SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
CHURCHILL DOWNS
INCORPORATED
(Exact name of
registrant as specified in its charter)
| Kentucky | 61-0156015 |
|
(State or other jurisdiction of incorporation or organization) |
(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). Yes X No__
The number of shares outstanding of registrant’s common stock at August 13, 2003 was 13,196,573 shares.
2
| ASSETS | June 30, 2003 (unaudited) |
December 31, 2002 |
June 30, 2002 (unaudited) | ||||||
| Current assets: | |||||||||
| Cash and cash equivalents | $ 27,185 | $ 14,662 | $ 26,381 | ||||||
| Restricted cash | 14,168 | 3,247 | 16,931 | ||||||
| Accounts receivable, net | 45,695 | 34,435 | 36,270 | ||||||
| Deferred income taxes | 3,043 | 2,159 | 2,022 | ||||||
| Other current assets | 5,564 | 5,988 | 5,081 | ||||||
| Total current assets | 95,655 | 60,491 | 86,685 | ||||||
| Other assets | 11,962 | 10,606 | 12,213 | ||||||
| Plant and equipment, net | 347,699 | 338,381 | 338,696 | ||||||
| Goodwill, net | 52,239 | 52,239 | 52,239 | ||||||
| Other intangible assets, net | 7,313 | 7,495 | 7,678 | ||||||
| $ 514,868 | $ 469,212 | $ 497,511 | |||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||
| Current Liabilities: | |||||||||
| Accounts payable | $ 64,435 | $ 31,189 | $ 75,070 | ||||||
| Accrued expenses | 35,853 | 31,782 | 36,512 | ||||||
| Dividends payable | - | 6,578 | - | ||||||
| Income taxes payable | 8,510 | 727 | 5,155 | ||||||
| Deferred revenue | 7,653 | 14,876 | 4,979 | ||||||
| Long-term debt, current portion | 472 | 508 | 490 | ||||||
| Total current liabilities | 116,923 | 85,660 | 122,206 | ||||||
| Long-term debt, due after one year | 119,811 | 122,840 | 116,672 | ||||||
| Other liabilities | 14,053 | 12,603 | 13,585 | ||||||
| Deferred income taxes | 13,103 | 13,112 | 15,119 | ||||||
| Total liabilities | 263,890 | 234,215 | 267,582 | ||||||
| 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: 13,183 shares June 30, 2003, 13,157 | |||||||||
| shares December 31, 2002, and 13,115 shares June 30, 2002 | 126,725 | 126,043 | 125,132 | ||||||
| Retained earnings | 125,770 | 109,241 | 105,923 | ||||||
| Accumulated other comprehensive loss | (1,517 | ) | (222 | ) | (1,061 | ) | |||
| Note receivable for common stock | - | (65 | ) | (65 | ) | ||||
| 250,978 | 234,997 | 229,929 | |||||||
| $ 514,868 | $ 469,212 | $ 497,511 | |||||||
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
3
| Six Months Ended June 30, | Three Months Ended June 30, | ||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||
| Net revenues | $ 214,285 | $ 203,599 | $ 180,496 | $ 172,627 | |||||
| Operating expenses | 166,967 | 162,430 | 123,425 | 122,701 | |||||
| Gross profit | 47,318 | 41,169 | 57,071 | 49,926 | |||||
| Selling, general and administrative expenses | 16,873 | 17,268 | 8,765 | 8,872 | |||||
| Operating income | 30,445 | 23,901 | 48,306 | 41,054 | |||||
| Other income (expense): | |||||||||
| Interest income | 135 | 174 | 73 | 93 | |||||
| Interest expense | (3,306 | ) | (4,967 | ) | (1,479 | ) | (2,315 | ) | |
| Miscellaneous, net | 553 | (591 | ) | 151 | (422 | ) | |||
| (2,618 | ) | (5,384 | ) | (1,255 | ) | (2,644 | ) | ||
| Earnings before provision for income taxes | 27,827 | 18,517 | 47,051 | 38,410 | |||||
| Provision for income taxes | (11,298 | ) | (7,444 | ) | (19,026 | ) | (15,302 | ) | |
| Net earnings | $ 16,529 | $ 11,073 | $ 28,025 | $ 23,108 | |||||
| Net earnings per common share data: | |||||||||
| Basic | $ 1.26 | $ 0.84 | $ 2.13 | $ 1.76 | |||||
| Diluted | $ 1.24 | $ 0.83 | $ 2.09 | $ 1.73 | |||||
| Weighted average shares outstanding: | |||||||||
| Basic | 13,167 | 13,110 | 13,174 | 13,115 | |||||
| Diluted | 13,367 | 13,341 | 13,380 | 13,338 | |||||
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
4
| 2003 | 2002 | ||||||||
| Cash flows from operating activities: | |||||||||
| Net earnings | $ 16,529 | $ 11,073 | |||||||
| Adjustments to reconcile net earnings to | |||||||||
| net cash provided by operating activities: | |||||||||
| Depreciation and amortization | 10,171 | 9,661 | |||||||
| Increase (decrease) in cash resulting from | |||||||||
| changes in operating assets and liabilities: | |||||||||
| Restricted cash | (10,921 | ) | (6,226 | ) | |||||
| Accounts receivable | (11,260 | ) | (5,095 | ) | |||||
| Other current assets | 424 | (3,053 | ) | ||||||
| Accounts payable | 34,928 | 31,800 | |||||||
| Accrued expenses | 1,891 | 6,621 | |||||||
| Income taxes payable | 7,783 | 4,184 | |||||||
| Deferred revenue | (7,223 | ) | (9,262 | ) | |||||
| Other assets and liabilities | 1,857 | 1,695 | |||||||
| Net cash provided by operating activities | 44,179 | 41,398 | |||||||
| Cash flows from investing activities: | |||||||||
| Additions to plant and equipment, net | (19,074 | ) | (8,756 | ) | |||||
| Net cash used in investing activities | (19,074 | ) | (8,756 | ) | |||||
| Cash flows from financing activities: | |||||||||
| Decrease in long-term debt, net | (279 | ) | (1,035 | ) | |||||
| Repayments of revolving loan facility for refinancing | (120,929 | ) | -- | ||||||
| Proceeds from senior notes, net of expenses | 98,229 | -- | |||||||
| Borrowings on bank line of credit | 172,453 | 141,731 | |||||||
| Repayments of bank line of credit | (154,310 | ) | (156,882 | ) | |||||
| Change in book overdraft | (1,915 | ) | 530 | ||||||
| Proceeds from note receivable for common stock | 65 | -- | |||||||
| Payment of dividends | (6,578 | ) | (6,549 | ) | |||||
| Common stock issued | 682 | 382 | |||||||
| Net cash used in financing activities | (12,582 | ) | (21,823 | ) | |||||
| Net increase in cash and cash equivalents | 12,523 | 10,819 | |||||||
| Cash and cash equivalents, beginning of period | 14,662 | 15,562 | |||||||
| Cash and cash equivalents, end of period | $ 27,185 | $ 26,381 | |||||||
| Supplemental disclosures of cash flow information: | |||||||||
| Cash paid during the period for: | |||||||||
| Interest | $ 3,398 | $ 4,648 | |||||||
| Income taxes | $ 3,442 | $ 3,260 | |||||||
| Schedule of non-cash activities: | |||||||||
| Plant and equipment additions included in accounts payable | $ 233 | $ -- | |||||||
The
accompanying notes are an integral part of the condensed consolidated financial
statements.
5
| 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 for the period ended December 31, 2002 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 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. | |
| 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, 2003 and 2002 would approximate the pro forma amounts presented below: | |
| Six Months Ended June 30, | |||||
| 2003 | 2002 | ||||
| Net earnings | $ 16,529 | $11,073 | |||
| Pro forma stock-based compensation expense, | |||||
| net of tax benefit | (922) | (697) | |||
| Pro forma net earnings | $ 15,607 | $ 10,376 | |||
| Pro forma net earnings per common share: | |||||
| Basic | $ 1.19 | $ 0.79 | |||
| Diluted | $ 1.17 | $ 0.78 | |||
6
| 2. | Stock-Based Compensation (cont'd) |
| Three Months Ended June 30, | |||||
| 2003 | 2002 | ||||
| Net earnings | $ 28,025 | $23,108 | |||
| Pro forma stock-based compensation expense, | |||||
| net of tax benefit | (539) | (508) | |||
| Pro forma net earnings | $ 27,486 | $ 22,600 | |||
| Pro forma net earnings per common share: | |||||
| Basic | $ 2.09 | $ 1.72 | |||
| Diluted | $ 2.05 | $ 1.69 | |||
| The effects of applying SFAS No. 123 in this pro forma disclosure are unlikely to be representative of the effects on pro forma net income 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 |
| Long-term debt is as follows: | |
| As of June 30, 2003 |
As of December 31, 2002 |
As of June 30, 2002 |
| $250 million revolving loan facility | $ -- | $116,000 | $109,596 | |||
| $100 million variable rate senior notes | 100,000 | -- | -- | |||
| $200 million revolving line of credit | 13,214 | -- | -- | |||
| Other notes payable | 7,069 | 7,348 | 7,566 | |||
| Total long-term debt | $120,283 | $123,348 | $117,162 | |||
| In April 2003, the Company refinanced its $250 million revolving loan facility to meet funding needs for 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 the Company 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 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 the Company’s senior notes is equal to LIBOR plus 155 basis points. The weighted average interest rate on these outstanding borrowings was 2.65% and 2.84% at June 30, 2003 and 2002, respectively. These interest rates are hedged by the interest rate swap contracts entered into by the Company as described in Note 4. 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. The Company repaid its previously existing revolving line of credit during the second quarter of 2003 with proceeds from the new facilities. |
7
| 4. | Financial Instruments |
| In order to mitigate a portion of the market risk on variable rate debt, the Company entered into interest rate swap contracts with major financial institutions in March 2003. Under terms of these contracts we receive a LIBOR based variable interest rate and pay a fixed interest rate on notional amounts totaling $60.0 million. As a result of these contracts, the Company will pay a fixed interest rate of approximately 3.55% on $60.0 million of the variable rate debt described in Note 3. We also received a LIBOR based variable interest rate of 1.29% during the three months ended June 30, 2003. The interest rate paid on the contracts is determined based on LIBOR on the last day of each March, June, September and December, which is consistent with the variable rate determination on the underlying debt. These contracts mature in March 2008. |
| The
Company also had three interest rate swaps in effect during 2002 on which the Company
received a LIBOR-based variable rate and paid a fixed interest rate. Terms of the swaps
are as follows: |
| Notional Amount | Termination Date | Fixed Rate |
| $35 million | May 2002 | 7.30% |
| $30 million | November 2002 | 6.40% |
| $35 million | March 2003 | 7.015% |
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 were recorded in other comprehensive earnings will be reclassified into net earnings as interest expense, net in the periods in which the related variable interest is paid. |
|
| Comprehensive
earnings consist of the following: |
| Six months ended June 30, | |||||
| 2003 | 2002 | ||||
| Net Earnings | $ 16,529 | $11,073 | |||
| Cash flow hedging (net of related tax benefit | |||||
| of $885 in 2003 and tax provision of $789 in 2002) | (1,295) | 1,239 | |||
| Comprehensive earnings | $ 15,234 | $12,312 | |||
| Three months ended June 30, | |||||
| 2003 | 2002 | ||||
| Net Earnings | $ 28,025 | $23,108 | |||
| Cash flow hedging (net of related tax benefit | |||||
| of $530 in 2003 and tax provision of $266 in 2002) | (763) | 418 | |||
| Comprehensive earnings | $ 27,262 | $23,526 | |||
8
| 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, | |||
| 2003 | 2002 | 2003 | 2002 | |
| Numerator for basic and diluted earnings | ||||
| per share: | $16,529 | $11,073 | $28,025 | $23,108 |
| Denominator for weighted average shares | ||||
| of common stock outstanding per share: | ||||
| Basic | 13,167 | 13,110 | 13,174 | 13,115 |
| Plus dilutive effect of stock options | 200 | 231 | 206 | 223 |
| Diluted | 13,367 | 13,341 | 13,380 | 13,338 |
| Earnings per common share: | ||||
| Basic | $ 1.26 | $ 0.84 | $ 2.13 | $ 1.76 |
| Diluted | $ 1.24 | $ 0.83 | $ 2.09 | $ 1.73 |
| Options to purchase 178 and 1 shares for the periods ended June 30, 2003 and 2002, 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 | |||
| The Company performs annual testing of goodwill and indefinite lived intangible assets in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” The Company completed the required impairment tests of goodwill and indefinite lived intangible assets during the three months ended March 31, 2003, and no adjustment to the carrying value of goodwill was required. | ||||
| Effective January 1, 2002, a portion of the goodwill arising from the Company’s previous acquisitions was reassigned to the new Churchill Downs Simulcast Network (“CDSN”) segment using a relative fair value allocation approach. There has been no change to the carrying value of the Company’s net goodwill since January 1, 2002. Net goodwill at June 30, 2003 and 2002 for Kentucky Operations, Calder Racecourse and CDSN was $4.8 million, $36.4 million and $11.0 million, respectively. |
9
| 6. | Goodwill and Other Intangible Assets (cont’d) |
| The Company’s other intangible assets are comprised of the following: | |
| As of June 30, 2003 |
As of December 31, 2002 |
As of June 30, 2002 |
| Illinois Horse Race Equity fund | $ 3,307 | $ 3,307 | $ 3,307 | |||
| Arlington Park trademarks | 494 | 494 | 494 | |||
| Indiana racing license | 2,085 | 2,085 | 2,085 | |||
| Other intangible assets | 3,296 | 3,296 | 3,296 | |||
| 9,182 | 9,182 | 9,182 | ||||
| Accumulated amortization | (1,869) | (1,687) | (1,504) | |||
| $ 7,313 | $ 7,495 | $ 7,678 | ||||
Other intangible assets with indefinite useful lives total $3.8 million and consist primarily of a future right to participate in the Illinois Horse Race Equity fund, which has not been amortized since the Arlington Park merger in September 2000. |
| Other intangible assets, which are being amortized, are recorded at approximately $3.5 million at June 30, 2003, which is net of accumulated amortization of $1.9 million. Amortization expense for other intangibles of approximately $182 and $183 for the six months ended June 30, 2003 and 2002, respectively, is classified in operating expenses. |
| Future estimated aggregate amortization expense on other intangible assets for each of the five fiscal years are as follows: |
| Estimated Amortization Expense | |
| 2003 | 365 |
| 2004 | 167 |
| 2005 | 167 |
| 2006 | 167 |
| 2007 | 167 |
10
| 7. | Segment Information |
| The Company has determined that it currently operates in the following seven segments: (1) Kentucky Operations, including Churchill Downs racetrack and its off-track betting facility (“OTB”) and Ellis Park racetrack and its on-site simulcast facility; (2) Hollywood Park racetrack and its on-site simulcast facility; (3) Calder Racecourse; (4) Arlington Park and its seven OTBs; (5) Hoosier Park racetrack and its on-site simulcast facility and the other three Indiana simulcast facilities; (6) CDSN, the simulcast product provider of the Company; and (7) other investments, including Charlson Broadcast Technologies LLC (“CBT”) and the Company’s other various equity interests which are not material. Intercompany net revenues are generated from transactions with other operating segments primarily for activity between CDSN and our racetracks for the purchase of racing signals. Eliminations include the elimination of CDSN activity, management fees and other intersegment transactions. | |
| The Company’s recurring revenues are generated from commissions on pari-mutuel wagering at the Company’s racetracks and OTBs (net of state pari-mutuel taxes), plus simulcast host fees 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 year-to-year. Non-wagering revenues are primarily generated from admissions, sponsorship, licensing rights and broadcast fees, Indiana riverboat admissions subsidy, lease income and other sources. | |
| The accounting policies of the segments are the same as those described in the “Summary of Significant Accounting Policies” in the Company’s annual report to stockholders for the year ended December 31, 2002. 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 income (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. | |
11
| 7. | Segment Information (cont'd) |
| The table below presents information about reported segments for the six months and three months ended June 30, 2003 and 2002: | |
| Six Months Ended June 30, | Three Months Ended June 30, | ||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||
| Net revenues from | |||||||||
| external customers: | |||||||||
| Kentucky Operations | $ 57,852 | $ 56,007 | $ 52,954 | $ 50,411 | |||||
| Hollywood Park | 41,765 | 42,217 | 36,796 | 37,185 | |||||
| Calder Race Course | 19,988 | 19,673 | 18,856 | 18,603 | |||||
| Arlington Park | 34,047 | 26,417 | 22,058 | 20,298 | |||||
| Hoosier Park | 20,451 | 26,629 | 11,021 | 14,593 | |||||
| CDSN | 37,988 | 30,742 | 37,145 | 30,045 | |||||
| Total racing operations | 212,091 | 201,685 | 178,830 | 171,135 | |||||
| Other investments | 1,253 | 1,104 | 725 | 692 | |||||
| Corporate revenues | 941 | 810 | 941 | 800 | |||||
| $ 214,285 | $ 203,599 | $ 180,496 | $ 172,627 | ||||||
| Intercompany net revenues: | |||||||||
| Kentucky Operations | $ 16,229 | $ 13,344 | $ 16,229 | $ 13,344 | |||||
| Hollywood Park | 6,906 | 6,270 | 6,902 | 6,270 | |||||
| Calder Race Course | 3,585 | 3,152 | 3,337 | 2,968 | |||||
| Arlington Park | 2,732 | 1,217 | 2,732 | 1,217 | |||||
| Hoosier Park | 37 | 34 | 33 | 34 | |||||
| Total racing operations | 29,489 | 24,017 | 29,233 | 23,833 | |||||
| Other investments | 899 | 876 | 755 | 757 | |||||
| Corporate expenses | 552 | 801 | 269 | 373 | |||||
| Eliminations | (30,940 | ) | (25,694 | ) | (30,257 | ) | (24,963 | ) | |
| $ - | $ - | $ - | $ - | ||||||
| EBITDA: | |||||||||
| Kentucky Operations | $ 23,270 | $ 19,700 | $ 28,417 | $ 24,911 | |||||
| Hollywood Park | 7,339 | 6,806 | 9,554 | 9,023 | |||||
| Calder Race Course | 1,462 | 819 | 4,129 | 3,894 | |||||
| Arlington Park | 958 | (2,488 | ) | 2,427 | (227 | ) | |||
| Hoosier Park | 1,219 | 3,878 | 545 | 1,888 | |||||
| CDSN | 9,363 | 7,505 | 9,144 | 7,242 | |||||
| Total racing operations | 43,611 | 36,220 | 54,216 | 46,731 | |||||
| Other investments | 466 | (352 | ) | 431 | (20 | ) | |||
| Corporate expenses | (2,908 | ) | (2,835 | ) | (1,081 | ) | (1,231 | ) | |
| Eliminations | - | (62 | ) | - | (2 | ) | |||
| $ 41,169 | $ 32,971 | $ 53,566 | $ 45,478 | ||||||
12
| 7. | Segment Information (cont'd) |
| As of June 30, 2003 |
As of December 31, 2002 |
As of June 30, 2002 |
|||||
| Total assets: | |||||||
| Kentucky Operations | $ 416,327 | $ 396,998 | $ 396,373 | ||||
| Hollywood Park | 175,619 | 150,627 | 174,849 | ||||
| Calder Race Course | 86,438 | 87,498 | 87,097 | ||||
| Arlington Park | 83,640 | 80,766 | 81,275 | ||||
| Hoosier Park | 35,444 | 34,759 | 38,494 | ||||
| CDSN | 11,018 | 11,018 | 11,018 | ||||
| Other investments | 89,558 | 77,724 | 54,373 | ||||
| 898,044 | 839,390 | 843,479 | |||||
| Eliminations | (383,176 | ) | (370,178 | ) | (345,968 | ) | |
| $ 514,868 | $ 469,212 | $ 497,511 | |||||
| Following is a reconciliation of total EBITDA to net earnings: | |
| Six Months Ended June 30, | Three Months Ended June 30, | ||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||
| Total EBITDA | $ 41,169 | $ 32,971 | $ 53,566 | $ 45,478 | |||||
| Depreciation and amortization | (10,171 | ) | (9,661 | ) | (5,109 | ) | (4,846 | ) | |
| Interest income (expense), net | (3,171 | ) | (4,793 | ) | (1,406 | ) | (2,222 | ) | |
| Provision for income taxes | (11,298 | ) | (7,444 | ) | (19,026 | ) | (15,302 | ) | |
| Net earnings | $ 16,529 | $ 11,073 | $ 28,025 | $ 23,108 | |||||
13
| 8. | Significant Accounting Pronouncement |
| The Financial Accounting Standards Board (“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. Adoption of SFAS No. 146 did not impact the Company’s results of operations or financial position. | |
| In December 2002, the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation –Transition and Disclosure, an amendment of FASB Statement No. 123.” This Statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Management does not currently expect to change its method of accounting treatment for stock options. | |
| In April 2003, the FASB issued SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The changes in SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. Management anticipates that the adoption of SFAS No. 149 will not have a significant effect on the Company’s results of operations or financial position. | |
| In May 2003, the FASB issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of SFAS No. 150 did not impact the Company’s results of operations or financial position. | |
14
| 8. | Significant Accounting Pronouncement (cont’d) |
| In January 2003, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, and interpretation of SFAS No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34” (“FIN 45”). FIN 45 requires that upon issuance of a guarantee, the entity must recognize a liability for the fair value of the obligation it assumes under that guarantee. FIN 45 requires disclosure about each guarantee even if the likelihood of the guarantor’s having to make any payments under the guarantee is remote. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. Adoption of FIN 45 did not impact the Company’s results of operations or financial position. | |
|
January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51” (“FIN 46”). This
Interpretation of Accounting Research Bulletin No. 51 “Consolidated Financial
Statements,” requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient equity at
risk for the entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective immediately for all new variable interest
entities created or acquired after January 31, 2003. For variable interest entities
created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied
for the first interim or annual period beginning after June 15, 2003. Adoption of FIN 46
did not impact the Company’s results of operations or financial position. |
| 9. | Related Party Transaction |
| During 2003, the Company was paid $65 by the President and Chief Executive Officer of the Company for repayment of a note receivable to purchase shares of common stock. Notes receivable for common stock was classified in the balance sheet as a reduction of shareholders’ equity at December 31, 2002 and June 30, 2002. |
15
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. 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 Indiana racetrack and its 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; 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, 2002, for further information.
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.
16
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 eleven simulcast wagering facilities in Kentucky, Indiana and Illinois, as well as at our six racetracks.
The Churchill Downs Simulcast Network (“CDSN”) segment was developed in 2002 to focus on the distribution of the Company’s simulcast signal. CDSN oversees 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.
Our revenues and earnings are significantly influenced by our live 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 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 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 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.
Live racing handle includes patron wagers on live races at our tracks and also wagers made at our facilities on imported simulcast signals during live races. Import simulcasting handle includes wagers on imported signals at our racetracks when our respective tracks are not conducting live races and at our OTBs throughout the year. Export handle includes all patron wagers made on our live racing signals sent to other tracks or OTBs.
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, 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 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 for the period ended December 31, 2002.
17
Our business can be impacted positively and negatively by legislative changes and from alternative gaming competition. Significant negative changes resulting 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 renewal effective March 1, 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, 2003 business insurance renewals included substantially the same coverages and retentions as the 2002 renewal. Based on our historical loss experience, management does not anticipate that this increased risk assumption will materially impact our results of operations.
During December 2002, we reduced the carrying value of the buildings, equipment and furniture and fixtures of Ellis Park to reflect their estimated fair value in a divestiture transaction. Should a transaction not be completed at the currently estimated sales price, an additional write down of these assets could occur.
Legislative Changes
During the 2003 session of the Indiana legislature, legislation was introduced to evenly split the riverboat subsidy between Hoosier Park and Indiana Downs. Additionally, a second bill was introduced, as part of the state budget, which sought to cap the total horse industry share from the riverboat subsidy at $17 million. Both of these bills subsequently failed. Under current Indiana Horse Racing Commission (“IHRC”) rules, which can be changed by the IHRC or by the enactment of legislation, the riverboat subsidy for purses and operating costs will be split evenly during 2003 and 2004 between the two racetracks in Indiana reducing Hoosier Park’s subsidy revenues by approximately $5 million in 2003 compared to 2002.
Indiana Downs is also seeking to receive riverboat subsidies for operating costs for amounts earned in 2002 based on the 2003 ruling, which would evenly split the subsidy between Hoosier Park and Indiana Downs. These riverboat subsidies for operating costs were accrued by Hoosier Park during 2002. The IHRC is expected to act on this allocation during the third quarter of 2003.
In the 2003 session of the Illinois General Assembly, Chicago-area racetracks, including Arlington Park, were unsuccessful in their attempt to pass legislation that would authorize the Illinois Gaming Board to award unlimited gaming to riverboat casinos and allow racetracks to operate slot machines and video lottery terminals. Discussions are ongoing between racetracks, horsemen and riverboat operators, with the goal of introducing a similar bill in the 2004 session of the Illinois General Assembly.
18
During January and February when there is no live racing in Illinois, the Illinois Racing Commission (“IRC”) appoints a Thoroughbred racetrack as the host track in Illinois. The IRC appointed Arlington Park as the host track in Illinois during January 2003 resulting in increased pari-mutuel revenues compared to the prior period. Arlington Park’s future appointment as the host track is subject to the annual approval by the IRC.
Pari-mutuel wagering information, including intercompany transactions, for our CDSN segment and five live racing segments including on-site simulcast facilities and separate OTBs, which are included in their respective segments, during the three months ended June 30, 2003 and 2002, is as follows ($ in thousands):
| Kentucky Operations |
Hollywood Park |
Calder Race Course |
Arlington Park* |
Hoosier Park |
CDSN | ||||||||
| Pari-mutuel wagering: | |||||||||||||
| Live Racing | |||||||||||||
| 2003 handle | $ 87,511 | $ 93,021 | $ 64,560 | $ 19,469 | $ 3,735 | - | |||||||
| 2003 no. of days | 47 | 50 | 51 | 39 | 50 | - | |||||||
| 2002 handle | $ 85,552 | $ 98,938 | $ 63,985 | $ 12,166 | $ 4,634 | - | |||||||
| 2002 no. of days | 47 | 50 | 50 | 20 | 57 | - | |||||||
| Export simulcasting** | |||||||||||||
| 2003 handle | $ 23,043 | $167,417 | $ 85,538 | $ 13,254 | $26,784 | $991,099 | |||||||
| 2003 no. of days | 47 | 50 | 51 | 39 | 50 | 187 | |||||||
| 2002 handle | $ 21,878 | $181,927 | $ 84,636 | $ 7,893 | $20,243 | $819,387 | |||||||
| 2002 no. of days | 47 | 50 | 50 | 20 | 57 | 167 | |||||||
| Import simulcasting | |||||||||||||
| 2003 handle | $ 54,691 | $102,039 | - | $234,388 | $62,926 | - | |||||||
| 2003 no. of days | 259 | 130 | - | 1,098 | 670 | - | |||||||
| 2002 handle | $ 66,249 | $112,200 | - | $176,129 | $69,259 | - | |||||||
| 2002 no. of days | 277 | 130 | - | 925 | 597 | - | |||||||
| Number of OTBs | 1 | - | - | 7 | 3 | - | |||||||
| Totals | |||||||||||||
| 2003 handle | $165,245 | $362,477 | $150,098 | $267,111 | $93,445 | $991,099 | |||||||
| 2002 handle | $173,679 | $393,065 | $148,621 | $196,188 | $94,136 | $819,387 | |||||||
19
| Kentucky Operations |
Hollywood Park |
Calder Race Course |
Arlington Park |
Hoosier Park |
CDSN | ||||||||
| ***Pari-mutuel revenues: | |||||||||||||
| 2003 Revenues | |||||||||||||
| Live racing | $10,578 | $ 8,955 | $ 8,700 | $ 3,605 | $ 372 | - | |||||||
| Export simulcasting | 1,421 | 7,811 | 9,267 | 1,191 | 772 | $36,486 | |||||||
| Import simulcasting | 8,253 | 5,960 | - | 14,327 | 11,368 | - | |||||||
| Other revenues | 4,196 | 10,668 | 867 | 10,295 | 383 | - | |||||||
| Total 2003 Revenues | $24,448 | $33,394 | $18,834 | $29,418 | $12,895 | $36,486 | |||||||
| 2002 Revenues | |||||||||||||
| Live racing | $10,887 | $ 9,710 | $ 8,598 | $ 2,247 | $ 437 | - | |||||||
| Export simulcasting | 1,308 | 8,563 | 9,260 | 633 | 556 | $29,410 | |||||||
| Import simulcasting | 9,307 | 6,283 | - | 10,637 | 12,519 | - | |||||||
| Other revenues | 4,444 | 8,957 | 739 | 8,803 | 311 | - | |||||||
| Total 2002 Revenues | $25,946 | $33,513 | $18,597 | $22,320 | $13,823 | $29,410 | |||||||
As a result of the reorganization for internal reporting during 2002, this summary above is now reported on a new basis, which separates our CDSN operations into a separate segment.
*Arlington Park’s seventh OTB opened during June 2003 and the sixth OTB opened during December 2002.
** CDSN export simulcasting includes all interstate handle activity at our live racing segments except Hoosier Park. Hoosier Park export simulcasting includes interstate and intrastate handle activity for Hoosier Park racetrack.
*** 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. Other revenues includes source market fees from in-home wagering and other statutory racing revenues.
Net Revenues
Net revenues during the six months ended June 30, 2003 increased $10.7 million from $203.6 million in 2002 to $214.3 million in 2003. Arlington Park revenues increased $7.6 million primarily due to a change in the racing schedule resulting in an additional 19 days of live racing during the first six months of 2003 compared to 2002. Additionally, during January and February when there is no live racing in Illinois, the IRC appoints a Thoroughbred racetrack as the host track in Illinois. The IRC appointed Arlington Park as the host track in Illinois during January 2003 resulting in increased pari-mutuel revenues compared to the prior period. Kentucky Operations revenues increased $4.7 million primarily due to record wagering for the Kentucky Derby and Kentucky Oaks and revenues from our new Jockey Club luxury suites for Kentucky Derby and Oaks days. Calder Race Course revenues increased $0.7 million primarily due to one additional day of live racing in 2003 compared to 2002. CDSN revenues increased $7.2 million primarily due to increases in overall interstate export simulcasting activity as well as the additional one day of racing at Calder Race Course, 19 additional live race days at Arlington Park and record wagering on the Kentucky Oaks and Kentucky Derby days. These increases were partially offset by a $4.9 million decrease in Indiana riverboat admissions subsidy at Hoosier Park resulting from regulatory changes requiring Hoosier Park to split the subsidy revenues with Indiana Downs. Hoosier Park also had a decrease in pari-mutuel revenues of $0.9 million due to seven fewer live Standardbred race days during 2003 compared to 2002.
20
Operating Expenses
Operating expenses increased $4.6 million from $162.4 million in 2002 to $167.0 million in 2003 primarily due to increased purse expenses of $4.4 million at Arlington Park resulting from increases in host track pari-mutuel revenues and increased number of live race days noted above. Kentucky Operations and Calder Race Course also had increases in purse expenses of a combined $1.9 million consistent with their increases in pari-mutuel revenues. Hoosier Park purse expenses decreased $3.0 million consistent with the decrease in Indiana riverboat admissions subsidy noted above.
Gross Profit
Gross profit increased $6.1 million from $41.2 million in 2002 to $47.3 million in 2003 primarily due to revenue growth during 2003 discussed above.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses decreased by $0.4 million from $17.3 million in 2002 to $16.9 million in 2003 primarily as a result of a decrease in legislative costs for our Kentucky Operations which were incurred during 2002 related to legislative alternative gaming initiatives.
Other Income and Expense
Interest expense decreased $1.7 million from $5.0 million in 2002 to $3.3 million in 2003 due to lower interest rates and the use of available cash to pay down our line of credit.
21
Income Tax Provision
Our income tax provision increased $3.9 million as a result of an increase in pre-tax earnings and an increase in our currently estimated effective income tax rate from 40.2% in 2002 to 40.6% in 2003.
Three Months Ended June 30, 2003 Compared to Three Months Ended June 30, 2002
Net Revenues
Net revenues during the three months ended June 30, 2003 increased $7.9 million from $172.6 million in 2002 to $180.5 million in 2003. Arlington Park revenues increased $3.3 million resulting from an additional 19 days of live racing due to the racing calendar starting earlier in the year. Calder Race Course had an increase of $0.6 million in revenues primarily due to one additional day of live racing in 2003 compared to 2002. Kentucky Operation revenues also increased $5.4 million as a result of record wagering for the Kentucky Derby and Kentucky Oaks and revenues from our new Jockey Club luxury suites for Kentucky Derby and Oaks days. CDSN revenues increased $7.1 million primarily due to increases in overall interstate export simulcasting activity as well as the additional one day of racing at Calder Race Course, 19 additional live race days at Arlington Park and record wagering on the Kentucky Oaks and Kentucky Derby days. These increases were partially offset by a $2.7 million decrease in Indiana riverboat admissions subsidy at Hoosier Park resulting from legislative changes requiring Hoosier Park to split the subsidy revenues with Indiana Downs. Hoosier Park also had a decrease in pari-mutuel revenues of $0.8 million due to 14 fewer live Standardbred race days during the second quarter of 2003 compared to 2002.
Operating Expenses
Operating expenses increased $0.7 million from $122.7 million in 2002 to $123.4 million in 2003 primarily due to increased expenses at Calder Race Course and Arlington Park resulting from the increased number of live racing days noted above. Kentucky Operations also had increases in operating expenses of $2.1 million consistent with the increases in pari-mutuel revenues. Hoosier Park operating expenses decreased $2.3 million consistent with the decrease in Indiana riverboat admissions subsidy and 14 fewer live racing days during the second quarter of 2003 compared to 2002.
Gross Profit
Gross profit increased $7.2 million from $49.9 million in 2002 to $57.1 million in 2003 primarily due to increased revenues for the three months ended June 30, 2003 discussed above. These increases were partially offset by a decrease of $1.3 million in Indiana riverboat admissions subsidy, net of purse expenses, as discussed.
22
Selling, General and Administrative Expenses
SG&A expenses decreased slightly by $0.1 million primarily as a result of a decrease in legislative alternative gaming initiative costs.
Other Income and Expense
Interest expense decreased $0.8 million in 2003 due to lower interest rates and the use of available cash to pay down our line of credit.
Income Tax Provision
Our income tax provision increased $3.7 million as a result of an increase in pre-tax earnings and an increase in our currently estimated effective income tax rate from 39.8% in 2002 to 40.4% in 2003.
Restricted cash increased $10.9 million due to the timing of the Hollywood Park and Hoosier Park live meets. Hollywood Park and Hoosier Park’s increases of $12.4 million and $1.7 million, respectively, were offset by a decrease of $3.1 million at Arlington Park for restricted cash balances previously held for the 2002 Breeders’ Cup Championship. Restricted cash represents refundable deposits and amounts due to horsemen for purses, stakes and awards.
Accounts receivable balances increased by $11.3 million in 2003 primarily due to the timing of payments received related to the 2003 live meets for Kentucky Operations, Arlington Park and Hollywood Park with increases in accounts receivable balances of $6.1 million, $3.8 million and $4.4 million, respectively. Hoosier Park also had an increase of $1.0 million and Calder Race Course had a decrease of $4.4 million due to timing of collections.
Net plant and equipment increased $9.3 million primarily as a result of capital expenditures of $12.1 million related to the renovation plan to restore and modernize key areas at our Churchill Downs racetrack facility, referred to as our “Master Plan”. Additional increases were due to routine capital spending at our operating units offset by depreciation of $10.0 million.
Accounts payable increased $33.2 million primarily due to the timing of payments for horsemen accounts, purses payable and other expenses related to the operation of live racing at Arlington Park, Kentucky Operations, Hollywood Park and Hoosier Park.
Dividends payable decreased $6.6 million at June 30, 2003 due to the payment of dividends in the first quarter of 2003.
23
Deferred revenue decreased $7.2 million at June 30, 2003, primarily due to the significant amount of admissions and seat revenue that was received prior to December 31, 2002 recognized as income in May 2003 for the Kentucky Derby and Kentucky Oaks race days.
Accounts receivable balances increased by $9.4 million due to the timing of payments related to Kentucky Operations and Hollywood Park’s live race meets as well as the timing of payments for Hoosier Park’s Indiana riverboat admissions subsidy. Additionally, Kentucky Operations accounts receivable increased $3.2 million for the licensing of our new Jockey Club luxury suites.
Net plant and equipment increased $9.0 million primarily as a result of capital expenditures related to the Master Plan. Additional increases were due to routine capital spending at our operating units offset by depreciation expense.
Accounts payable decreased $10.6 million primarily due to decreases in purses payable at Arlington Park and Hoosier Park resulting from changes in racing schedules. Kentucky Operation purses payable increased as a result of increased handle.
Cash flows provided by operations were $44.2 million and $41.4 million for the six months ended June 30, 2003 and 2002, respectively. Cash provided by operations increased slightly as compared to 2002 consistent with results from operations offset by timing of accounts receivable collections.
Cash flows used in investing activities were $19.1 million and $8.8 million for the six months ended June 30, 2003 and 2002, respectively. During the six months ended June 30, 2003 we used $12.1 million in cash for the Master Plan renovation of our Churchill Downs racetrack. We are planning capital expenditures, including $15.5 million for the completion of the first phase and $24.9 million for the second phase of our Master Plan renovation, of approximately $53.0 million in 2003.
Cash flows used in financing activities were $12.6 million and $21.8 million for the six months ended June 30, 2003 and 2002, respectively, reflecting 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 $113.2 million was outstanding at June 30, 2003. 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.
24
The Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“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. Adoption of SFAS No. 146 did not impact our results of operations or financial position.
In December 2002, the FASB issued SFAS No. 148 “Accounting for Stock-Based Compensation –Transition and Disclosure, an amendment of FASB Statement No. 123.” This Statement amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. Management does not currently expect to change its method of accounting treatment for stock options.
In April 2003, the FASB issued SFAS No. 149 “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The changes in SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. Management anticipates that the adoption of SFAS No. 149 will not have a significant effect on our results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of SFAS No. 150 did not impact our results of operations or financial position.
25
In January 2003, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, and interpretation of SFAS No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34” (“FIN 45”). FIN 45 requires that upon issuance of a guarantee, the entity must recognize a liability for the fair value of the obligation it assumes under that guarantee. FIN 45 requires disclosure about each guarantee even if the likelihood of the guarantor’s having to make any payments under the guarantee is remote. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002. Adoption of FIN 45 did not impact our results of operations or financial position.
In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN 46”). This Interpretation of Accounting Research Bulletin No. 51 “Consolidated Financial Statements,” requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. Adoption of FIN 46 did not impact our results of operations or financial position.
26
| At June 30, 2003, we had $113.2 million of debt outstanding under our senior notes and revolving loan facility, which bears 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 revolving loan facility remains constant, a one percentage point increase in the LIBOR rate would reduce annual pre-tax earnings and cash flows by $1.1 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 during March 2003. Under terms of these contracts we receive a LIBOR based variable interest rate and pay a fixed interest rate on a notional amounts totaling $60.0 million. As a result of these contracts, the Company will pay a fixed interest rate of approximately 3.55% on $60.0 million of the floating rate debt described in Note 3 in this report. Assuming the June 30, 2003, 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 $0.6 million. |
|
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, 2003 that have materially
affected, or are reasonably likely to materially affect, our internal control over
financial reporting. |
| Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. |
27
| ITEM 1. | Legal Proceedings |
| Not applicable | |
| ITEM 2. | Changes in Securities and Use of Proceeds |
| (a) “ In June of 2003, the shareholders of the Company approved an amendment to the articles of incorporation of the Company eliminating cumulative voting for the election of directors of the Company. The effect of this amendment is that common shareholders of the Company will no longer have the right to vote their shares cumulatively for the election of directors.” | |
| ITEM 3. | Defaults Upon Senior Securities |
| Not applicable | |
| ITEM 4. | Submission of Matters to a Vote of Security Holders |
| The registrant’s 2003 Annual Meeting of Shareholders was held on June 19, 2003. 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 I Director | Votes For | Votes Withheld |
| Leonard S. Coleman, Jr. | 11,882,258 | 225,848 |
| Craig J. Duchossois | 11,094,668 | 1,013,438 |
| G. Watts Humphrey, Jr. | 11,794,459 | 313,647 |
| Dennis D. Swanson | 11,099,851 | 1,008,255 |
| A proposal (Proposal No. 2) to approve the Churchill Downs Incorporated 2003 Stock Option Plan was approved by a vote of the majority of the shares of the registrant’s common stock represented at the meeting: 11,399,838 shares were voted in favor of the proposal; 559,958 shares were voted against; and 148,308 shares abstained. | |
| A proposal (Proposal No. 3) to approve the amendments to the Company’s Articles of Incorporation to eliminate cumulative voting for the election of directors of the Company was approved by a vote of the majority of the shares of the registrant’s common stock represented at the meeting: 7,563,074 shares were voted in favor of the proposal; 1,152,967 shares were voted against; 3,357,618 shares were broker non-votes; and 34,447 shares abstained. |
28
| ITEM 4. | Submission of Matters to a Vote of Security Holders (cont'd) |
| A proposal (Proposal No. 4) to approve the minutes of the 2002 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: 11,124,593 shares were voted in favor of the proposal; 945,382 shares were voted against; and 38,120 shares abstained. | |
| The total number of shares of common stock outstanding as of April 23, 2003, the record date of the Annual Meeting of Shareholders, was 13,168,489. | |
| 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) | Churchill Downs Incorporated filed a Current Report on Form 8-K dated May 7, 2003, under Item 5, “Other Events”, attaching our first quarter 2003 earnings release dated May 6, 2003, which was amended by a Current Report on Form 8-K/A dated May 14, 2003, under Item 9, “Regulation FD Disclosure (Item 12. Results of Operations and Financial Condition)", furnishing our first quarter 2003 earnings release dated May 6, 2003. | |||
29
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.
August 13, 2003 |
CHURCHILL DOWNS INCORPORATED BY: /s/Thomas H. Meeker —————————————— Thomas H. Meeker President and Chief Executive Officer (Principal Executive Officer) |
August 13, 2003 |
BY: /s/Michael E. Miller —————————————— Michael E. Miller Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
30
EXHIBIT INDEX | ||||
| Numbers |
Description | By Reference To | ||
| 3(a) | Articles of Amendment to the Articles of Incorporation of Churchill Downs Incorporated dated July 18, 2003 | Report on Form 10-Q for the fiscal quarter ended June 30, 2003 | ||
| 3(b) | Articles of Incorporation of Churchill Downs Incorporated as amended through July 18, 2003 |
Report on Form 10-Q for the fiscal quarter ended June 30, 2003 | ||
| 4(a) | $100,000,000 Churchill Downs Incorporated Note Purchase Agreement for Floating Rate Senior Secured Notes, dated as of April 3, 2003 |
Exhibit 4(a) to Report on Form 10-Q for the fiscal quarter ended March 31, 2003 | ||
| 10(a) | Credit Agreement among Churchill Downs Incorporated, the guarantors party hereto, the Lenders party hereto and Bank One, Kentucky, NA, a national banking association, as agent, dated April 3, 2003. |
Exhibit 10(b) to Report on Form 10-Q for the fiscal quarter ended March 31, 2003 | ||
| 10(b) | Churchill Downs Incorporated 2003 Stock Option Plan | Exhibit 4(e) to the Registrant's Registration Statement on Form S-8 dated June 20, 2003 (No. 333-106310) | ||
| 99.31(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, 2003 | ||
| 99.31(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, 2003 | ||
| 99.32 | Certification 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, 2003 | ||
31