SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q/A

 

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

 

For the quarterly period ended June 30, 2004

 

OR

 

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

 

(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 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 August 5, 2004 was 13,298,006 shares.

 

 



 

EXPLANATORY NOTE

 

Churchill Downs Incorporated (the “Company”) recently determined that purse overpayments were improperly recorded as assets.  Purse overpayments are created when, at the end of a race meeting, the purses paid to horsemen exceed the purses payable as a result of pari-mutuel operations during the race meeting.  Contractual arrangements between the Company and the horsemen’s organizations at the Company’s various racetracks, which generally expire at the end of a race meeting, provide that if a purse overpayment exists at the end of a race meeting, such overpayment may be recovered through reductions of purses otherwise paid in the subsequent race meeting(s) if a subsequent contract is entered into with the horsemen’s organization.  The Company has historically recorded these purse overpayments as receivables, subject to any necessary valuation allowances.  The Company has now determined that these overpayments do not constitute receivables and do not meet the definition of an asset under U.S. Generally Accepted Accounting Principles, thus any purse overpayment that exists at the end of a race meeting should be expensed.  Accordingly, the Company is filing this Form 10-Q/A to restate its consolidated financial statements for the effect of this error.  This restatement serves to delay the recognition of the recovery until the period in which it actually occurs.  Additionally, amounts recorded as revenues for Illinois purse recapture subsidies have been reclassified to operating expenses to offset purse expense.

 

The Items of the Company’s Form 10-Q/A for the quarter ended June 30, 2004 which are amended and restated are as follows: Part I Financial Information, Item 1 Financial Statements; Part I Financial Information, Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations; and Part I Financial Information, Item 4 Controls and Procedures.

 

The remaining Items contained within this Form 10-Q/A consist of all other Items originally contained in our Form 10-Q for the quarter ended June 30, 2004 in the form filed on August 8, 2004.  This Form 10-Q/A does not reflect events occurring after the filing of the original Form 10-Q, nor modify or update those disclosures in any way other than as required to reflect the effects of the restatement.

 

2



 

CHURCHILL DOWNS INCORPORATED

I N D E X TO QUARTERLY REPORT ON FORM 10-Q/A

 

Part I

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

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

 

 

 

 

 

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

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

 

Part II

 

 

 

 

Item 1.

Legal Proceedings (Not applicable)

 

 

 

 

Item 2.

Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities (Not applicable)

 

 

 

 

Item 3.

Defaults Upon Senior Securities (Not applicable)

 

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

 

 

 

 

Item 5.

Other Information (Not applicable)

 

 

 

 

Item 6.

Exhibits and Reports on Form 8-K

 

 

 

 

Signatures

 

 

 

 

 

Exhibit Index

 

 

3



 

PART I.  FINANCIAL INFORMATION
 

ITEM 1.  FINANCIAL STATEMENTS

 

CHURCHILL DOWNS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

 

 

 

June 30, 2004

 

December 31, 2003

 

June 30, 2003

 

 

 

As Restated,
Note 1

 

As Restated,
Note 1

 

As Restated,
Note 1

 

 

 

(unaudited)

 

 

 

(unaudited)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

39,587

 

$

18,053

 

$

41,353

 

Accounts receivable, net of allowance for doubtful accounts of $1,147 at June 30, 2004 and $1,141 at December 31, 2003 and $975 at June 30, 2003

 

49,016

 

35,604

 

45,148

 

Deferred income taxes

 

3,349

 

3,767

 

3,043

 

Other current assets

 

4,828

 

1,613

 

4,885

 

Total current assets

 

96,780

 

59,037

 

94,429

 

 

 

 

 

 

 

 

 

Other assets

 

16,474

 

16,941

 

11,962

 

Plant and equipment, net

 

403,191

 

367,229

 

347,699

 

Goodwill, net

 

52,239

 

52,239

 

52,239

 

Other intangible assets, net

 

7,178

 

7,464

 

7,313

 

 

 

$

575,862

 

$

502,910

 

$

513,642

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

76,723

 

$

35,149

 

$

65,288

 

Accrued expenses

 

43,918

 

38,491

 

35,853

 

Dividends payable

 

 

6,625

 

 

Income taxes payable

 

7,240

 

 

8,291

 

Deferred revenue

 

4,478

 

18,050

 

7,653

 

Long-term debt, current portion

 

 

5,740

 

472

 

Total current liabilities

 

132,359

 

104,055

 

117,557

 

 

 

 

 

 

 

 

 

Long-term debt, due after one year

 

146,079

 

121,096

 

119,811

 

Other liabilities

 

13,627

 

11,719

 

14,053

 

Deferred income taxes

 

13,318

 

13,327

 

13,103

 

Total liabilities

 

305,383

 

250,197

 

264,524

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

 

Preferred stock, no par value; 250 shares authorized; no shares issued

 

 

 

 

Common stock, no par value; 50,000 shares authorized; issued: 13,295 shares June 30, 2004, 13,250 shares December 31, 2003, and 13,183 shares June 30, 2003

 

129,789

 

128,583

 

126,725

 

Retained earnings

 

140,441

 

124,491

 

123,910

 

Accumulated other comprehensive earnings (loss)

 

249

 

(361

)

(1,517

)

 

 

270,479

 

252,713

 

249,118

 

 

 

$

575,862

 

$

502,910

 

$

513,642

 

 

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

 

4



 

CHURCHILL DOWNS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF NET EARNINGS

for the six and three months ended June 30, 2004 and 2003

(Unaudited)

(In thousands, except per share data)

 

 

 

Six Months Ended June 30,

 

Three Months Ended June 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

As Restated,
Note 1

 

As Restated,
Note 1

 

As Restated,
Note 1

 

As Restated,
Note 1

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

227,364

 

$

223,438

 

$

189,635

 

$

187,719

 

Operating expenses

 

179,200

 

176,722

 

131,707

 

131,251

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

48,164

 

46,716

 

57,928

 

56,468

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

19,163

 

16,909

 

10,085

 

8,731

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

29,001

 

29,807

 

47,843

 

47,737

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

Interest income

 

201

 

135

 

85

 

73

 

Interest expense

 

(2,558

)

(3,306

)

(1,174

)

(1,479

)

Miscellaneous, net

 

840

 

597

 

504

 

173

 

 

 

(1,517

)

(2,574

)

(585

)

(1,233

)

 

 

 

 

 

 

 

 

 

 

Earnings before provision for income taxes

 

27,484

 

27,233

 

47,258

 

46,504

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

(11,534

)

(11,060

)

(19,562

)

(18,807

)

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

15,950

 

$

16,173

 

$

27,696

 

$

27,697

 

 

 

 

 

 

 

 

 

 

 

Net earnings per common share data:

 

 

 

 

 

 

 

 

 

Basic

 

$

1.20

 

$

1.23

 

$

2.08

 

$

2.10

 

Diluted

 

$

1.18

 

$

1.21

 

$

2.06

 

$

2.07

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

13,272

 

13,167

 

13,287

 

13,174

 

Diluted

 

13,460

 

13,367

 

13,473

 

13,380

 

 

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

5



 

CHURCHILL DOWNS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

for the six months ended June 30,

(Unaudited)

(in thousands)

 

 

 

2004

 

2003

 

 

 

As Restated,
Note 1

 

As Restated,
Note 1

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings

 

$

15,950

 

$

16,173

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

10,819

 

10,171

 

Increase (decrease) in cash resulting from changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(13,412

)

(10,612

)

Other current assets

 

(3,215

)

(322

)

Accounts payable

 

39,272

 

34,758

 

Accrued expenses

 

10,035

 

1,961

 

Income taxes payable

 

7,240

 

8,291

 

Deferred revenue

 

(13,572

)

(7,223

)

Other assets and liabilities

 

2,406

 

1,903

 

Net cash provided by operating activities

 

55,523

 

55,100

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Additions to plant and equipment, net

 

(47,828

)

(19,074

)

Net cash used in investing activities

 

(47,828

)

(19,074

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Repayments of revolving loan facility for refinancing

 

 

(120,929

)

Proceeds from senior notes, net of expenses

 

 

98,229

 

Borrowings on bank line of credit

 

196,295

 

172,453

 

Repayments of bank line of credit

 

(175,434

)

(154,310

)

Decrease in long-term debt, net

 

(1,618

)

(279

)

Change in book overdraft

 

15

 

(1,915

)

Proceeds from note receivable for common stock

 

 

65

 

Payment of dividends

 

(6,625

)

(6,578

)

Common stock issued

 

1,206

 

682

 

Net cash provided by (used in) financing activities

 

13,839

 

(12,582

)

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

21,534

 

23,444

 

Cash and cash equivalents, beginning of period

 

18,053

 

17,909

 

Cash and cash equivalents, end of period

 

$

39,587

 

$

41,353

 

 

 

 

 

 

 

Supplemental cash flow disclosures:

 

 

 

 

 

Interest

 

$

2,960

 

$

3,398

 

Income taxes

 

$

3,009

 

$

3,442

 

Schedule of non-cash activities:

 

 

 

 

 

Plant and equipment additions included in accounts payable

 

$

5,915

 

$

233

 

 

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

 

6



 

CHURCHILL DOWNS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the six months ended June 30, 2004 and 2003 (Unaudited)

($ in thousands, except per share data)

 

1.                   Restatements of Previously Issued Consolidated Financial Statements

 

(1)          Churchill Downs Incorporated (the “Company”) recently determined that purse overpayments were improperly recorded as assets.  Purse overpayments are created when, at the end of a race meeting, the purses paid to horsemen exceed the purses payable as a result of pari-mutuel operations during the race meeting.  Contractual arrangements between the Company and the horsemen’s organizations at the Company’s various racetracks, which generally expire at the end of a race meeting, provide that if a purse overpayment exists at the end of a race meeting, such overpayment may be recovered through reductions of purses otherwise paid in the subsequent race meeting(s) if a subsequent contract is entered into with the horsemen’s organization.  The Company has historically recorded these purse overpayments as receivables, subject to any necessary valuation allowances.  The Company has now determined that these overpayments do not constitute receivables and do not meet the definition of an asset under U.S. Generally Accepted Accounting Principles, thus any purse overpayment that exists at the end of a race meeting should be expensed.  Accordingly, the Company has restated its consolidated financial statements for the effect of this error.  This restatement serves to delay the recognition of the recovery until the period in which it actually occurs.  Additionally, amounts recorded as revenues for Illinois purse recapture subsidies have been reclassified to operating expenses to offset purse expense.

 

(2)          During 2004 the Company also determined that it was classifying simulcast host fees incurred inconsistently.  The Company imports simulcast horse racing from other racetracks and pays a fee for the signal (simulcast host fees incurred).  The Company’s accounting policy is to record the simulcast host fees incurred as an expense.  However, at certain of the Company’s racetracks, simulcast host fees incurred were incorrectly netted against revenue.  The 2003 condensed consolidated financial statements have been restated to reclassify simulcast host fees incurred that were netted against revenue to operating expense.  There is no change in net earnings or earnings per share as a result of this restatement.  Additionally, various immaterial amounts were reclassified, at certain of the Company’s racetracks, to conform to the current period presentation.

 

The effect of the restatements are as follows:

 

 

 

As Previously
Reported

 

Adjustment (1)

 

As Restated

 

Six Months ended June 30, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

228,797

 

$

(1,433

)

$

227,364

 

Operating expenses

 

181,079

 

(1,879

)

179,200

 

Gross profit (loss)

 

47,718

 

446

 

48,164

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

19,163

 

 

19,163

 

Operating income (loss)

 

28,555

 

446

 

29,001

 

 

 

 

 

 

 

 

 

Other income (expense)

 

(1,517

)

 

(1,517

)

 

 

 

 

 

 

 

 

Earnings (loss) before (provision) benefit for income taxes

 

27,038

 

446

 

27,484

 

(Provision) benefit for income taxes

 

(11,356

)

(178

)

(11,534

)

Net earnings (loss)

 

$

15,682

 

$

268

 

$

15,950

 

 

 

 

 

 

 

 

 

Net earnings per common share data:

 

 

 

 

 

 

 

Basic

 

$

1.18

 

$

0.02

 

$

1.20

 

Diluted

 

$

1.17

 

$

0.01

 

$

1.18

 

 

7



 

 

 

As Previously
Reported

 

Adjustment (1)

 

As Restated

 

Three Months ended June 30, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

191,068

 

$

(1,433

)

$

189,635

 

Operating expenses

 

133,586

 

(1,879

)

131,707

 

Gross profit (loss)

 

57,482

 

446

 

57,928

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

10,085

 

 

10,085

 

Operating income (loss)

 

47,397

 

446

 

47,843

 

 

 

 

 

 

 

 

 

Other income (expense)

 

(585

)

 

(585

)

 

 

 

 

 

 

 

 

Earnings (loss) before (provision) benefit for income taxes

 

46,812

 

446

 

47,258

 

(Provision) benefit for income taxes

 

(19,384

)

(178

)

(19,562

)

Net earnings (loss)

 

$

27,428

 

$

268

 

$

27,696

 

 

 

 

 

 

 

 

 

Net earnings (loss) per common share data:

 

 

 

 

 

 

 

Basic

 

$

2.06

 

$

0.02

 

$

2.08

 

Diluted

 

$

2.04

 

$

0.02

 

$

2.06

 

 

 

 

As Previously
Reported

 

Adjustment (1)

 

Adjustment (2)

 

As Restated

 

Six Months ended June 30, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

214,285

 

$

(1,280

)

$

10,433

 

$

223,438

 

Operating expenses

 

166,967

 

(802

)

10,557

 

176,722

 

Gross profit (loss)

 

47,318

 

(478

)

(124

)

46,716

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

16,873

 

70

 

(34

)

16,909

 

Operating income (loss)

 

30,445

 

(548

)

(90

)

29,807

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

(2,618

)

(46

)

90

 

(2,574

)

 

 

 

 

 

 

 

 

 

 

Earnings (loss) before (provision) benefit for income taxes

 

27,827

 

(594

)

 

27,233

 

(Provision) benefit for income taxes

 

(11,298

)

238

 

 

(11,060

)

Net earnings (loss)

 

$

16,529

 

$

(356

)

$

 

$

16,173

 

 

 

 

 

 

 

 

 

 

 

Net earnings per common share data:

 

 

 

 

 

 

 

 

 

Basic

 

$

1.26

 

$

(0.03

)

 

$

1.23

 

Diluted

 

$

1.24

 

$

(0.03

)

 

$

1.21

 

 

8



 

 

 

As Previously
Reported

 

Adjustment (1)

 

Adjustment (2)

 

As Restated

 

Three Months ended June 30, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

$

180,496

 

$

(1,280

)

$

8,503

 

$

187,719

 

Operating expenses

 

123,425

 

(733

)

8,559

 

131,251

 

Gross profit (loss)

 

57,071

 

(547

)

(56

)

56,468

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

8,765

 

 

(34

)

8,731

 

Operating income (loss)

 

48,306

 

(547

)

(22

)

47,737

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

(1,255

)

 

22

 

(1,233

)

 

 

 

 

 

 

 

 

 

 

Earnings (loss) before (provision) benefit for income taxes

 

47,051

 

(547

)

 

46,504

 

(Provision) benefit for income taxes

 

(19,026

)

219

 

 

(18,807

)

Net earnings (loss)

 

$

28,025

 

$

(328

)

$

 

$

27,697

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) per common share data:

 

 

 

 

 

 

 

 

 

Basic

 

$

2.13

 

$

(0.03

)

 

$

2.10

 

Diluted

 

$

2.09

 

$

(0.02

)

 

$

2.07

 

 

The following tables represent the effect of the restatement on the condensed consolidated balance sheets:

 

 

 

As Previously
Reported

 

Adjustment (1)

 

As Restated

 

June 30, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

49,717

 

$

(701

)

$

49,016

 

Other current assets

 

$

6,261

 

$

(1,433

)

$

4,828

 

Other assets

 

$

15,474

 

$

1,000

 

$

16,474

 

Accounts payable

 

$

76,040

 

$

653

 

$

76,723

 

Income taxes payable

 

$

7,062

 

$

178

 

$

7,240

 

Retained earnings

 

$

142,436

 

$

(1,995

)

$

140,441

 

 

 

 

As Previously
Reported

 

Adjustment (1)

 

As Restated

 

December 31, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

36,693

 

$

(1,089

)

$

35,604

 

Other current assets

 

$

4,120

 

$

(2,507

)

$

1,613

 

Other assets

 

$

15,941

 

$

1,000

 

$

16,941

 

Accounts payable

 

$

34,466

 

$

683

 

$

35,149

 

Income taxes payable

 

$

1,016

 

$

(1,016

)

$

 

Retained earnings

 

$

126,754

 

$

(2,263

)

$

124,491

 

 

9



 

 

 

As Previously
Reported

 

Adjustment (1)

 

As Restated

 

June 30, 2003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

$

45,695

 

$

(547

)

$

45,148

 

Other current assets

 

$

5,564

 

$

(679

)

$

4,885

 

Other assets

 

$

11,962

 

$

 

$

11,962

 

Accounts payable

 

$

64,435

 

$

853

 

$

65,288

 

Income taxes payable

 

$

8,510

 

$

(219

)

$

8,291

 

Retained earnings

 

$

125,770

 

$

(1,860

)

$

123,910

 

 

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/A may wish to refer to the Company’s Form 10-K, as amended by Form 10-K/A, for the period ended December 31, 2003 for further information.  The accompanying condensed consolidated financial statements have been prepared in accordance with the registrant’s customary accounting practices and have not been audited.

 

Certain prior-period financial statement amounts have been reclassified to conform to the current-period presentation.  In the opinion of management, all adjustments necessary for a fair presentation of this information have been made and all such adjustments are of a normal recurring nature.

 

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

 

Revenue Recognition

 

The Company recognizes revenue from commissions or 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 in-home wagering providers in the period in which performance occurred.  The Company also earns pari-mutuel related streams of revenues from sources that are not related to the handle wagered at the Company’s facilities.  These other revenues are primarily derived from statutory racing regulations in some of the states where the Company’s facilities are located and are recognized when performance has occurred.  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.  These non-wagering revenues are recognized in the period in which the performance has occurred.

 

Purse Expense

 

The Company recognizes purse expense from the statutorily required percentage of revenue that is required to be paid out in the form of purse to the winning owners of races run at the Company’s racetracks in the period in which performance occurs.  The Company incurs a liability for all unpaid purse to be paid out.  The Company may pay out purses in excess of statutorily required amounts resulting purse overpayments which are expensed as incurred.  Recoveries of purse overpayments are recognized in the period they are realized.

 

10



 

2.                   Stock-Based Compensation

 

The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees.”  Had the compensation cost for our stock-based compensation plans been determined consistent with Statement of Financial Accounting Standards (“SFAS”) No. 123 “Accounting for Stock-based Compensation” the Company’s net earnings and net earnings per common share for the six and three months ended June 30, 2004 and 2003 would approximate the pro forma amounts presented below:

 

 

 

Six Months Ended June 30,

 

 

 

2004

 

2003

 

 

 

As Restated

 

As Restated

 

Net earnings

 

$

15,950

 

$

16,173

 

Pro forma stock-based compensation expense, net of tax benefit

 

(869

)

(922

)

Pro forma net earnings

 

$

15,081

 

$

15,251

 

 

 

 

 

 

 

Pro forma net earnings per common share:

 

 

 

 

 

Basic

 

$

1.14

 

$

1.16

 

Diluted

 

$

1.12

 

$

1.14

 

 

 

 

Three Months Ended June 30,

 

 

 

2004

 

2003

 

 

 

As Restated

 

As Restated

 

Net earnings

 

$

27,696

 

$

27,697

 

Pro forma stock-based compensation expense, net of tax benefit

 

(681

)

(539

)

Pro forma net earnings

 

$

27,015

 

$

27,158

 

 

 

 

 

 

 

Pro forma net earnings per common share:

 

 

 

 

 

Basic

 

$

2.03

 

$

2.06

 

Diluted

 

$

2.01

 

$

2.03

 

 

The effects of applying SFAS No. 123 in this pro forma disclosure are unlikely to be representative of the effects on pro forma net earnings for future years since variables such as option grants, exercises, and stock price volatility included in the disclosures may not be indicative of future activity. We anticipate making awards in the future under stock-based compensation plans.

 

3.                   Long-Term Debt

 

The following table presents our long-term debt, including current portion:

 

 

 

As of
June 30, 2004

 

As of
December 31, 2003

 

As of
June 30, 2003

 

Long-term debt, current portion:

 

 

 

 

 

 

 

Other notes payable

 

$

 

$

5,740

 

$

472

 

 

 

 

 

 

 

 

 

Long-term debt, due after one year:

 

 

 

 

 

 

 

$100 million variable rate senior notes

 

100,000

 

100,000

 

100,000

 

$200 million revolving credit facility

 

40,861

 

20,000

 

13,214

 

Other notes payable

 

5,218

 

1,096

 

6,597

 

Total long-term debt

 

$

146,079

 

$

126,836

 

$

120,283

 

 

11



 

In April 2003, the Company refinanced its $250 million revolving credit facility to meet funding needs for working capital, capital improvements and potential acquisitions.  The refinancing included a new $200.0 million revolving line of credit through a bank syndicate with a five-year term and $100.0 million in variable rate senior notes with a seven-year term.  Both debt facilities are collateralized by substantially all of the assets of the Company and its wholly owned subsidiaries.  The interest rate on the line of credit is based upon LIBOR plus a spread of 125 to 225 basis points, determined by certain Company financial ratios.  The current interest rate on the senior notes is equal to three month LIBOR plus 155 basis points.  The weighted average interest rate on outstanding borrowings for the $200.0 million revolving line of credit was 2.44% and 2.51% at June 30, 2004 and 2003, respectively.  The weighted average interest rate on outstanding borrowings for the $100.0 million senior notes was 2.71% and 2.66% at June 30, 2004 and 2003, respectively.  These interest rates are partially hedged by the interest rate swap contracts entered into by the Company as described in Note 4.  The senior notes require interest only payments during their term with principal due at maturity.  Both debt facilities contain financial and other covenant requirements, including specific fixed charge and leverage ratios, as well as minimum levels of net worth.

 

4.                   Financial Instruments

 

In order to mitigate a portion of the market risk on variable rate debt, the Company has entered into interest rate swap contracts with major financial institutions.  Under terms of these contracts the Company receives a three-month LIBOR-based variable interest rate and pays a fixed interest rate on notional amounts totaling $100.0 million.  As a result of these contracts, the Company will pay a fixed interest rate of approximately 3.68% on $100.0 million of the variable rate debt described in Note 3.  The interest rate received on the contracts is determined based on LIBOR near the end of each calendar quarter, which is consistent with the variable rate determination on the underlying debt.  Terms of the swaps are as follows:

 

Notional Amount

 

Termination Date

 

Fixed Rate

 

$20 million

 

July 2006

 

3.24

%(1)

$20 million

 

March 2008

 

3.54

%

$15 million

 

March 2008

 

3.55

%

$25 million

 

March 2008

 

3.54

%

$20 million

 

March 2010

 

4.55

%(1)

 


(1) The two interest rate swap contracts noted above were entered into during June 2004.

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

 

Comprehensive earnings consist of the following:

 

 

 

Six months ended June 30,

 

 

 

2004

 

2003

 

 

 

As Restated

 

As Restated

 

Net Earnings

 

$

15,950

 

$

16,173

 

Cash flow hedging (net of related tax provision of $417 in 2004 and tax benefit of $885 in 2003)

 

610

 

(1,295

)

Comprehensive earnings

 

$

16,560

 

$

14,878

 

 

12



 

 

 

Three months ended June 30,

 

 

 

2004

 

2003

 

 

 

As Restated

 

As Restated

 

Net Earnings

 

$

27,696

 

$

27,697

 

Cash flow hedging (net of related tax provision of $902 in 2004 and tax benefit of $530 in 2003)

 

1,320

 

(763

)

Comprehensive earnings

 

$

29,016

 

$

26,934

 

 

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,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

As Restated

 

Numerator for basic and diluted earnings per share:

 

$

15,950

 

$

16,173

 

$

27,696

 

$

27,697

 

 

 

 

 

 

 

 

 

 

 

Denominator for weighted average shares of common stock outstanding per share:

 

 

 

 

 

 

 

 

 

Basic

 

13,272

 

13,167

 

13,287

 

13,174

 

Plus dilutive effect of stock options

 

188

 

200

 

186

 

206

 

Diluted

 

13,460

 

13,367

 

13,473

 

13,380

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

1.20

 

$

1.23

 

$

2.08

 

$

2.10

 

Diluted

 

$

1.18

 

$

1.21

 

$

2.06

 

$

2.07

 

 

Options to purchase 145 and 178 shares for the periods ended June 30, 2004 and 2003, respectively, were not included in the computation of earnings per common share assuming dilution because the options’ exercise prices were greater than the average market price of the common shares.

 

6.                   Goodwill and Other Intangible Assets

 

There has been no change to the carrying value of the Company’s net goodwill since January 1, 2002. Net goodwill at June 30, 2004 and 2003 for Kentucky Operations, Calder Race Course and CDSN was $4.8 million, $36.4 million and $11.0 million, respectively.

 

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

 

 

 

As of
June 30, 2004

 

As of
December 31, 2003

 

As of
June 30, 2003

 

Illinois Horse Race Equity fund

 

$

3,307

 

$

3,307

 

$

3,307

 

Indiana racing license

 

2,085

 

2,085

 

2,085

 

Other various intangible assets

 

4,093

 

4,133

 

3,790

 

 

 

9,485

 

9,525

 

9,182

 

Accumulated amortization

 

(2,307

)

(2,061

)

(1,869

)

 

 

$

7,178

 

$

7,464

 

$

7,313

 

 

Amortization expense for other intangibles of approximately $246 and $182 for the six months ended June 30, 2004 and 2003, respectively, are classified in operating expenses.  Other intangible assets, which are being

 

13



 

amortized, are recorded at approximately $3.9 million and $4.0 million at June 30, 2004 and 2003, respectively, which are net of accumulated amortization of $2.3 million and $1.9 million at June 30, 2004 and 2003, respectively.

 

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

 

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

 

 

 

Estimated
Amortization Expense

 

2004

 

$

472

 

2005

 

$

472

 

2006

 

$

472

 

2007

 

$

472

 

2008

 

$

437

 

 

7.                   Segment Information

 

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

 

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

 

14



 

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

 

 

 

Six Months Ended June 30,

 

Three Months Ended June 30,

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

As Restated (1)

 

As Restated (1)

 

Net revenues from external customers:

 

 

 

 

 

 

 

 

 

Kentucky Operations

 

$

61,625

 

$

57,852

 

$

56,892

 

$

52,954

 

Hollywood Park

 

45,527

 

44,234

 

40,428

 

39,265

 

Arlington Park

 

38,629

 

36,716

 

22,574

 

22,792

 

Calder Race Course

 

23,675

 

24,003

 

22,160

 

22,876

 

Hoosier Park

 

20,603

 

20,451

 

11,193

 

11,021

 

CDSN

 

36,043

 

37,988

 

35,164

 

37,145

 

Total racing operations

 

226,102

 

221,244

 

188,411

 

186,053

 

Other investments

 

238

 

1,253

 

200

 

725

 

Corporate revenues

 

1,024

 

941

 

1,024

 

941

 

 

 

$

227,364

 

$

223,438

 

$

189,635

 

$

187,719

 

Intercompany net revenues:

 

 

 

 

 

 

 

 

 

Kentucky Operations

 

$

15,559

 

$

16,229

 

$

15,559

 

$

16,229

 

Hollywood Park

 

6,918

 

6,906

 

6,914

 

6,902

 

Arlington Park

 

2,200

 

2,732

 

2,200

 

2,732

 

Calder Race Course

 

3,276

 

3,585

 

2,992

 

3,337

 

Hoosier Park

 

50

 

37

 

43

 

33

 

Total racing operations

 

28,003

 

29,489

 

27,708

 

29,233

 

Other investments

 

845

 

899

 

700

 

755

 

Corporate expenses

 

544

 

552

 

266

 

269

 

Eliminations

 

(29,392

)

(30,940

)

(28,674

)

(30,257

)

 

 

$

 

$

 

$

 

$

 

Segment EBITDA & net earnings:

 

 

 

 

 

 

 

 

 

Kentucky Operations

 

$

23,927

 

$

23,270

 

$

30,103

 

$

28,417

 

Hollywood Park

 

5,835

 

6,792

 

9,024

 

9,007

 

Arlington Park

 

3,402

 

888

 

2,998

 

2,427

 

Calder Race Course

 

808

 

1,389

 

3,460

 

4,129

 

Hoosier Park

 

1,228

 

1,361

 

554

 

545

 

CDSN

 

8,613

 

9,363

 

8,746

 

9,144

 

Total racing operations

 

43,813

 

43,063

 

54,885

 

53,669

 

Other investments

 

647

 

466

 

632

 

431

 

Corporate expenses

 

(3,794

)

(2,954

)

(1,707

)

(1,081

)

Eliminations

 

(6

)

 

(6

)

 

Depreciation and amortization

 

(10,819

)

(10,171

)

(5,457

)

(5,109

)

Interest income (expense), net

 

(2,357

)

(3,171

)

(1,089

)

(1,406

)

Provision for income taxes

 

(11,534

)

(11,060

)

(19,562

)

(18,807

)

Net earnings

 

$

15,950

 

$

16,173

 

$

27,696

 

$

27,697

 

 

15



 

The table below presents total asset information about reported segments:

 

 

 

As of
June 30, 2004

 

As of
December 31, 2003

 

As of
June 30, 2003

 

 

 

As Restated (1)

 

As Restated (1)

 

As Restated (1)

 

Total assets:

 

 

 

 

 

 

 

Kentucky Operations

 

$

476,847

 

$

439,101

 

$

417,348

 

Hollywood Park

 

173,376

 

147,290

 

175,072

 

Arlington Park

 

86,692

 

81,725

 

81,940

 

Calder Race Course

 

88,164

 

88,675

 

86,438

 

Hoosier Park

 

37,911

 

34,940

 

35,444

 

CDSN

 

11,018

 

11,018

 

11,018

 

Other investments

 

101,929

 

90,735

 

89,558

 

 

 

975,937

 

893,484

 

896,818

 

Eliminations

 

(400,075

)

(390,574

)

(383,176

)

 

 

$

575,862

 

$

502,910

 

$

513,642

 

 


(1) The Company has restated its previously reported consolidated financial statements to reflect certain adjustments as discussed in Note 1 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q/A.

 

16



 

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/A are made pursuant to the Act.  The reader is cautioned that such forward-looking statements are based on information available at the time and/or management’s good faith belief with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements.  Forward-looking statements speak only as of the date the statement was made. We assume no obligation to update forward-looking information to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information.  Forward-looking statements are typically identified by the use of terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “predict,” “project,” “should,” “will,” and similar words, although some forward-looking statements are expressed differently.  Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct.  Important factors that could cause actual results to differ materially from our expectations include: the effect of global economic conditions; the effect (including possible increases in the cost of doing business) resulting from future war and terrorist activities or political uncertainties; the economic environment; the impact of increasing insurance costs; the impact of interest rate fluctuations; the effect of any change in the Company’s accounting policies or practices; the financial performance of our racing operations; the impact of gaming competition (including lotteries and riverboat, cruise ship and land-based casinos) and other sports and entertainment options in those markets in which we operate; the impact of live racing day competition with other Florida and California racetracks within those respective markets; costs associated with our efforts in support of alternative gaming initiatives; costs associated with our Customer Relationship Management initiatives; a substantial change in law or regulations affecting our pari-mutuel activities; a substantial change in allocation of live racing days; litigation surrounding the Rosemont, Illinois, riverboat casino; changes in Illinois law that impact revenues of racing operations in Illinois; a decrease in riverboat admissions subsidy revenue from our Indiana operations; the impact of an additional Indiana racetrack and its wagering facilities near our operations; our continued ability to effectively compete for the country’s top horses and trainers necessary to field high-quality horse racing; our continued ability to grow our share of the interstate simulcast market; our ability to execute our acquisition strategy and to complete or successfully operate planned expansion projects; our ability to adequately integrate acquired businesses; market reaction to our expansion projects; any business disruption associated with our facility renovations; the loss of our totalisator companies or their inability to keep their technology current; our accountability for environmental contamination; the loss of key personnel and the volatility of our stock price.

 

The Company restated its 2004 and 2003 condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q/A to correct errors relating to the accounting for purse overpayments and classification of subsidies and simulcast host fees (at certain racetracks).  See Note 1 to the Condensed Consolidated Financial Statements in this Form 10-Q/A for additional information.  Corresponding amounts throughout this Item 2 have also been restated as appropriate.

 

You should read this discussion with the financial statements included in this report and the Company’s Form 10-K, as amended by Form 10-K/A, for the year ended December 31, 2003, for further information.  Additionally, the Company has amended the Form 10-K for the fiscal year ended December 31, 2003 to restate the financial statements contained therein to correct the accounting for purse overpayments.  See Note 1 to the Condensed Consolidated Financial Statements in this Form 10-Q/A for additional information.

 

Overview

 

We conduct pari-mutuel wagering on live thoroughbred, quarter horse and standardbred horse racing and simulcast signals of races.  Additionally, we offer racing services through our other interests.

 

We operate the Churchill Downs racetrack in Louisville, Kentucky, which has conducted thoroughbred racing since 1875 and is internationally known as the home of the Kentucky Derby, and Ellis Park Race Course, Inc., a

 

17



 

thoroughbred racing operation in Henderson, Kentucky (collectively referred to as “Kentucky Operations”).  We also own and operate Hollywood Park, a thoroughbred racing operation in Inglewood, California; Arlington Park, a thoroughbred racing operation in Arlington Heights, Illinois; and Calder Race Course, a thoroughbred racing operation in Miami, Florida.  Additionally, we are the majority owner and operator of Hoosier Park in Anderson, Indiana, which conducts thoroughbred, quarter horse and standardbred horse racing.  We conduct simulcast wagering on horse racing at twelve simulcast wagering facilities in Kentucky, Indiana and Illinois, as well as at our six racetracks.

 

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

 

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

 

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

 

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

 

Legislative and Regulatory Changes

 

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

 

In Florida, Yes for Local Control (formerly known as The Floridians for a Level Playing Field), a coalition of pari-mutuel facilities, including Calder Race Course, has successfully gathered the necessary petition signatures to place a question on the ballot for the November 2004 general election to allow Dade and Broward counties to hold a referendum on the installation of slot machines at existing pari-mutuel sites in those respective counties. The Florida Supreme Court upheld the constitutionality of this initiative in May, 2004.  The ballot question was

 

18



 

officially certified as initiative number 4 by the Florida Secretary of State on July 21, 2004.  On July 23, 2004, a suit was filed against the Florida Division of Elections challenging the format of the initiative petition.  Calder Race Course is committed to fund a pro-rata share of the initiative costs.

 

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

 

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

 

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

 

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

 

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

 

19



 

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

 

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

 

Critical Accounting Policies

 

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

 

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

 

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

 

20



 

RESULTS OF OPERATIONS

 

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

 

 

 

Kentucky
Operations

 

Hollywood
Park

 

Calder Race
Course

 

Arlington
Park (1)

 

Hoosier
Park

 

CDSN

 

Pari-mutuel wagering:

 

 

 

 

 

 

 

 

 

 

 

 

 

On-track Live

 

 

 

 

 

 

 

 

 

 

 

 

 

2004 handle

 

$

69,342

 

$

54,956

 

$

20,951

 

$

17,654

 

$

2,634

 

 

2004 no. of days

 

48

 

51

 

49

 

35

 

60

 

 

2003 handle

 

$

76,995

 

$

58,178

 

$

22,139

 

$

19,469

 

$

2,208

 

 

2003 no. of days

 

47

 

50

 

51

 

39

 

50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On-track Import

 

 

 

 

 

 

 

 

 

 

 

 

 

2004 handle

 

$

15,231

 

$

34,156

 

$

40,081

 

$

25,379

 

$

5,335

 

 

2004 no. of days

 

48

 

51

 

49

 

87

 

60

 

 

2003 handle

 

$

12,667

 

$

34,843

 

$

42,421

 

$

22,084

 

$

4,837

 

 

2003 no. of days

 

47

 

50

 

51

 

69

 

50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Import Simulcasting

 

 

 

 

 

 

 

 

 

 

 

 

 

2004 handle

 

$

51,157

 

$

96,231

 

 

$

247,840

 

$

57,740

 

 

2004 no. of days

 

279

 

129

 

 

1,408

 

612

 

 

2003 handle

 

$

54,691

 

$

102,039

 

 

$

220,593

 

$

59,616

 

 

2003 no. of days

 

259

 

130

 

 

1,099

 

620

 

 

Number of Trackside/OTBs

 

1

 

 

 

8

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intrastate Export

 

 

 

 

 

 

 

 

 

 

 

 

 

2004 handle

 

$

21,710

 

$

81,705