SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
o 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
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CHURCHILL DOWNS INCORPORATED |
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(Exact name of registrant as specified in its charter) |
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Kentucky |
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61-0156015 |
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(State
or other jurisdiction of |
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(IRS
Employer |
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700 Central Avenue, Louisville, KY 40208 |
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(Address of principal executive offices) |
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(Zip Code) |
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(502)-636-4400 |
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(Registrant’s telephone number, including area code) |
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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 ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o
The number of shares outstanding of registrant’s common stock at May 12, 2003 was 13,175,889 shares.
CHURCHILL
DOWNS INCORPORATED
INDEX
2
CHURCHILL DOWNS INCORPORATED
CONDENSED CONSOLIDATED BALANCE
SHEETS
(in thousands)
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March 31, |
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December 31, |
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March 31, |
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(unaudited) |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
11,084 |
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$ |
14,662 |
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$ |
13,828 |
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Restricted cash |
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629 |
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3,247 |
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1,340 |
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Accounts receivable, net |
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17,435 |
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34,435 |
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13,889 |
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Deferred income taxes |
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2,513 |
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2,159 |
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2,288 |
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Other current assets |
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16,834 |
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5,988 |
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13,900 |
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Total current assets |
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48,495 |
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60,491 |
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45,245 |
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Other assets |
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10,707 |
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10,606 |
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12,320 |
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Plant and equipment, net |
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343,910 |
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338,381 |
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339,804 |
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Goodwill, net |
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52,239 |
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52,239 |
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52,239 |
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Other intangible assets, net |
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7,404 |
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7,495 |
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7,769 |
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$ |
462,755 |
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$ |
469,212 |
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$ |
457,377 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
27,296 |
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$ |
31,189 |
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$ |
28,250 |
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Accrued expenses |
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27,609 |
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31,782 |
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28,270 |
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Dividends payable |
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- |
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6,578 |
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- |
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Income taxes payable |
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- |
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727 |
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- |
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Deferred revenue |
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28,579 |
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14,876 |
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23,817 |
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Long-term debt, current portion |
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513 |
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508 |
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524 |
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Total current liabilities |
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83,997 |
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85,660 |
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80,861 |
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Long-term debt, due after one year |
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127,646 |
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122,840 |
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142,748 |
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Other liabilities |
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12,997 |
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12,603 |
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12,241 |
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Deferred income taxes |
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14,822 |
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13,112 |
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15,124 |
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Total liabilities |
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239,462 |
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234,215 |
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250,974 |
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Commitments and contingencies |
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- |
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- |
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- |
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Shareholders’ equity: |
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Preferred stock, no par value; 250 shares authorized; no shares issued |
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- |
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- |
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- |
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Common stock, no par value; 50,000 shares authorized; issued: 13,168 shares March 31, 2003, 13,157 shares December 31, 2002, and 13,115 shares March 31, 2002 |
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126,302 |
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126,043 |
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125,132 |
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Retained earnings |
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97,745 |
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109,241 |
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82,815 |
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Accumulated other comprehensive loss |
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(754 |
) |
(222 |
) |
(1,479 |
) |
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Note receivable for common stock |
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- |
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(65 |
) |
(65 |
) |
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223,293 |
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234,997 |
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206,403 |
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$ |
462,755 |
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$ |
469,212 |
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$ |
457,377 |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
3
CHURCHILL DOWNS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS
for the three months ended March 31,
(Unaudited)
(In thousands, except per share data)
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2003 |
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2002 |
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Net revenues |
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$ |
33,789 |
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$ |
30,972 |
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Operating expenses |
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43,542 |
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39,729 |
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Gross loss |
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(9,753 |
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(8,757 |
) |
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Selling, general and administrative expenses |
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8,108 |
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8,396 |
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Operating loss |
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(17,861 |
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(17,153 |
) |
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Other income (expense): |
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Interest income |
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62 |
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81 |
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Interest expense |
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(1,827 |
) |
(2,652 |
) |
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Miscellaneous, net |
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402 |
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(169 |
) |
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(1,363 |
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(2,740 |
) |
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Loss before income tax benefit |
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(19,224 |
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(19,893 |
) |
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Income tax benefit |
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7,728 |
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7,858 |
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Net loss |
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$ |
(11,496 |
) |
$ |
(12,035 |
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Basic and diluted net loss per common share |
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$ |
(0.87 |
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$ |
(0.92 |
) |
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Basic and diluted weighted average shares outstanding |
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13,159 |
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13,105 |
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4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended March 31,
(Unaudited)
(in thousands)
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2003 |
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2002 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(11,496 |
) |
$ |
(12,035 |
) |
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Adjustments to reconcile net earnings to net cash provided by operating activities: |
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Depreciation and amortization |
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5,062 |
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4,815 |
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Increase (decrease) in cash resulting from changes in operating assets and liabilities: |
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|
|
|
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Restricted cash |
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2,618 |
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9,365 |
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Accounts receivable |
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17,000 |
|
17,286 |
|
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Other current assets |
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(10,845 |
) |
(11,872 |
) |
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Accounts payable |
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(1,957 |
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(12,502 |
) |
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Accrued expenses |
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(5,059 |
) |
(2,305 |
) |
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Income taxes payable |
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(727 |
) |
(971 |
) |
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Deferred revenue |
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13,703 |
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9,576 |
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Other assets and liabilities |
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2,003 |
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249 |
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Net cash provided by operating activities |
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10,302 |
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1,606 |
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Cash flows from investing activities: |
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Additions to plant and equipment, net |
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(8,657 |
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(5,109 |
) |
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Net cash used in investing activities |
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(8,657 |
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(5,109 |
) |
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Cash flows from financing activities: |
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Decrease in long-term debt, net |
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(120 |
) |
(653 |
) |
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Borrowings on bank line of credit |
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51,354 |
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53,081 |
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Repayments of bank line of credit |
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(46,423 |
) |
(42,503 |
) |
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Change in book overdraft |
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(3,780 |
) |
(1,989 |
) |
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Proceeds from note receivable for common stock |
|
65 |
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- |
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Payment of dividends |
|
(6,578 |
) |
(6,549 |
) |
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Common stock issued |
|
259 |
|
382 |
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Net cash (used in) provided by financing activities |
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(5,223 |
) |
1,769 |
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Net decrease in cash and cash equivalents |
|
(3,578 |
) |
(1,734 |
) |
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Cash and cash equivalents, beginning of period |
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14,662 |
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15,562 |
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Cash and cash equivalents, end of period |
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$ |
11,084 |
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$ |
13,828 |
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Supplemental disclosures of cash flow information: |
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Cash paid during the period for: |
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Interest |
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$ |
1,699 |
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$ |
2,272 |
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Income taxes |
|
$ |
400 |
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$ |
850 |
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Schedule of non-cash activities: |
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Plant and equipment additions included in accounts payable |
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$ |
1,843 |
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- |
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5
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the three months ended March 31, 2003 and 2002 (Unaudited)
($ in thousands, except per share data)
1. Basis of Presentation
The accompanying condensed consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in Churchill Downs Incorporated’s (the “Company”) annual report on Form 10-K. The year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Accordingly, the reader of this Form 10-Q may wish to refer to the Company’s Form 10-K 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 loss and net loss per common share for the three months ended March 31, 2003 and 2002 would approximate the pro forma amounts presented below:
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Three Months Ended March 31, |
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2003 |
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2002 |
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Net loss |
|
$ |
(11,496 |
) |
$ |
(12,035 |
) |
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Pro forma stock-based compensation expense, net of tax benefit |
|
(385 |
) |
(191 |
) |
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Pro forma net loss |
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$ |
(11,881 |
) |
$ |
(12,226 |
) |
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Pro forma basic and diluted net loss per common share |
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$ |
(0.90 |
) |
$ |
(0.93 |
) |
6
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
for the three months ended March 31, 2003 and 2002 (Unaudited)
($ in thousands, except per share data)
2. Stock-Based Compensation (cont’d)
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
During the first quarter the Company had a $250 million line of credit under a revolving loan facility through a syndicate of banks to meet working capital and other short-term requirements and to provide funding for acquisitions. The interest rate on the borrowing was based upon LIBOR plus 75 to 250 additional basis points, which was determined by certain Company financial ratios. The weighted average interest rate on our outstanding revolving loan borrowings was 2.27% and 2.64% at March 31, 2003 and 2002, respectively. There was $120.9 million outstanding on the line of credit at March 31, 2003, compared to $116.0 million outstanding at December 31, 2002, and $135.3 million outstanding at March 31, 2002. The credit facility contained financial covenant requirements, including specified fixed charge, minimum interest coverage and maximum levels of net worth. As of March 31, 2003, the Company was in compliance with all covenants. The line of credit was collateralized by substantially all of the assets of the Company and its wholly owned subsidiaries. The facility, which was to mature in 2004, was refinanced in April 2003 (see note 10).
4. Financial Instruments
In order to mitigate a portion of the market risk on its variable rate debt, the Company 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 amount of $60.0 million. As a result of these contracts, the Company will pay a fixed interest rate of approximately 3.55% on $60.0 million of the floating rate debt described in note 10. The variable interest rate paid on the contracts is determined based on LIBOR on the last day of each March, June, September and December, which is consistent with the variable rate determination on the underlying debt. These contracts mature in March 2008.
The Company has designated its interest rate swaps as cash flow hedges of anticipated interest payments under its variable rate agreements. Gains and losses on these swaps that are recorded in other comprehensive income will be reclassified into net income as interest expense, net in the periods in which the related variable interest is paid.
The Company also had three interest rate swaps in effect during the three months ended March 31, 2002 on which the Company received a LIBOR-based variable rate and paid a fixed interest rate. Terms of the swaps are as follows:
7
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
for the three months ended March 31, 2003 and 2002 (Unaudited)
($ in thousands, except per share data)
4. Financial Instruments (cont’d)
Notional Amount |
|
Termination Date |
|
Fixed Rate |
|
|
$35 million |
|
May 2002 |
|
7.30% |
|
|
$30 million |
|
November 2002 |
|
6.40% |
|
|
$35 million |
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March 2003 |
|
7.015% |
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Comprehensive loss consists of the following:
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Three months ended March 31, |
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2003 |
|
2002 |
|
||
|
|
|
|
|
|
|
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Net Loss |
|
$ |
(11,496 |
) |
$ |
(12,035 |
) |
|
Cash flow hedging (net of related tax benefit |
|
|
|
|
|
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of $355 in 2003 and tax expense of $523 in 2002) |
|
(532 |
) |
821 |
|
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|
Comprehensive loss |
|
$ |
(12,028 |
) |
$ |
(11,214 |
) |
5. Earnings Per Share
The following is a reconciliation of the numerator and denominator of the earnings per common share computations:
|
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|
Three months ended March 31, |
|
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|
|
|
2003 |
|
2002 |
|
||
|
|
|
|
|
|
|
||
|
Numerator for basic and diluted per share: |
|
$ |
(11,496 |
) |
$ |
(12,035 |
) |
|
|
|
|
|
|
|
||
|
Denominator for weighted average shares of common stock outstanding per share: |
|
13,159 |
|
13,105 |
|
||
|
|
|
|
|
|
|
||
|
Basic and diluted net loss per common share: |
|
$ |
(0.87 |
) |
$ |
(0.92 |
) |
Options to purchase 999 and 894 shares for the three months ended March 31, 2003 and 2002, respectively, are excluded from the computation of diluted net loss per common share since their effect is antidilutive because of net losses for the periods.
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.
8
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
for the three months ended March 31, 2003 and 2002 (Unaudited)
($ in thousands, except per share data)
6. Goodwill and Other Intangible Assets (cont’d)
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 March 31, 2003 and 2002 for Kentucky Operations, Calder Racecourse and CDSN was $4.8 million, $36.4 million and $11.0 million, respectively.
The Company’s other intangible assets are comprised of the following:
|
|
|
2003 |
|
2002 |
|
||
|
Illinois Horse Race Equity fund |
|
$ |
3,307 |
|
$ |
3,307 |
|
|
Arlington Park trademarks |
|
494 |
|
494 |
|
||
|
Indiana racing license |
|
2,085 |
|
2,085 |
|
||
|
Other intangible asset |
|
3,296 |
|
3,296 |
|
||
|
|
|
9,182 |
|
9,182 |
|
||
|
Accumulated amortization |
|
(1,778 |
) |
(1,413 |
) |
||
|
|
|
$ |
7,404 |
|
$ |
7,769 |
|
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 $3.6 million at March 31, 2003, which is net of accumulated amortization of $1.8 million. Amortization expense for other intangibles of approximately $91 for the three months ended March 31, 2003 and 2002 is classified in operating expenses.
Future estimated aggregate amortization expense on other intangible assets for each of the five fiscal years are as follows:
|
|
|
Estimated |
|
|
2003 |
|
365 |
|
|
2004 |
|
167 |
|
|
2005 |
|
167 |
|
|
2006 |
|
167 |
|
|
2007 |
|
167 |
|
9
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
for the three months ended March 31, 2003 and 2002 (Unaudited)
($ in thousands, except per share data)
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 six 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. Eliminations include the elimination of management fees and other intersegment transactions, primarily between CDSN and the racetracks.
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 also earn pari-mutuel related streams of revenues from sources that are not related to the handle wagered at our facilities. 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. Additional non-wagering revenues are primarily generated from Indiana riverboat admissions subsidy, admissions, concessions, sponsorship, licensing rights and broadcast fees, 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.
10
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
for the three months ended March 31, 2003 and 2002 (Unaudited)
($ in thousands, except per share data)
7. Segment Information (cont’d)
The table below presents information about reported segments for the three months ended March 31, 2003 and 2002:
|
|
|
Three Months Ended March 31, |
|
||||
|
|
|
2003 |
|
2002 |
|
||
|
Net Revenues from External Customers: |
|
|
|
|
|
||
|
Kentucky Operations |
|
$ |
4,898 |
|
$ |
5,596 |
|
|
Hollywood Park |
|
4,969 |
|
5,032 |
|
||
|
Calder Race Course |
|
1,132 |
|
1,070 |
|
||
|
Arlington Park |
|
11,989 |
|
6,119 |
|
||
|
Hoosier Park |
|
9,430 |
|
12,036 |
|
||
|
CDSN |
|
843 |
|
697 |
|
||
|
Total racing operations |
|
33,261 |
|
30,550 |
|
||
|
Other investments |
|
528 |
|
412 |
|
||
|
Corporate revenues |
|
- |
|
10 |
|
||
|
|
|
$ |
33,789 |
|
$ |
30,972 |
|
|
|
|
|
|
|
|
||
|
Intercompany Net Revenues: |
|
|
|
|
|
||
|
Hollywood Park |
|
$ |
4 |
|
$ |
- |
|
|
Calder Race Course |
|
248 |
|
184 |
|
||
|
Hoosier Park |
|
4 |
|
- |
|
||
|
Total racing operations |
|
256 |
|
184 |
|
||
|
Other investments |
|
144 |
|
119 |
|
||
|
Corporate revenues |
|
283 |
|
428 |
|
||
|
Eliminations |
|
(683 |
) |
(731 |
) |
||
|
|
|
$ |
- |
|
$ |
- |
|
|
|
|
|
|
|
|
||
|
EBITDA: |
|
|
|
|
|
||
|
Kentucky Operations |
|
$ |
(5,147 |
) |
$ |
(5,211 |
) |
|
Hollywood Park |
|
(2,215 |
) |
(2,217 |
) |
||
|
Calder Race Course |
|
(2,667 |
) |
(3,075 |
) |
||
|
Arlington Park |
|
(1,469 |
) |
(2,261 |
) |
||
|
Hoosier Park |
|
674 |
|
1,990 |
|
||
|
CDSN |
|
219 |
|
263 |
|
||
|
Total racing operations |
|
(10,605 |
) |
(10,511 |
) |
||
|
Other investments |
|
35 |
|
(332 |
) |
||
|
Corporate expenses |
|
(1,827 |
) |
(1,604 |
) |
||
|
Eliminations |
|
- |
|
(60 |
) |
||
|
|
|
$ |
(12,397 |
) |
$ |
(12,507 |
) |
11
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
for the three months ended March 31, 2003 and 2002 (Unaudited)
($ in thousands, except per share data)
7. Segment Information (cont’d)
|
|
|
As of |
|
As of |
|
As of |
|
|||
|
Total assets: |
|
|
|
|
|
|
|
|||
|
Kentucky Operations |
|
$ |
400,610 |
|
$ |
396,998 |
|
$ |
388,224 |
|
|
Hollywood Park |
|
143,559 |
|
150,627 |
|
146,602 |
|
|||
|
Calder Race Course |
|
80,413 |
|
87,498 |
|
81,809 |
|
|||
|
Arlington Park |
|
77,216 |
|
80,766 |
|
76,089 |
|
|||
|
Hoosier Park |
|
35,780 |
|
34,759 |
|
37,226 |
|
|||
|
CDSN |
|
11,018 |
|
11,018 |
|
11,018 |
|
|||
|
Other investments |
|
80,927 |
|
77,724 |
|
55,272 |
|
|||
|
|
|
829,523 |
|
839,390 |
|
796,240 |
|
|||
|
Eliminations |
|
(366,768 |
) |
(370,178 |
) |
(338,863 |
) |
|||
|
|
|
$ |
462,755 |
|
$ |
469,212 |
|
$ |
457,377 |
|
The following table is a reconciliation of total EBITDA, which is generally considered a non-GAAP financial measure, to the accompanying financial statements, specifically, loss before income tax benefit:
|
|
|
Three Months Ended March 31, |
|
||||
|
|
|
2003 |
|
2002 |
|
||
|
Total EBITDA |
|
$ |
(12,397 |
) |
$ |
(12,507 |
) |
|
Depreciation and amortization |
|
(5,062 |
) |
(4,815 |
) |
||
|
Interest income (expense), net |
|
(1,765 |
) |
(2,571 |
) |
||
|
Loss before income tax benefit |
|
$ |
(19,224 |
) |
$ |
(19,893 |
) |
8. Significant Accounting Pronouncements
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. Management anticipates that the adoption of SFAS No. 146 will not have a significant effect on 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.
12
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
for the three months ended March 31, 2003 and 2002 (Unaudited)
($ in thousands, except per share data)
8. Significant Accounting Pronouncements (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. Management does not expect the adoption of this Interpretation to have a material impact on 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. Management does not expect the adoption of this Interpretation to have a material impact on our results of operations or financial position.
9. Related Party Transaction
During 2003, the Company was paid $65 by the President of the Company for repayment of a note receivable to purchase shares of common stock. Notes receivable for common stock was classified in the balance sheet as a reduction of shareholders’ equity at December 31, 2002 and March 31, 2002.
13
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
for the three months ended March 31, 2003 and 2002 (Unaudited)
($ in thousands, except per share data)
10. Subsequent Events
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 includes 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 borrowings is based upon LIBOR plus a spread of 125 to 225 additional basis points, which is determined by certain Company financial ratios. The interest rate on the Company’s senior notes is based upon LIBOR plus 155 basis points. These notes require interest only payments during their term with principal due at maturity. Both the bank facility and the senior notes contain financial 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.
14
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 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 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, 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.
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
15
CHURCHILL DOWNS INCORPORATED
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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 ten 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 also earn pari-mutuel related streams of revenues from sources that are not related to the handle wagered at our facilities. 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. Additional non-wagering revenues are primarily generated from Indiana riverboat admissions subsidy, admissions, concessions, sponsorships, licensing rights and broadcast fees, 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 the 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.
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.
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
16
CHURCHILL DOWNS INCORPORATED
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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.
We are currently pursuing the divestiture of our Ellis Park racetrack. If a sale occurs, we plan to use any net proceeds to reduce our debt. 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 IHRC or by enactment of legislation, the riverboat subsidy will be split evenly during 2003 between the two racetracks in Indiana reducing Hoosier Park’s subsidy revenues by approximately $5 million. It is also expected that subsidy revenues will be split evenly during the first half of 2004 and based on purses generated by each Indiana racetrack during the latter half of 2004.
Chicago-area racetracks, including Arlington Park, continue to lobby for a proposal that would authorize the Illinois Gaming Board to award unlimited gaming to riverboat casinos and allow racetracks to operate slot machines and video lottery terminals. In return for the right to operate electronic gaming machines, each racetrack would be required to advance a portion of its first-year projected state gaming taxes. Additionally, the horse industry would forego the Illinois Horseracing Equity Fund, a subsidy flowing to the industry from the tenth riverboat license, the Illinois Pari-Mutuel Real Estate Tax Credit, and the Recapture provisions of the Illinois Horseracing Act of 1975. Negotiations continue between racetracks, horsemen and riverboat operators, with the goal of introducing a bill for passage before the Illinois General Assembly adjourns on May 23, 2003.
17
CHURCHILL DOWNS INCORPORATED
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
RESULTS OF OPERATIONS
Pari-mutuel wagering information, including intercompany transactions, for our CDSN segment and five live racing segments including on-site simulcast facilities and ten separate OTBs, which are included in their respective segments, during the three months ended March 31, 2003 and 2002, is as follows ($ in thousands):
|
|
|
Kentucky |
|
Hollywood |
|
Calder Race |
|
Arlington |
|
Hoosier |
|
CDSN |
|
||||||
|
Pari-mutuel wagering: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Live Racing |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
2003 handle |
|
- |
|
- |
|
$ |
2,289 |
|
- |
|
$ |
522 |
|
- |
|
||||
|
2003 no. of days |
|
- |
|
- |
|
2 |
|
- |
|
7 |
|
- |
|
||||||
|
2002 handle |
|
- |
|
- |
|
$ |
2,098 |
|
- |
|
- |
|
- |
|
|||||
|
2002 no. of days |
|
- |
|
- |
|
2 |
|
- |
|
- |
|
- |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Export simulcasting* |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
2003 handle |
|
- |
|
- |
|
- |
|
- |
|
$ |
1,986 |
|
$ |
10,375 |
|
||||
|
2003 no. of days |
|
- |
|
- |
|
- |
|
- |
|
7 |
|
2 |
|
||||||
|
2002 handle |
|
- |
|
- |
|
- |
|
- |
|
- |
|
$ |
8,175 |
|
|||||
|
2002 no. of days |
|
- |
|
- |
|
- |
|
- |
|
- |
|
2 |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Import simulcasting |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
2003 handle |
|
$ |
37,764 |
|
$ |
76,253 |
|
- |
|
$ |
106,882 |
|
$ |
30,541 |
|
- |
|
||
|
2003 no. of days |
|
165 |
|
65 |
|
- |
|
540 |
|
335 |
|
- |
|
||||||
|
2002 handle |
|
$ |
44,152 |
|
$ |
83,008 |
|
- |
|
$ |
70,459 |
|
$ |
33,716 |
|
- |
|
||
|
2002 no. of days |
|
165 |
|
65 |
|
- |
|
450 |
|
295 |
|
- |
|
||||||
|
Number of OTBs |
|
1 |
|
- |
|
- |
|
6 |
|
3 |
|
- |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Totals |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
2003 handle |
|
$ |
37,764 |
|
$ |
76,253 |
|
$ |
2,289 |
|
$ |
106,882 |
|
$ |
33,049 |
|
$ |
10,375 |
|
|
2002 handle |
|
$ |
44,152 |
|
$ |
83,008 |
|
$ |
2,098 |
|
$ |
70,459 |
|
$ |
33,716 |
|
$ |
8,175 |
|
18
CHURCHILL DOWNS INCORPORATED
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
|
|
|
Kentucky |
|
Hollywood |
|
Calder Race |
|
Arlington |
|
Hoosier |
|
CDSN |
|
||||||
|
**Pari-mutuel revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
2003 Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Live racing |
|
- |
|
- |
|
$ |
543 |
|
- |
|
$ |
43 |
|
- |
|
||||
|
Export simulcasting |
|
- |
|
- |
|
- |
|
- |
|
56 |
|
$ |
314 |
|
|||||
|
Import simulcasting |
|
$ |
3,789 |
|
$ |
1,675 |
|
- |
|
$ |
3,563 |
|
5,501 |
|
- |
|
|||
|
Other revenue |
|
269 |
|
- |
|
17 |
|
7,108 |
|
161 |
|
- |
|
||||||
|
Total 2003 Revenue |
|
$ |
4,058 |
|
$ |
1,675 |
|
$ |
560 |
|
$ |
10,671 |
|
$ |
5,761 |
|
$ |
314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
2002 Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Live racing |
|
- |
|
- |
|
$ |
491 |
|
- |
|
- |
|
- |
|
|||||
|
Export simulcasting |
|
|
|
|
|
- |
|
- |
|
- |
|
$ |
230 |
|
|||||
|
Import simulcasting |
|
$ |
4,401 |
|
$ |
1,660 |
|
- |
|
$ |
3,339 |
|
$ |
5,986 |
|
- |
|
||
|
Other revenue |
|
246 |
|
- |
|
13 |
|
1,347 |
|
111 |
|
- |
|
||||||
|
Total 2002 Revenue |
|
$ |
4,647 |
|
$ |
1,660 |
|
$ |
504 |
|
$ |
4,686 |
|
$ |
6,097 |
|
$ |
230 |
|
*Arlington Park’s sixth OTB opened during December 2002.
** 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.
Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002
Net Revenues
Net revenues during the three months ended March 31, 2003 increased $2.8 million from $31.0 million in 2002 to $33.8 million in 2003. 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 of $6.9 million compared to the prior year period. This increase was partially offset by a $2.3 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. The remaining decrease is primarily attributable to decreased attendance and handle at our racetracks, except Calder Race Course, as a result of a number of factors including the Illinois horsemen’s strike, increased competition and poor economic conditions.
Operating Expenses
Operating expenses increased $3.8 million from $39.7 million in 2002 to $43.5 million in 2002 primarily due to increased purse expenses of $5.0 million at Arlington Park resulting from increases in host track pari-mutuel revenues noted above. Purse expenses decreased a combined $1.7 million at our Kentucky Operations and Hoosier Park, resulting from the decreased handle
19
CHURCHILL DOWNS INCORPORATED
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
and Indiana riverboat admissions subsidy also noted above.
Gross Loss
Gross losses were incurred in both periods as a result of limited live racing during the first quarter. During the first quarter of 2003 there were only two days of live racing at Calder Race Course and seven days of live racing at Hoosier Park. Live racing will be held at five of our six racetracks during the second quarter.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses decreased by $0.3 million from $8.4 million in 2002 to $8.1 million in 2003 primarily as a result of our expense containment efforts.
Other Income and Expense
Interest expense decreased $0.8 million in 2003 primarily due to lower interest rates and the use of available cash to pay down our line of credit since March 31, 2002.
Income Tax Provision
Our income tax benefit decreased slightly for the three months ended March 31, 2003, as compared to March 31, 2002, as a result of a decrease in pre-tax losses and an increase in our currently estimated effective income tax rate from 39.5% in 2002 to 40.2% in 2003.
Significant Changes in the Balance Sheet March 31, 2003 to December 31, 2002
Accounts receivable balances decreased by $17.0 million in 2003 primarily due to the collection of 2002 live meet receivables for Calder Race Course and Hollywood Park with decreases in accounts receivables of $6.6 million and $6.4 million, respectively. Hoosier Park and Arlington Park each had a decrease of $0.7 million due to the timing of collections. In addition, our Kentucky Operations had a decrease of $2.4 million primarily due to the collection of accounts receivables related to the 2003 Kentucky Derby and Kentucky Oaks.
Other current assets increased $10.8 million primarily as a result of the estimated income tax benefit associated with the first quarter net loss.
Net plant and equipment increased $5.5 million as a result of capital expenditures of $7.0 million related to the renovation plan to restore and modernize key areas at the Churchill Downs racetrack facility, referred to as our “Master Plan”. Additional increases were due to capital spending at the other operating units offset by depreciation of $5.0 million.
Dividends payable decreased $6.6 million at March 31, 2003 due to the payment of dividends in the first quarter of 2003.
Deferred revenue increased $13.7 million at March 31, 2003, primarily due to the sale by Kentucky Operations of the new Master Plan suites, corporate sponsor event tickets, season boxes, membership sales and future wagering related to the 2003 Kentucky Derby and Kentucky Oaks race days to be held in the second quarter of 2003.
20
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, 2003 to March 31, 2002
The long-term debt decrease of $15.1 million was a result of the use of current cash flows to reduce borrowings under our bank line of credit since March 31, 2002.
Liquidity and Capital Resources
Cash flows provided by operations were $10.3 million and $1.6 million for the three months ended March 31, 2003 and 2002, respectively. The increase in cash provided by operations as compared to 2002 was primarily a result of increased deposits for newly constructed suites in the first phase of the Master Plan.
Cash flows used in investing activities were $8.7 million and $5.1 million for the three months ended March 31, 2003 and 2002, respectively. During the three months ended March 31, 2003 we used $5.1 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 for 2003.
Cash flows (used in) provided by financing activities were $(5.2) million and $1.8 million for the three months ended March 31, 2003 and 2002, respectively, reflecting the use of improved cash flows from operations to minimize net borrowings on our line of credit in 2003 compared to 2002.
During the first quarter we had a $250 million line of credit under a revolving loan facility, of which $120.9 million was outstanding at March 31, 2003. The credit facility contained financial covenant requirements, including specified fixed charge, minimum interest coverage and maximum leverage ratios and minimum levels of net worth. This line of credit was secured by substantially all of our assets and was to mature in 2004. This credit facility was intended to meet working capital and other short-term requirements and to provide funding for potential future acquisitions.
During April 2003, we refinanced our revolving loan facility to meet our needs for funding future working capital, capital improvements and potential future acquisitions. The refinancing includes 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. Both debt facilities are collateralized by substantially all of our assets. The interest rate on the bank line of credit borrowings is based upon LIBOR plus a spread of 125 to 225 additional basis points, which is determined by certain Company financial ratios. The interest rate on our senior notes is based upon LIBOR plus 155 basis points. These notes require interest only payments during their term with principal due at maturity. Both the bank facility and the senior notes contain financial 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.
21
CHURCHILL DOWNS INCORPORATED
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Significant Accounting Pronouncements
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 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 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. Management does not expect the adoption of this Interpretation to have a material impact on 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. Management does not expect the adoption of this Interpretation to have a material impact on our results of operations or financial position.
22
CHURCHILL DOWNS INCORPORATED
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 2003, we had $120.9 million of debt outstanding under our 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 $1.2 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 amount of $60.0 million. As a result of these contracts, the Company will pay a fixed interest rate of approximately 5.05% on $60.0 million of the floating rate debt described in note 10 in this report. Assuming the March 31, 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 pursuant to Exchange Act Rule 13a-14 within 90 days of the filing date of 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 controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
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.
23
|
ITEM 1. |
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Not applicable |
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ITEM 2. |
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Not applicable |
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ITEM 3. |
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Not Applicable |
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ITEM 4. |
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Not Applicable |
||
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ITEM 5. |
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Not Applicable |
||
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|
ITEM 6. |
|
|||
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|
|
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||
|
|
|
A. |
Exhibits |
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|
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|
|
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|
|
|
Not Applicable |
|
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|
|
B. |
Reports on Form 8-K |
|
|
|
|
|
|
|
|
|
|
|
(1) |
Churchill Downs Incorporated filed a Current Report on Form 8-K dated December 26, 2002, under Item 2, “Acquisitions or Disposition of Assets,” reporting on the transfer and lease back of certain of our assets related to the financing of the master plan redevelopment project. |
|
|
|
|
|
|
|
|
|
|
(2) |
Churchill Downs Incorporated filed a Current Report on Form 8-K dated February 12, 2003, under Item 5, “Other Events”, attaching our fourth quarter and fiscal year ended December 31, 2002 earnings release dated February 11, 2003. |
24
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 |
|
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|
|
|
|
|
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|
|
May 14, 2003 |
|
/s/ Thomas H. Meeker |
|
|
|
|
Thomas H. Meeker |
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
(Principal Executive Officer) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
May 14, 2003 |
|
/s/ Michael E. Miller |
|
|
|
|
Michael E. Miller |
|
|
|
|
Executive Vice President and |
|
|
|
|
Chief Financial Officer |
|
|
|
|
(Principal Financial and Accounting Officer) |
|
25
I, Thomas H. Meeker, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Churchill Downs Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|
Date: May 14, 2003 |
|
/s/ Thomas H. Meeker |
|
|
|
Thomas H. Meeker |
|
|
|
President and Chief Executive Officer |
26
I, Michael E. Miller, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Churchill Downs Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
c. Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
a. All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
|
Date: May 14, 2003 |
|
/s/ Michael E. Miller |
|
|
|
|
Michael E. Miller |
|
|
|
|
Executive Vice President and |
|
|
|
|
Chief Financial Officer |
|
27
|
Numbers |
|
Description |
|
By Reference To |
|
3(a) |
|
Restated Bylaws of Churchill Downs Incorporated as amended |
|
Report on Form 10-Q for the fiscal quarter ended March 31, 2003. |
|
|
|
|
|
|
|
4(a) |
|
$100,000,000 Churchill Downs Incorporated Note Purchase Agreement for Floating Rate Senior Secured Notes, dated as of April 3, 2003 |
|
Report on Form 10-Q for the fiscal quarter ended March 31, 2003. |
|
|
|
|
|
|
|
10(a) |
|
Employment Agreement dated as of March 13, 2003, with Thomas H. Meeker, President |
|
Report on Form 10-Q for the fiscal quarter ended March 31, 2003. |
|
|
|
|
|
|
|
10(b) |
|
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. |
|
Report on Form 10-Q for the fiscal quarter ended March 31, 2003. |
|
|
|
|
|
|
|
99(a) |
|
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 |
|
Report on Form 10-Q for the fiscal quarter ended March 31, 2003. |
28