes at Hollywood Park but the CHRB is expected to discuss pick six wagering at a meeting on November 21, 2002. Also, totalizator hubs at our facilities will no longer accept wagers placed through account-wagering facilities that do not make recordings of touch-tone wagering transactions. These steps were taken to further ensure the integrity of our vendor totalizator systems.

Further, horse racing regulators in various jurisdictions are reviewing the integrity of these systems. In Illinois, the Illinois Racing Board ("IRB") has suspended pick four, pick six and pick nine wagering by Illinois racetracks pending the outcome of the IRB's review. In Canada, the Canadian Pari-Mutuel Agency banned pick four, pick six and superfecta wagering pending a resolution of registering all wagering on the network host system in a timely manner. At this time, management is unable to determine the financial impact, if any, of these decisions and actions.

CHURCHILL DOWNS INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

RESULTS OF OPERATIONS

Pari-mutuel wagering information, including intercompany transactions, for our CDSN segment and six live racing facilities, including on-site simulcast facilities and nine separate off-track betting facilities ("OTBs"), which are included in their respective racetracks, during the nine months ended September 30, 2002 and 2001 is as follows ($ in thousands):

CHURCHILL DOWNS INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30, 2001

Net Revenues

Net revenues during the nine months ended September 30, 2002 increased $13.0 million from $316.2 million in 2001 to $329.2 million in 2002. Calder Race Course revenues increased $8.8 million as a result of an expanded live race meet during 2002 resulting from 16 additional live race days through September 30, 2002. Arlington Park revenues increased $2.9 million as a result of six additional live race days and Hollywood Park revenues decreased $1.8 million primarily due to a decrease in concessions revenue as a result of outsourcing its food service. Kentucky Operations revenues increased $0.7 million primarily due to record wagering for the Kentucky Derby and Kentucky Oaks. CDSN revenues increased $6.9 million primarily due to increases in overall export simulcasting activity, the additional days of racing at Calder Race Course and Arlington Park, as well as record wagering on the Kentucky Oaks and Kentucky Derby days.

Operating Expenses

Operating expenses increased $10.8 million from $253.2 million in 2001 to $264.0 million in 2002 due to several factors, including increases in 2002 business insurance expenses at all of our racetracks. Calder Race Course and Arlington Park also had increases in operating expenses from the increased number of live race days and Hollywood Park’s expenses decreased due to the decrease of one live race day discussed above. Kentucky Operations also experienced additional costs related to the incremental Kentucky Derby security measures in May 2002. Increases were offset by a decrease in amortization expense of $1.1 million related to the adoption of the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 142 adopted January 1, 2002.

Gross Profit

Gross profit increased $2.2 million from $63.0 million in 2001 to $65.2 million in 2002. Although there was revenue growth during 2002 as a result of increased live racing days at Calder Race Course and Arlington Park, record wagering results on Kentucky Derby and Oaks days and an increase for CDSN, these increases were partially offset by an increase in business insurance expenses, and other operating expenses, as discussed above.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses increased by $2.5 million primarily due to costs incurred by our Kentucky Operations related to the Kentucky legislative gaming initiatives in 2002 and costs incurred by Arlington Park related to the Illinois riverboat legislation.

CHURCHILL DOWNS INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Other Income and Expense

Interest expense decreased $2.9 million in 2002 as a result of lower interest rates and continued debt reduction through our positive cash flow and balance sheet management.

Income Tax Provision

Our provision for income taxes increased slightly for the nine months ended September 30, 2002, as compared to September 30, 2001, as a result of an increase in pre-tax earnings offset partially by a decline in our effective income tax rate from 40.5% in 2001 to 40.2% in 2002.

Three Months Ended September 30, 2002 Compared to Three Monthe Ended September 30, 2001

Net Revenues

Net revenues during the three months ended September 30, 2002 increased $4.4 million from $121.2 million in 2001 to $125.6 million in 2002. Hollywood Park revenues increased $2.1 million resulting from an additional three days of live racing due to the racing calendar starting later in the year. Hollywood Park's increases in pari-mutuel revenues were partially offset by decreases in concessions revenue as a result of outsourcing its food service. Kentucky Operation revenues decreased as a result of one less day of racing and Calder Race Course revenues decreased as a result of four fewer race days during the quarter compared to the prior year. Arlington Park revenues increased $2.7 million primarily due to increases in export simulcasting. CDSN had an increase of $2.0 million primarily due to overall increases in export simulcasting activity as well as the additional three days of racing at Hollywood Park.

Operating Expenses

Operating expenses increased $2.5 million from $99.1 million in 2001 to $101.6 million in 2002 primarily due to increased expenses at Hollywood Park related to the increase of three days of live racing during the quarter partially offset by decreases from outsourcing food services. Arlington Park and CDSN also experienced increases in operating expenses consistent with the increase in export pari-mutuel revenues discussed above. Additional increases during 2002 were due to increases in business insurance expenses. A portion of the overall increase was offset by a decrease in amortization expense of $0.3 million related to the adoption of SFAS No. 142 adopted January 1, 2002.

CHURCHILL DOWNS INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Gross Profit

Gross profit increased $1.9 million due to increased revenues from the increase in the number of live race days at Hollywood Park and an increase in revenues for CDSN. These increases were partially offset by an increase in business insurance expenses, and other operating expenses, as previously discussed.

Selling, General and Administrative Expenses

SG&A expenses increased by $1.0 million from $7.3 million in 2001 to $8.3 million in 2002 primarily due to increased charitable donations and corporate costs incurred for professional fees and timing of marketing expenses.

Other Income and Expense

Interest expense decreased $0.9 million as a result of lower interest rates and continued debt reduction as a result of our positive cash flow and balance sheet management.

Significant Changes in the Balance Sheet September 30, 2002 to December 31, 2001

Restricted cash decreased $6.8 million since December 31, 2001. Management of the horsemen's cash and accounts payable accounts at Calder Race Course were assumed by the Florida Horseman's Benevolent and Protective Association ("FHBPA") resulting in a decrease of $9.3 million. The remaining change in restricted cash relates to the timing of live meets, including an increase of $3.5 million at Hoosier Park.

Accounts payable decreased $5.9 million primarily due to a decrease of $9.5 million at Calder Race Course relating to the FHBPA assuming management of the horsemen's payable account as mentioned above. Hollywood Park had a decrease of $4.7 million resulting from the timing of their live meet offset by an increase in horsemen accounts and purses payable at Hoosier Park and Arlington Park also due to the timing of live race meets.

Dividends payable decreased $6.5 million at September 30, 2002 due to the payment in the first quarter of 2002.

Deferred revenue decreased $11.1 million at September 30, 2002, primarily due to the significant amount of admissions and seat revenue that was received prior to December 31, 2001 recognized as income in May 2002 for the Kentucky Derby and Kentucky Oaks race days. Long-term debt decreased $8.9 million as the result of the application of current cash flows to reduce borrowings under our bank line of credit during 2002.

CHURCHILL DOWNS INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Significant Changes in the Balance Sheet September 30, 2002 to September 30, 2001

The long-term debt decrease of $10.2 million was a result of the application of current cash flows to reduce borrowings under our bank line of credit since September 30, 2001.

Income taxes payable decreased $10.9 million as a result of the timing of federal income taxes paid during 2001 compared to 2002. This timing change during 2001 was the result of the changes to tax laws included in the Economic Growth and Tax Relief Reconciliation Act of 2001.

Liquidity and Capital Resources

Cash flows provided by operations were $30.6 million and $42.9 million for the nine months ended September 30, 2002 and 2001, respectively. The net decrease in cash provided by operations as compared to 2001 is primarily a result of the timing of our income tax payments.

Cash flows used in investing activities were $16.0 million and $12.7 million for the nine months ended September 30, 2002 and 2001, respectively. We used $16.0 million during 2002 for capital spending at our facilities including $6.6 million for the Master Plan renovation at our Kentucky Operations. We are planning capital expenditures, including the first phase of our Master Plan renovation, of approximately $20.0 million in 2002. The first phase of the Master Plan renovation, which began in December 2001, is scheduled for completion in the fall of 2003 at a total cost of $26.6 million. The second phase of our Master Plan renovation is scheduled to begin in July 2003 and is scheduled for completion in 2005 at an additional cost of $95.0 million.

Cash flows used in financing activities were $14.7 million and $26.6 million for the nine months ended September 30, 2002 and 2001, respectively, reflecting the use of cash flows from operations to repay debt. We borrowed $205.4 million and repaid $213.2 million on our line of credit and paid dividends of $6.5 million during 2002.

We have a $250 million line of credit under a revolving loan facility, of which $116.9 million was outstanding at September 30, 2002. This line of credit is secured by substantially all of our assets and matures in 2004. This credit facility is intended to meet working capital and other short-term requirements and to provide funding for future acquisitions.

We believe that sufficient resources will be available to satisfy cash requirements and capital expenditure requirements for at least the next twelve months. If we make significant acquisitions or if working capital and capital expenditure requirements exceed expected levels during the next twelve months or in subsequent periods, we may require additional external sources of capital. There can be no assurance that any additional required financing will be available through bank borrowings, debt or equity financing or otherwise, or that if such financing is available, it will be available on terms acceptable to us. If adequate funds are not available on acceptable terms, our business, results of operations and financial condition could be adversely affected.

CHURCHILL DOWNS INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)

Significant Accounting Pronouncements

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB SFAS No. 4, 44 and 64, Amendment of FASB SFAS No. 13, and Technical Corrections." SFAS No. 145 addresses financial accounting and reporting for gains and losses from the extinguishments of debt. This statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishments of Debt," and an amendment of that Statement, SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers," SFAS No. 13, "Accounting for Leases" and amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS No. 145 are effective in fiscal years beginning after May 15, 2002. Management anticipates that the adoption of SFAS No. 145 will not have an effect on our results of operations or financial position.

The FASB issued SFAS No. 146 "Accounting for Exit or Disposal Activities." SFAS No. 146 addresses the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including certain lease termination costs and severance-type costs under a one-time benefit arrangement rather than an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS No. 146 requires liabilities associated with exit and disposal activities to be expensed as incurred and will be effective for exit or disposal activities that are initiated after December 31, 2002. Management anticipates that the adoption of SFAS No. 146 will not have a significant effect on our results of operation or financial position.

CHURCHILL DOWNS INCORPORATED

PART II. OTHER INFORMATION

EXHIBIT INDEX