UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the quarterly period ended March 31, 2006
OR
(
) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the transition period from ____
to
____
Commission
file number 0-1469
(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, Kentucky 40208
|
|
|
(Address
of principal executive offices) (zip code)
|
|
|
(502)
636-4400
|
|
|
(Registrant's
telephone number, including area
code)
|
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
one): Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer
[
]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes [ ] No [X]
The
number of shares outstanding of registrant's common stock at May 2, 2006
was
13,196,789 shares.
CHURCHILL
DOWNS INCORPORATED
I
N D E X
TO QUARTERLY REPORT ON FORM 10-Q
For
the Quarter Ended March 31, 2006
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Page
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Item
1.
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3
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4
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5
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6
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Item
2.
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15
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Item
3.
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25
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Item
4.
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25
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Item
1.
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Legal
Proceedings (Not applicable)
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26
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Item
1A.
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26
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|
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Item
2.
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Unregistered
Sales of Equity Securities and Use of
Proceeds (Not applicable)
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27
|
|
Item
3.
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Defaults
Upon Senior Securities (Not
applicable)
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27
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|
Item
4.
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Submission
of Matters to a Vote of Security Holders (Not
applicable)
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27
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Item
5.
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Other
Information (Not applicable)
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28
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Item
6.
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28
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29
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30
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2
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FINANCIAL
INFORMATION
|
|
|
ITEM
1.
|
CHURCHILL
DOWNS INCORPORATED
(Unaudited)
(in thousands)
|
March
31, 2006
|
December
31,2005
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$
|
14,659
|
$
|
22,488
|
||||
|
Restricted
cash
|
7,323
|
4,946
|
||||||
|
Accounts
receivable, net of allowance for doubtful accounts of $784 at March
31,
2006 and $786 at December 31, 2005
|
20,238
|
42,823
|
||||||
|
Deferred
income taxes
|
3,949
|
3,949
|
||||||
|
Income
taxes receivable
|
9,911
|
697
|
||||||
|
Other
current assets
|
19,181
|
9,085
|
||||||
|
Total
current assets
|
75,261
|
83,988
|
||||||
|
Other
assets
|
13,709
|
13,020
|
||||||
|
Plant
and equipment, net
|
350,399
|
346,530
|
||||||
|
Goodwill
|
53,528
|
53,528
|
||||||
|
Other
intangible assets, net
|
17,864
|
18,130
|
||||||
|
Total
assets
|
$
|
510,761
|
$
|
515,196
|
||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable
|
$
|
23,410
|
$
|
27,957
|
||||
|
Purses
payable
|
19,921
|
14,564
|
||||||
|
Accrued
expenses
|
40,943
|
44,003
|
||||||
|
Dividends
payable
|
-
|
6,520
|
||||||
|
Deferred
revenue
|
40,420
|
26,219
|
||||||
|
Total
current liabilities
|
124,694
|
119,263
|
||||||
|
Long-term
debt
|
32,019
|
33,793
|
||||||
|
Other
liabilities
|
21,989
|
21,625
|
||||||
|
Deferred
revenue
|
18,973
|
18,614
|
||||||
|
Deferred
income taxes
|
5,670
|
5,670
|
||||||
|
Total
liabilities
|
203,345
|
198,965
|
||||||
|
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: 13,191 shares
March
31, 2006 and 13,132 shares December 31, 2005
|
119,688
|
121,270
|
||||||
|
Retained
earnings
|
187,728
|
198,001
|
||||||
|
Unearned compensation
|
-
|
(3,040
|
)
|
|||||
|
Total
shareholders’ equity
|
307,416
|
316,231
|
||||||
|
Total
liabilities and shareholders’ equity
|
$
|
510,761
|
$
|
515,196
|
||||
The
accompanying notes are an integral part of the Condensed Consolidated Financial
Statements.
3
CHURCHILL
DOWNS INCORPORATED
for
the three months ended March 31,
(Unaudited)
(in thousands, except per share data)
|
2006
|
2005
|
|||||||
|
Net
revenues
|
$
|
45,028
|
$
|
51,882
|
||||
|
Operating
expenses
|
51,872
|
57,153
|
||||||
|
Gross
loss
|
(6,844
|
)
|
(5,271
|
)
|
||||
|
Selling,
general and administrative expenses
|
10,462
|
12,755
|
||||||
|
Operating
loss
|
(17,306
|
)
|
(18,026
|
)
|
||||
|
Other
income (expense):
|
||||||||
|
Interest
income
|
119
|
85
|
||||||
|
Interest
expense
|
(603
|
)
|
(295
|
)
|
||||
|
Unrealized
gain on derivative instruments
|
204
|
206
|
||||||
|
Miscellaneous,
net
|
653
|
533
|
||||||
|
373
|
529
|
|||||||
|
Loss
from continuing operations before income tax benefit
|
(16,933
|
)
|
(17,497
|
)
|
||||
|
Income
tax benefit
|
6,660
|
7,639
|
||||||
|
Net
loss from continuing operations
|
(10,273
|
)
|
(9,858
|
)
|
||||
|
Discontinued
operations, net of income taxes:
|
||||||||
|
Loss
from operations
|
-
|
(4,039
|
)
|
|||||
|
Net
loss
|
(10,273
|
)
|
(13,897
|
)
|
||||
|
Other
comprehensive income, net of income taxes:
|
||||||||
|
Change
in fair value of cash flow hedges
|
-
|
1,069
|
||||||
|
Comprehensive
loss
|
$
|
(10,273
|
)
|
$
|
(12,828
|
)
|
||
|
Basic
and diluted net loss per common share:
|
||||||||
|
Net
loss from continuing operations
|
$
|
(0.79
|
)
|
$
|
(0.77
|
)
|
||
|
Discontinued
operations
|
-
|
(0.31
|
)
|
|||||
|
Net
loss
|
$
|
(0.79
|
)
|
$
|
(1.08
|
)
|
||
|
Basic
and diluted weighted average shares outstanding
|
13,074
|
12,881
|
||||||
The
accompanying notes are an integral part of the Condensed Consolidated Financial
Statements.
4
CHURCHILL
DOWNS INCORPORATED
for
the three months ended March 31,
(Unaudited)
(in thousands)
|
2006
|
2005
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
loss
|
$
|
(10,273
|
)
|
$
|
(13,897
|
)
|
||
|
Adjustments
to reconcile net loss to net cash provided by operating
activities:
|
||||||||
|
Depreciation
and amortization
|
5,298
|
5,993
|
||||||
|
Unrealized
gain on derivative instruments
|
(204
|
)
|
(206
|
)
|
||||
|
Other
|
436
|
203
|
||||||
|
Increase
(decrease) in cash resulting from changes in operating assets and
liabilities:
|
||||||||
|
Restricted
cash
|
(2,377
|
)
|
3,359
|
|||||
|
Accounts
receivable
|
15,296
|
14,359
|
||||||
|
Income
taxes receivable
|
(9,214
|
)
|
(11,283
|
)
|
||||
|
Other
current assets
|
(10,096
|
)
|
(6,499
|
)
|
||||
|
Accounts
payable
|
(3,901
|
)
|
(9,717
|
)
|
||||
|
Purses
payable
|
5,357
|
(70
|
)
|
|||||
|
Accrued
expenses
|
(1,649
|
)
|
(4,946
|
)
|
||||
|
Deferred
revenue
|
21,849
|
32,139
|
||||||
|
Other
assets and liabilities
|
(121
|
)
|
(58
|
)
|
||||
|
Net
cash provided by operating activities
|
10,401
|
9,377
|
||||||
|
Cash
flows from investing activities:
|
||||||||
|
Additions
to plant and equipment, net
|
(9,953
|
)
|
(18,868
|
)
|
||||
|
Net cash used in investing activities
|
(9,953
|
)
|
(18,868
|
)
|
||||
|
Cash
flows from financing activities:
|
||||||||
|
Borrowings
on bank line of credit
|
68,412
|
81,751
|
||||||
|
Repayments
of bank line of credit
|
(70,648
|
)
|
(78,244
|
)
|
||||
|
Change
in book overdraft
|
(646
|
)
|
(807
|
)
|
||||
|
Payment
of dividends
|
(6,520
|
)
|
(6,430
|
)
|
||||
|
Common
stock issued
|
1,125
|
624
|
||||||
|
Net cash used in financing activities
|
(8,277
|
)
|
(3,106
|
)
|
||||
|
Net
decrease in cash and cash equivalents
|
(7,829
|
)
|
(12,597
|
)
|
||||
|
Cash
and cash equivalents, beginning of period
|
22,488
|
27,694
|
||||||
|
Cash
and cash equivalents, end of period
|
14,659
|
15,097
|
||||||
|
Cash
and cash equivalents included in assets held for sale
|
-
|
762
|
||||||
|
Cash
and cash equivalents in continuing operations
|
$
|
14,659
|
$
|
14,335
|
||||
|
Cash
paid during the period for:
|
||||||||
|
Interest
|
$
|
295
|
$
|
3,545
|
||||
|
Income
taxes
|
$
|
2,550
|
$
|
385
|
||||
|
Schedule
of non-cash activities:
|
||||||||
|
Plant
and equipment additions included in accounts payable/accrued
expenses
|
$
|
2,206
|
$
|
98
|
||||
|
Issuance
of common stock in connection with restricted stock plan
|
-
|
$
|
30
|
|||||
The
accompanying notes are an integral part of the Condensed Consolidated Financial
Statements.
5
NOTES
TO CONDENSED CONSOLIDATED FINIANCIAL STATMENTS
21
|
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 Quarterly Report on Form 10-Q should refer to the Company’s
Annual Report on Form 10-K for the year ended December 31, 2005 for further
information. The accompanying Condensed Consolidated Financial Statements
have
been prepared in accordance with the Company’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.
The
Company’s revenues and earnings are significantly influenced by its 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. The Company historically has had very few live racing days during
the
first quarter, with a majority of its live racing occurring in the second,
third
and fourth quarters, including the running of the Kentucky Derby and the
Kentucky Oaks during the second quarter, the quarter during which the Company
typically generates the majority of its annual operating income.
Long-lived
Assets
In
the
event that facts and circumstances indicate that the carrying amount of
tangible
or intangible long-lived assets or groups of assets may be impaired, an
evaluation of recoverability is performed. If an evaluation were required,
the
estimated future undiscounted cash flows associated with the assets would
be
compared to the assets’ carrying amount to determine if an impairment loss
should be recorded. In addition, goodwill is otherwise tested for impairment
on
an annual basis in accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” In assessing whether
goodwill is impaired, the fair market value of the related reporting unit
is
compared to its carrying amount, including goodwill. If the carrying amount
of
the reporting unit exceeds its fair market value, the second step of the
goodwill impairment test is performed to measure the amount of impairment
loss,
if any. The second step of the goodwill impairment test consists of comparing
the implied fair value of reporting unit goodwill with the carrying amount
of
that goodwill. If the carrying amount of reporting unit goodwill exceeds
the
implied fair value of that goodwill, an impairment loss is recognized equal
to
such excess. The implied fair value of goodwill is determined in the same
manner
as the amount of goodwill recognized in a business combination is determined.
The Company completed the required impairment tests of goodwill and indefinite
lived intangible assets during the three months ended March 31, 2006, and
no
adjustment to the carrying value of goodwill was required.
Revenue
Recognition
The
Company’s pari-mutuel revenues include commissions on pari-mutuel wagering at
its racetracks and off-track betting facilities (net of state and local
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 and fees earned on pari-mutuel wagering,
the
Company earns 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,
concessions, video poker, lease income and other sources and are recognized
when
the related service is performed. Non-wagering revenues also include the
Indiana
riverboat admissions subsidy, which is recognized ratably over the Company’s
fiscal year.
6
NOTES TO CONDENSED CONSOLIDATED FINIANCIAL
STATMENTS
Pari-mutuel
revenues are recognized upon occurrence of the live race that is presented
for
wagering and after that live race is made official by the respective
states’
racing regulatory body. Additional non-wagering revenues such as admissions,
programs and concession revenues are recognized as delivery of the
product or
services has occurred.
Greater
than 70% of the Company’s 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 the Company’s racetracks and also
wagers made on imported simulcast signals by patrons at the Company’s racetracks
during live meets. Import simulcasting handle includes wagers on imported
signals at the Company’s racetracks when the respective racetracks are not
conducting live race meets and at the Company’s off-track betting facilities
("OTBs") throughout the year. Export handle includes all patron wagers
made on
live racing signals sent to other racetracks, OTBs and in-home wagering.
In-home
wagering, or account wagering, consists of patron wagers through an
advance
deposit account.
The
Company retains as revenue a pre-determined percentage or commission
on the
total amount wagered on live and import simulcasting sources, and the
balance is
distributed to the winning patrons. The gross percentages retained
on live
racing and import simulcasting at the Company’s various locations range from
approximately 15% to 27%. In general, the fees earned from export simulcasting
are contractually determined and average approximately 3.5%. All commissions
and
fees earned from pari-mutuel wagering are shared with horsemen through
payment
of purses based on local contracts and statutes and average approximately
50%.
Purse
Expense
The
Company recognizes purse expense from the statutorily or contractually
required
percentage of revenue that is required to be paid out in the form of
purses to
the winning owners of races run at the Company’s racetracks in the period in
which wagering occurs. The Company incurs a liability for all unpaid
purses to
be paid out. The Company may pay out purses in excess of statutorily
or
contractually required amounts resulting in purse overpayments, which
are
expensed as incurred. Recoveries of purse overpayments are recognized
in the
period they are received.
Discontinued
Operations
The
results of operations of assets sold are reflected in the Condensed
Consolidated
Statements of Net Loss as "discontinued operations" for all periods
presented.
Interest expense on debt that was required to be repaid as a result
of the
disposal transaction is allocated to discontinued operations.
Share-Based
Compensation
In
December 2004, the Financial Accounting Standards Board issued SFAS
No. 123(R),
“Share-Based Payment” (“SFAS No. 123(R)”), which requires companies to measure
compensation cost for all share-based payments (including employee
stock
options) at fair value for interim or annual periods beginning after
June 15,
2005. In April 2005, the U.S. Securities and Exchange Commission issued
a rule
allowing public companies to delay the adoption of SFAS No. 123(R)
to annual
periods beginning after June 15, 2005. As a result, the Company adopted
SFAS No.
123R, using the modified-prospective transition method, beginning on
January 1,
2006, and therefore began to expense the fair value of all outstanding
options
related to an employee stock purchase plan over their remaining vesting
periods
to the extent the options were not fully vested as of the adoption
date and will
begin to expense the fair value of all options granted subsequent to
December
31, 2005 over their requisite service periods. During the three months
ended
March 31, 2006, the Company recorded $23 thousand, net of a related
income tax
benefit of $15 thousand, of additional share-based compensation expense
as a
result of adopting SFAS No. 123(R). Previous periods have not been
restated.
(See Note 5 for further details).
|
2.
|
Discontinued
Operations
|
In
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal
of
Long-Lived Assets," the results of operations of Hollywood Park Racetrack
sold
on September 23, 2005 are reflected in the Condensed Consolidated Statements
of
Net Loss as discontinued operations for the three months ended March
31, 2005.
7
NOTES TO CONDENSED CONSOLIDATED FINIANCIAL
STATMENTS
During
the three months ended March 31, 2006, the
Company did not dispose of any operating assets or have any operating
assets
classified as held for sale, and therefore, no amounts were reported
in
discontinued operations. Set forth below is a summary of the results
of
operations of Hollywood Park Racetrack for the three months ended
March 31,
2005.
|
Three
months
ended
|
||||||
| (in thousands) |
March
31,
2005
|
|||||
|
Net
revenues
|
$
|
4,435
|
||||
|
Operating
expenses
|
8,463
|
|||||
|
Gross
loss
|
(4,028
|
)
|
||||
|
Selling,
general and administrative expenses
|
1,221
|
|||||
|
Operating
loss
|
(5,249
|
)
|
||||
|
Other
income (expense):
|
||||||
|
Interest
income
|
1
|
|||||
|
Interest
expense
|
(2,352
|
)
|
||||
|
Other
income (expense)
|
(2,351
|
)
|
||||
|
Loss
before benefit for income taxes
|
(7,600
|
)
|
||||
|
Benefit
for income taxes
|
3,561
|
|||||
|
Net
loss
|
$
|
(4,039
|
)
|
|||
|
3.
|
Natural
Disasters
|
Hurricane
Katrina
On
August
29, 2005, Hurricane Katrina caused significant damage to the metropolitan
New
Orleans, Louisiana area. A significant portion of the assets of the
Company's
Louisiana Operations suffered damages from Hurricane Katrina. The Company
carries property and casualty insurance, as well as business interruption
insurance. The Company is currently working with its insurance carriers
to
determine to what extent insurance proceeds will offset any losses.
As of March
31, 2006, the Company has received $4.0 million in insurance proceeds
in
advance. Approximately $3.2 million of the proceeds was recorded as
a reduction
of selling, general and administrative expenses against losses related
to the
interruption of business caused by Hurricane Katrina that were actually
incurred
through March 31, 2006, that management determined are probable of
recovery
under an existing business interruption insurance policy. Approximately
$1.0
million of these expenses were incurred during the three months ended
March 31,
2006. The remaining $0.8 million of proceeds has been recorded as a
current
liability in the Company's Condensed Consolidated Balance Sheet as
of March 31,
2006, until such time that management identifies additional future
business
interruption or property and casualty losses that are deemed probable
of
recovery under existing insurance policies. The Company has not yet
determined
the ultimate impact that Hurricane Katrina will have on its results
of
operations. However, under existing policies, the Company is required
to pay a
$500 thousand deductible related to any recoveries for damages.
Hurricane
Wilma
On
October 24, 2005, Hurricane Wilma caused significant damage to Miami
as well as
other parts of South Florida. A significant portion of the assets of
Calder Race
Course suffered damages from Hurricane Wilma. The Company carries property
and
casualty insurance as well as business interruption insurance. The
Company is
currently working with its insurance carriers to determine to what
extent
insurance proceeds will offset any losses. As of March 31, 2006, approximately
$0.2 million of insurance recoveries have been accrued as a reduction
of
selling, general and administrative expenses related to costs incurred
to clean
up the property after the hurricane as management has determined that
it is
probable such costs will be recovered based on the terms of an existing
insurance policy. All of these costs were incurred during 2005. The
Company does
not believe that Hurricane Wilma will have a material, adverse impact
on its
results of operations. Under existing policies, the Company is required
to pay a
deductible equal to 2% of the total insured value on an insurable unit
basis
related to any recoveries for damages.
Tornado
Damage
On
November 6, 2005, a tornado caused significant damage to portions of
southwestern Indiana and northwestern Kentucky, including Henderson,
Kentucky,
the location of Ellis Park racetrack and its on-site simulcast facility.
Ellis
Park sustained damage to its stable area as well as several other buildings
at
the racetrack. The Company carries property and casualty insurance as well
as business interruption insurance. As of March 31, 2006, the Company
has
received $1.0 million in insurance proceeds in advance. Approximately
$0.3
million of insurance recoveries have been accrued as a reduction of
selling,
general and administrative expenses related to costs incurred to clean
up the
property after the tornado as management determined that it is probable
such
costs will be recovered based on the terms of an existing insurance
policy.
Approximately $0.2 million of the costs were incurred during the three
months
ended March 31, 2006. The Company does not believe that the tornado
damage will
have a material, adverse impact on its results of operations. However,
under
existing policies, the Company is required to pay a $500 thousand deductible
related to any recoveries for damages.
8
|
4.
|
Earnings
Per Share
|
The
following is a reconciliation of the numerator and denominator of the
loss from
continuing operations per common share computations:
|
Three
months ended March 31,
|
||||||||
| (in thousands, except per share data) |
2006
|
2005
|
||||||
|
Numerator
for basic and diluted net loss per common share
|
$
|
(10,273
|
)
|
$
|
(9,858
|
)
|
||
|
Denominator
for basic and diluted net loss per common share
|
13,074
|
12,881
|
||||||
|
Basic
and diluted net loss per common share
|
$
|
(0.79
|
)
|
$
|
(0.77
|
)
|
||
Options
to purchase 74 thousand shares and 169 thousand shares for the three
months
ended March 31, 2006 and 2005, respectively, are excluded from the
computation
of diluted net loss from continuing operations per common share since
their
effect is antidilutive because of net losses for the periods. Also,
453 thousand
shares issuable upon conversion of notes payable for each of the three
months
ended March 31, 2006 and 2005 are excluded from the computation of
diluted net
loss from continuing operations per common share since their effect
is
antidilutive because of net losses for the periods.
|
5.
|
Share-Based
Compensation
|
At
March
31, 2006, the Company has share-based employee compensation plans as
described
below. The total compensation expense related to these plans was $202
thousand,
net of an income tax benefit of $131 thousand, for the three months
ended March
31, 2006 and 2005, respectively. Prior to January 1, 2006, the Company
accounted
for these plans under the recognition and measurement provisions of
Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”
(“APB No. 25”). Accordingly, the Company generally recognized compensation
expense only when it granted options with a discounted exercise price.
Any
resulting compensation expense was recognized ratably over the associated
service period, which was generally the vesting term.
Prior
to
January 1, 2006, the Company provided pro forma disclosure amounts
in accordance
with SFAS No. 148, “Accounting for Stock-Based Compensation - Transaction and
Disclosure,” as if the fair value method defined by SFAS No. 123, “Accounting
for Stock-Based Compensation” had been applied to its share-based
compensation.
Effective
January 1, 2006, the Company adopted the fair value recognition provisions
of
SFAS No. 123(R), using the modified prospective transition method and
therefore
has not restated prior periods’ results. Under this transition method,
share-based compensation expense for the first quarter of 2006 included
compensation expense for all share-based compensation awards granted
prior to,
but not yet vested as of January 1, 2006, based on the grant date fair
value
estimated in accordance with the original provisions of SFAS No. 123.
Share-based compensation expense for all share-based payment awards
granted
after January 1, 2006, is based on the grant-date fair value estimated
in
accordance with the provisions of SFAS No. 123(R). The Company recognizes
these
compensation costs for only those shares expected to vest on a straight-line
basis over the requisite service period of the award, which is generally
the
option vesting term of 1 year for options related to an employee stock
purchase
plan.
9
As
a
result of adopting SFAS No. 123(R), the impact to the Condensed Consolidated
Financial Statements for the three months ended March 31, 2006 for
net loss from
continuing operations before income tax benefit and net loss from continuing
operations was $38 thousand and $23 thousand lower, respectively, than
if the
Company had continued to account for share-based compensation under
APB No. 25.
Amounts previously recorded as unearned compensation within shareholders’ equity
on the Condensed Consolidated Balance Sheets were reclassified to common
stock
as of January 1, 2006. In addition, prior to the adoption of SFAS No.
123(R),
the Company presented the tax benefit of stock option exercises as
operating
cash flows. Upon adoption of SFAS No. 123(R), tax benefits resulting
from tax
deductions in excess of the compensation cost recognized for those
options are
classified as financing cash flows.
The
Company accounted for share-based compensation in accordance with APB
No. 25 for
the quarter ended March 31, 2005. Had the compensation cost for the
Company’s
share-based compensation plans been determined consistent with SFAS
No. 123(R),
the Company’s net loss from continuing operations and net loss from continuing
operations per common share for the three months ended March 31, 2005
would
approximate the pro forma amounts presented below:
|
(in
thousands, except per share data)
|
2005
|
|||
|
Net
loss from continuing operations, as reported
|
$
|
(9,858
|
)
|
|
|
Add:
Stock based compensation expense included in reported net
loss from
continuing operations
|
55
|
|||
|
Deduct:
Pro forma stock-based compensation expense, net of tax
benefit
|
(313
|
)
|
||
|
Pro
forma net loss from continuing operations
|
$
|
(10,116
|
)
|
|
|
As
reported basic and diluted net loss from continuing operations
per common
share
|
$
|
(0.77
|
)
|
|
|
Pro
forma basic and diluted net loss from continuing operations
per common
share
|
$
|
(0.79
|
)
|
Employee
Stock Options
The
Company sponsors the Churchill Downs Incorporated 2003 Stock Option
Plan (the
"03 Plan"), the Churchill Downs Incorporated 1997 Stock Option Plan
(the "97
Plan"), and the Churchill Downs Incorporated 1993 Stock Option Plan
(the "93
Plan"), also collectively referred to as the “Stock Option Plans." These
share-based incentive compensation plans are described below.
On
November 13, 2003, the Board of Directors terminated the 03 Plan, effective
upon
the shareholders' approval of the Churchill Downs Incorporated 2004
Restricted
Stock Plan (the "Restricted Stock Plan"). Awards issued under the 03
Plan prior
to its termination were unaffected by such termination.
The
Stock
Option Plans provide that the exercise price of any incentive stock
option may
not be less than the fair market value of the common stock on the date
of grant.
The exercise price of any non-qualified stock option is not so limited
by the
plans. All outstanding stock options have contractual terms of 10 years
and
generally vest three years from the date of grant. The Company has
not granted
any stock options since December of 2003.
10
A
summary
of the status of the Company's stock options as of March 31, 2006 and
the
changes during the quarter ended on that date is presented below (in
thousands,
except per share data):
|
|
Number
of Shares
Under
Option
|
Weighted
Average Exercise
Price
|
||||||
|
Balance,
December 31, 2005
|
525
|
$
|
28.30
|
|||||
|
Granted
|
-
|
-
|
||||||
|
Exercised
|
(59
|
)
|
$
|
19.01
|
||||
|
Cancelled/Forfeited
|
(10
|
)
|
$
|
34.64
|
||||
|
Balance,
March 31, 2006
|
456
|
$
|
29.37
|
|||||
The
following table summarizes information about stock options outstanding
and
exercisable at March 31, 2006 (in thousands, except per share
data):
|
Shares
Under
Option
|
Weighted
Average Remaining Contractual
Life
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
per
Share
(1)
|
Aggregate
Intrinsic
Value
(1)
|
|||||
|
Options
outstanding,
exercisable
and vested at
March
31, 2006
|
456
|
4.6
|
$29.37
|
$8.95
|
$4,080
|
(1)
Computed based upon the amount by which the fair market value of the
Company’s common stock at March 31, 2006 of $38.32 per share exceeded the
weighted average exercise price.
The
total
intrinsic value of stock options exercised during the three months
ended March
31, 2006 was $1.1 million, compared with $0.3 million for the three
months ended
March 31, 2005. Cash received from stock option exercises totaled $1.1
million
and $0.6 million for the three months ended March 31, 2006 and 2005,
respectively.
At
December 31, 2005, there were 514 thousand options exercisable with
a weighted
average exercise price of $28.17.
Restricted
Stock Plan
On
November 13, 2003, the Board of Directors adopted the Restricted Stock
Plan,
which was subsequently approved by the shareholders in June of 2004.
The
Restricted Stock Plan permits the award of common stock to directors
and key
employees, including officers, of the Company and its subsidiaries
who are from
time to time responsible for the management, growth and protection
of the
business of the Company and its subsidiaries. Up to 195 thousand shares
of
common stock have been reserved and set aside out of the Company's
authorized
but unissued common stock for issuance under the Restricted Stock Plan.
Restricted shares generally vest in full five years from the date of
grant or
upon retirement at or after age 60. The fair value of restricted shares
under
the Restricted Stock Plan is determined by the product of the number
of shares
granted and the grant date market price of the Company’s common stock. For
grants made prior to January 1, 2006, the fair value of restricted
shares is
expensed on a straight-line basis over the requisite service period
of five
years. For nonvested restricted shares granted prior to January 1,
2006, the
unrecognized compensation expense was recognized immediately in current
earnings
using the nominal vesting approach upon retirement at or after age
60 of a
participant. The Company recorded approximately $295 thousand and $99
thousand
of compensation expense, included in net loss from continuing operations,
during
the three months ended March 31, 2006 and 2005, respectively. SFAS
No. 123(R),
as described above, requires the use of the non-substantive vesting
period
approach for new grants. That is, compensation expense must be recognized
immediately for awards granted to retirement eligible employees or
over the
period from the grant date to the date retirement eligibility is achieved,
if
that is expected to occur during the nominal vesting period. If the
Company had
used the non-substantive vesting approach for awards existing prior
to January
1, 2006, compensation expense included in net loss from continuing
operations
during the three months ended March 31, 2006 and 2005 would have been
$168
thousand and $118 thousand, respectively. As of December 31, 2005 and
March 31,
2006, there were 88 thousand outstanding, nonvested restricted shares
with a
weighted average grant date fair value of $39.47, which represents
total
compensation cost of $2.7 million at March 31, 2006 that the Company
expects to
recognize over a weighted average period of 4.2 years.
11
NOTES
TO CONDENSED CONSOLIDATED FINIANCIAL
STATMENTS
Employee
Stock Purchase Plan
Under
the
Company's Employee Stock Purchase Plan (the "Employee Stock Purchase
Plan"), the
Company is authorized to sell, pursuant to short-term stock options,
shares of
its common stock to its full-time (or part-time for at least 20 hours
per week
and at least five months per year) employees at a discount from the
common
stock's fair market value. The Employee Stock Purchase Plan operates
on the
basis of recurring, consecutive one-year periods. Each period commences
on
August 1 and ends on the following July 31.
On
the
first day of each 12-month period, August 1, the Company offers to
each eligible
employee the opportunity to purchase common stock. Employees who elect
to
participate for each period have a designated percentage of their compensation
withheld (after-tax) and applied to the purchase of shares of common
stock on
the last day of the period, July 31. The Employee Stock Purchase Plan
allows
withdrawals, terminations and reductions on the amounts being deducted.
The
purchase price for the common stock is 85% of the lesser of the fair
market
value of the common stock on (i) the first day of the period, or (ii)
the last
day of the period. No employee may purchase common stock under the
Employee
Stock Purchase Plan valued at more than $25 thousand for each calendar
year.
During
the 2005 plan year, the Company granted 10 thousand shares to eligible
employees
under the Employee Stock Purchase Plan. The Company’s estimate of options
granted in 2005 under the Employee Stock Purchase Plan is based on
the number of
shares sold to employees under the Employee Stock Purchase Plan for
the 2004
plan year, adjusted to reflect the change in the number of employees
participating in the Employee Stock Purchase Plan in 2005. During the
three
months ended March 31, 2006, the Company recognized $38 thousand of
compensation
expense related to the unvested portion of the grant made during the
2005 plan
year.
|
6.
|
Segment
Information
|
The
Company has determined that it currently operates in the following
seven
segments: (1) Kentucky Operations, including Churchill Downs racetrack,
its
on-site simulcast facility and racetrack enclosure and Ellis Park racetrack
and
its on-site simulcast facility; (2) Calder Race Course; (3) Arlington
Park and
its eight OTBs; (4) Hoosier Park racetrack, its on-site simulcast facility
and
its three OTBs; (5) Louisiana Operations, including Fair Grounds Race
Course,
its eleven OTBs and Video Services Inc. (“VSI”); (6) Churchill Downs Simulcast
Network (“CDSN”), the simulcast product provider of the Company; and (7) other
investments, including Churchill Downs Simulcast Productions (“CDSP”) 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 Annual Report on
Form 10-K for the year ended December 31, 2005. 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, the Company’s 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
(loss)
(as determined in accordance with accounting principles generally accepted
in
the United States of America) as a measure of the Company’s operating results or
operating cash flows (as determined in accordance with accounting principles
generally accepted in the United States of America) as a measure of
the
Company’s liquidity.
12
The
table
below presents information about reported segments for the three months
ended
March 31, 2006 and 2005 (in thousands):
|
Three
months ended March 31,
|
||||||||
|
2006
|
2005
|
|||||||
|
Net
revenues from external customers:
|
||||||||
|
Kentucky
Operations
|
$
|
3,993
|
$
|
4,377
|
||||
|
Arlington
Park
|
12,427
|
11,445
|
||||||
|
Calder
Race Course
|
1,937
|
1,618
|
||||||
|
Hoosier
Park
|
8,253
|
8,911
|
||||||
|
Louisiana
Operations
|
15,234
|
16,633
|
||||||
|
CDSN
|
2,564
|
8,765
|
||||||
|
Total
racing operations
|
44,408
|
51,749
|
||||||
|
Other
investments
|
455
|
-
|
||||||
|
Corporate
|
165
|
133
|
||||||
|
Net
revenues from continuing operations
|
45,028
|
51,882
|
||||||
|
Discontinued
operations
|
-
|
4,435
|
||||||
|
$
|
45,028
|
$
|
56,317
|
|||||
|
Intercompany
net revenues:
|
||||||||
|
Kentucky
Operations
|
$
|
-
|
$
|
18
|
||||
|
Arlington
Park
|
-
|
-
|
||||||
|
Calder
Race Course
|
255
|
292
|
||||||
|
Hoosier
Park
|
-
|
-
|
||||||
|
Louisiana
Operations
|
1,407
|
6,335
|
||||||
|
Total
racing operations
|
1,662
|
6,645
|
||||||
|
Other
investments
|
100
|
137
|
||||||
|
Eliminations
|
(1,762
|
)
|
(6,782
|
)
|
||||
|
|
$ | - |
$
|
-
|
||||
|
Segment EBITDA and net loss:
|
||||||||
|
Kentucky
Operations
|
$
|
(6,807
|
)
|
$
|
(6,636
|
)
|
||
|
Arlington
Park
|
(1,952
|
)
|
(1,651
|
)
|
||||
|
Calder
Race Course
|
(3,405
|
)
|
(5,854
|
)
|
||||
|
Hoosier
Park
|
127
|
414
|
||||||
|
Louisiana
Operations
|
140
|
(1,178
|
)
|
|||||
|
CDSN
|
559
|
2,133
|
||||||
|
Total
racing operations
|
(11,338
|
)
|
(12,772
|
)
|
||||
|
Other
investments
|
598
|
178
|
||||||
|
Corporate
|
(411
|
)
|
(280
|
)
|
||||
|
Total
EBITDA
|
(11,151
|
)
|
(12,874
|
)
|
||||
|
Depreciation
and amortization
|
(5,298
|
)
|
(4,413
|
)
|
||||
|
Interest
income (expense), net
|
(484
|
)
|
(210
|
)
|
||||
|
Income
tax benefit
|
6,660
|
7,639
|
||||||
|
Net
loss from continuing operations
|
(10,273
|
)
|
(9,858
|
)
|
||||
|
Discontinued
operations, net of income taxes
|
-
|
(4,039
|
)
|
|||||
|
Net
loss
|
$
|
(10,273
|
)
|
$
|
(13,897
|
)
|
||
The
table
below presents total asset information about reported segments (in
thousands):
|
March
31,
2006
|
December
31,
2005
|
|||||||
|
Total
assets:
|
||||||||
|
Kentucky
Operations
|
$
|
436,719
|
$
|
440,953
|
||||
|
Arlington
Park
|
85,773
|
84,796
|
||||||
|
Calder
Race Course
|
89,217
|
92,552
|
||||||
|
Hoosier
Park
|
36,242
|
33,318
|
||||||
|
Louisiana
Operations
|
75,543
|
74,157
|
||||||
|
CDSN
|
11,018
|
11,018
|
||||||
|
Other
investments
|
145,300
|
143,003
|
||||||
|
879,812
|
879,797
|
|||||||
|
Eliminations
|
(369,051
|
)
|
(364,601
|
)
|
||||
|
$
|
510,761
|
$
|
515,196
|
|||||
|
|
Three
Months Ended March 31,
|
|||||||
|
2006
|
2005
|
|||||||
|
Capital
expenditures, net:
|
||||||||
|
Kentucky
Operations
|
$
|
2,355
|
$
|
12,301
|
||||
|
Calder
Race Course
|
4,175
|
560
|
||||||
|
Arlington
Park
|
410
|
2,287
|
||||||
|
Hoosier
Park
|
181
|
59
|
||||||
|
Louisiana
Operations
|
2,748
|
2,807
|
||||||
|
Other
Investments
|
84
|
854
|
||||||
|
$
|
9,953
|
$
|
18,868
|
|||||
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.
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 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 our 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 Louisiana
racetracks within those respective markets; costs associated with our
efforts in
support of alternative gaming initiatives; costs associated with Customer
Relationship Management initiatives; a substantial change in law or
regulations
affecting pari-mutuel and gaming 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 successfully
complete any divestiture transaction; our ability to adequately integrate
acquired businesses; market reaction to our expansion projects; the
loss of our
totalisator companies or their inability to provide us assurance of
the
reliability of their internal control processes through Statement on
Auditing
Standards No. 70 audits or to keep their technology current; the need
for
various alternative gaming approvals in Louisiana; our accountability
for
environmental contamination; the loss of key personnel; the impact
of natural
disasters, including Hurricanes Katrina, Rita and Wilma on our operations
and
our ability to adjust the casualty losses through our property and
business
interruption insurance coverage; any business disruption associated
with a
natural disaster and/or its aftermath; and the volatility of our stock
price.
You
should read this discussion in conjunction with the Condensed Consolidated
Financial Statements included in this Quarterly Report on Form 10-Q
and the
Company’s Annual Report on Form 10-K for the year ended December 31, 2005 for
further information, including Part I - Item 1A for a discussion regarding
some
of the reasons that actual results may be materially different from
those we
anticipate, as modified by Part II - Item 1A of this Quarterly Report
on Form
10-Q.
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 as well as alternative
gaming
through video poker machines in Louisiana.
We
operate the Churchill Downs racetrack, its on-site simulcast facility
and
racetrack enclosure 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, and its on-site simulcast facility (collectively
referred
to as “Kentucky Operations”).
15
We
also
own and operate Arlington Park, a Thoroughbred racing operation in
Arlington
Heights, Illinois and its eight off-track betting facilities (“OTBs”); Calder
Race Course, a Thoroughbred racing operation in Miami Gardens, Florida;
and Fair
Grounds Race Course (“Fair Grounds”), a Thoroughbred racing operation in New
Orleans, Louisiana, its eleven OTBs and Video Services, Inc. (“VSI”)
(collectively referred to as “Louisiana Operations”), the owner and operator of
more than 700 video poker machines in Louisiana. Additionally, we are
the
majority owner and operator of Hoosier Park in Anderson, Indiana, which
conducts
Thoroughbred, Quarter Horse and Standardbred horse racing, its on-site
simulcast
facility and its three OTBs.
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.
Recent
Developments
On
April
3, 2006, we entered into a definitive agreement (the “Agreement”) with Magna
Entertainment Corporation (“MEC”) and Racing UK to form a subscription
television channel that will broadcast races from our racetracks, racetracks
of
MEC, as well as other North American and international racetracks,
into the
United Kingdom and Ireland. As part of the Agreement, the Company,
MEC and
Racing UK became owners of Racing World Limited. Under the terms of
the
Agreement, we anticipate making a total investment in this venture
of 375
thousand British pounds.
Legislative
and Regulatory Changes
Federal
In
2003,
the country of Antigua filed a formal complaint against the United
States with
the World Trade Organization ("WTO"), challenging the United States'
ability to
enforce certain Federal gaming laws (Sections 1084, 1952 and 1955 of
Title 18 of
the United States Code known as the Wire Act, the Travel Act and the
Illegal
Gambling Business Act, respectively, and collectively the "Acts") against
foreign companies that were accepting Internet wagers from United States
residents. At issue was whether the United States' enforcement of the
Wire Act,
the Travel Act and the Illegal Gambling Business Act against foreign
companies
violated the General Agreement on Trade in Services ("GATS"). In November
of
2004, a WTO panel ruled that the United States, as a signatory of GATS,
could
not enforce the Acts against foreign companies that were accepting
Internet
wagers from United States residents. The United States appealed the
ruling and,
in April of 2005, the WTO's appellate body ruled that the United States
had
demonstrated that the Wire Act, the Travel Act and the Illegal Gambling
Business
Act were measures necessary to protect public morals or maintain public
order,
but that the United States did not enforce the Acts consistently between
domestic companies and foreign companies as required by GATS. The WTO's
appellate body specifically referenced the Interstate Horseracing Act,
which
appeared to authorize domestic companies to accept Internet wagers
on
horseracing, as being inconsistent with the United States' stated policy
against
Internet wagering. In arguments and briefs before the WTO's appellate
body, the
United States argued that the Acts, specifically the Wire Act, applies
equally
to domestic companies and foreign companies and the Interstate Horseracing
Act
does not create an exception for domestic companies to accept Internet
wagering
on horseracing. The WTO's appellate body did not rule on whether an
exception
for domestic U.S. companies was created under the Interstate Horseracing
Act,
but recommended that the WTO's Dispute Settlement Body request the
United States
bring measures found to be inconsistent with GATS into conformity with
its
obligations with GATS. The United States was given until April 3, 2006
to bring
its policies in line with the ruling, assuming it believed any changes
were
necessary. On April 10, 2006, the United States delegation to the WTO
submitted
a brief report to the Chairman of the Dispute Settlement Body (“U.S. Report”)
stating that no changes are necessary to bring U.S. policies in line
with the
ruling. In support of its position, the United States delegation informed
the
Dispute Settlement Body that on April 5, 2006, the United States Department
of
Justice confirmed the United States Government position regarding remote
wagering on horseracing in testimony before a subcommittee of the United
States
House of Representatives. According to the U.S. Report, in that testimony,
the
Department of Justice stated its view that regardless of the Interstate
Horseracing Act, existing criminal statutes prohibit the interstate
transmission
of bets or wagers, including wagers on horseracing, and informed the
subcommittee that it is currently undertaking a civil investigation
relating to
a potential violation of law regarding this activity. Antigua has not
indicated what actions, if any, it will take in response to the U.S
Report and
the United States' position relative to interstate wagering on horseracing.
The
effect of the WTO ruling on the ability of domestic companies to accept
Internet
wagers and other account wagers on horse racing remains unclear.
16
Indiana
During
April of 2005, Senate Enrolled Act 92 ("SEA 92"), a bill that makes
it a Class D
Felony for an operator to use the Internet to engage in unlawful gambling
in
Indiana or with a person located in Indiana, passed both chambers of
the Indiana
General Assembly and was signed by the Governor. An "operator," as
defined by
SEA 92, is a person who owns, maintains or operates an Internet site
that is
used for interactive gambling. Under SEA 92, effective July 1, 2005,
an operator
is guilty of professional gambling if it uses the Internet to accept,
or offer
to accept, for profit, money or other property risked in gambling in
Indiana or
in a transaction directly involving a person located in Indiana. We
receive
source market fees from various in-home wagering providers for the
licensing of
our live racing products in the distribution of such products through
broadcast
mediums such as television or the Internet. TVG, one of our major in-home
providers in Indiana, has ceased operations in Indiana due to legal
uncertainty.
Florida
On
November 2, 2004, Amendment 4, a slot machine question which sought
to allow
voters in Miami-Dade and Broward counties to hold local referenda on
the issue,
passed by a margin of 1.4%. On March 8, 2005, voters in Miami-Dade
and Broward
counties voted in separate local referenda to decide whether slot machines
could
be installed at the seven existing pari-mutuel sites in those counties,
including Calder. Although the measure passed in Broward County, home
of
Gulfstream Park, it was unsuccessful in Miami-Dade County, where Calder
is
located. Slot machine gaming was approved by the Florida legislature
during a
special session of the Florida legislature on December 9, 2005. Slot
operations
are expected to commence at Broward's four pari-mutuel wagering facilities
in
early Summer of 2006. We believe that the failure of the local referendum
to
pass in Miami-Dade County was due primarily to Governor Bush's active
opposition
to the measure during the final days of the campaign. We are preparing
a
strategy to seek passage in Miami-Dade County when the issue can again
be placed
on the ballot. The earliest that it can be placed on the ballot is
March 8,
2007, but it may be 2008 before it is placed on the ballot. We are
currently
determining the most advantageous date for placing the issue on the
ballot. The
impact on our results of operations and financial position of the failed
referendum in Miami-Dade County and the operation of slot machines
at
pari-mutuel wagering facilities in Broward County is uncertain at this
time.
Illinois
Pursuant
to the Illinois Horse Racing Act, Arlington Park (and all other Illinois
racetracks) is permitted to receive a payment commonly known as purse
recapture.
Generally, in any year that wagering on Illinois horse races at Arlington
Park
is less than 75% of wagering both in Illinois and at Arlington Park
on Illinois
horse races in 1994, Arlington Park is permitted to receive 2% of the
difference
in wagering in the subsequent year. The payment is funded from the
Arlington
Park purse account. Under the Illinois Horse Racing Act, the Arlington
Park
purse account is to be repaid via an appropriation by the Illinois
General
Assembly from the Illinois General Revenue Fund. However, this appropriation
has
not been made since 2001. Subsequently, Illinois horsemen unsuccessfully
petitioned the Illinois Racing Board ("IRB") to prevent Illinois racetracks
from
receiving this payment in any year that the Illinois General Assembly
did not
appropriate the repayment to the racetrack's purse accounts from the
General
Revenue Fund. Further, the Illinois horsemen filed lawsuits seeking,
among other
things, to block payment to Illinois racetracks, as well as to recover
the 2002
and 2003 amounts already paid to the Illinois racetracks. These lawsuits
filed
by the Illinois horsemen challenging the 2002 and 2003 reimbursements
have been
resolved in favor of Arlington Park and the other Illinois racetracks.
Several
bills were filed in the 2003, 2004 and 2005 sessions of the Illinois
legislature
that, in part, would eliminate the statutory right of Arlington Park
and the
other Illinois racetracks to continue to receive this payment. None
of these
bills passed. As the legal right still exists, Arlington Park has elected
to
continue to receive the recapture payment from the purse account. If
Arlington
Park loses the statutory right to receive this payment, there would
be a
material adverse impact on Arlington Park's results of operations.
17
Arlington
Park is entitled under law to share in the proceeds of the Illinois
Horse Racing
Equity Fund. The Illinois Horse Racing Equity Fund is to be funded
by the
10th
riverboat license issued in Illinois. The grant of the 10th
riverboat license is currently the subject of numerous legal challenges
and, as
such, is currently not an operational riverboat license. At such time
should the
10th
riverboat license in Illinois be granted and a riverboat become operational,
Arlington Park would be entitled to receive additional revenue, which
could be
significant. As an alternative, on May 4, 2006, House Bill 1918 ("HB
1918")
passed both houses of the legislature that allocates 3% of adjusted
gross
receipts from certain riverboat casinos to the Illinois Horse Racing
Equity
Trust Fund for a period of two years. Subsidies to be allocated under HB
1918 will be distributed as follows: 60% for purse expenses and 40%
for the
exsisting racetrack operators, which will be allocated based on a formula
defined in HB 1918. HB 1918 is currently awaiting signature by the
governor of Illinois.
During
January and February when there is no live racing in Illinois, the
IRB
designates a Thoroughbred racetrack as the host track in Illinois.
The IRB
appointed Arlington Park the host track in Illinois during January
2006 for 29
days, which is the same as January of 2005. In addition, Arlington
Park was
appointed the host track for eight days during February of 2006, which
resulted
in an increase of $0.5 million in pre-tax earnings for the month of
February of
2006 compared to the same period of 2005. Arlington Park's future designation
as
the host track is subject to the annual appointment by the IRB. A change
in the
number of days that Arlington Park is designated "host track" could
have an
adverse impact on our results of operations.
Kentucky
The
Kentucky horse industry continues to seek legal authority to offer
alternative
forms of gaming at Kentucky's eight existing racetracks. Alternative
forms of
gaming would enable our Kentucky racetracks to better compete with
neighboring
gaming venues by providing substantial new revenues for purses and
capital
improvements. Several alternative gaming bills were filed in the 2006
session of
the Kentucky General Assembly, including two bills filed in the House
and two in
the Senate. The Kentucky Equine Education Project ("KEEP"), an alliance
of the
Commonwealth's equine industry leaders, including our Company, supported
legislation that called for a statewide voter referendum in the Fall
of 2006 to
amend the State constitution to allow Kentucky's eight racetracks to
offer full
casino gaming. The Commonwealth's share of the new revenue would have
been
earmarked for education, healthcare, local development and environmental
concerns benefiting the entire Commonwealth under the KEEP plan. For
several
reasons, including active and public opposition by the Senate President
and the
governor publicly questioning the economics of alternative gaming,
no
alternative gaming legislation was passed. KEEP has vowed to continue
the fight
for full casino gaming at racetracks in 2007, and we plan to participate
actively in that effort.
Louisiana
We
have
received statutory, regulatory and other authorizations to operate
slot machines
at Fair Grounds. Failure to maintain the necessary gaming licenses
to own and
operate slot machines at Fair Grounds could have a material, adverse
impact on
our results of operations. Under the Louisiana statute, Fair Grounds
may operate
500 slot machines. As a result of Hurricane Katrina, the agreement
between
Harrah's Casino in New Orleans and the State of Louisiana has been
amended to
eliminate the $350.0 million gaming revenue threshold before Fair Grounds
may
operate 700 slot machines. Fair Grounds is currently pursuing a conforming
statutory amendment. Due to Hurricane Katrina, we are currently evaluating
the
feasibility of beginning construction of a new slot facility.
Churchill
Downs Louisiana Horseracing Company, LLC has completed the process
to seek the
necessary local zoning change and permits. On August 18, 2005, the
New Orleans
City Council passed ordinances approving hours of operation for slot
machines at
Fair Grounds as part of its conditional use permit. The ordinances
also
established additional provisos negotiated by Churchill Downs Louisiana
Horseracing Company, LLC and the New Orleans City Council relating
to other
conditional use activities.
In
April
2005, the New Orleans City Council instructed the city attorney to
file a
declaratory judgment action to determine if installation of slot machines
at
Fair Grounds would violate the City Charter. The Louisiana Attorney
General has
expressed an opinion that the addition of slots at the racetrack would
not
violate the City Charter. In June 2005, a resident living near Fair
Grounds
filed a lawsuit alleging, among other claims, that slot machines at
the
racetrack would be a violation of the City Charter, which limits New
Orleans to
one land-based casino. Based upon an opinion from the Louisiana Attorney
General
and other legal advice, we do not believe the installation of slot
machines at
Fair Grounds violates the City Charter.
18
Critical
Accounting Policies
Our
Condensed Consolidated Financial Statements have been prepared in conformity
with accounting principles generally accepted in the United States
of America.
Accordingly, we are required to make estimates, judgments and assumptions
that
we believe are reasonable based on our historical experience, contract
terms,
observance of known trends in our company and the industry as a whole,
and
information available from other outside sources. Our estimates affect
the
reported amounts of assets and liabilities and related disclosures
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 may
differ from those initial estimates. In general, however, our estimates
have
historically approximated actual results.
Our
most
significant estimates relate to the valuation of plant and equipment,
receivables, goodwill and other intangible assets, which may be significantly
affected by changes in the regulatory environment in which we operate,
and to
the aggregate costs for self-insured liability and worker’s compensation claims.
Additionally, estimates are used for determining income tax liabilities
and the
valuation of interest rate risk derivative contracts (interest rate
swaps) and
other derivative instruments.
We
evaluate our goodwill, intangible and other long-lived assets in accordance
with
the application of Statement of Financial Accounting Standards (“SFAS”) No. 142,
“Goodwill and Intangible Assets” and SFAS No. 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets”. For goodwill and intangible
assets, we review the carrying values at least annually during the
first quarter
of each year or whenever events or changes in circumstances indicate
that the
carrying value of these assets may not be recoverable. We assign estimated
useful lives to our intangible assets based on the period of time the
asset is
expected to contribute directly or indirectly to future cash flows.
We consider
certain factors when assigning useful lives such as legal, regulatory,
competition and other economic factors. Intangible assets with finite
lives are
amortized using the straight-line method.
While
we
believe that our estimates of future revenues and cash flows are reasonable,
different assumptions could materially affect our assessment of useful
lives and
fair market values. Changes in assumptions may cause modifications
to our
estimates for amortization or impairment, thereby impacting our results
of
operations. If the estimated lives of our intangible assets were to
decrease
based on the factors mentioned above, amortization expense could increase
significantly.
Our
business can be impacted positively and negatively by legislative and
regulatory
changes and by alternative gaming competition. A significant negative
impact
from these activities could result in a significant impairment of our
plant and
equipment and/or our goodwill and intangible assets in accordance with
generally
accepted accounting principles.
In
connection with losses incurred from natural disasters, insurance proceeds
are
collected on existing business interruption and property and casualty
insurance
policies. When losses are sustained in one period and the amounts to
be
recovered are collected in a subsequent period, management uses estimates
and
judgment to determine the amounts that are probable of recovery under
such
policies as specified in Financial Accounting Standards Board Interpretation
No.
30, "Accounting for Involuntary Conversions of Nonmonetary Assets to
Monetary
Assets."
We
also
use estimates and judgments for financial reporting to determine our
current tax
liability, as well as those taxes deferred until future periods. Net
deferred
and accrued income taxes represent significant assets and liabilities
of the
Company. In accordance with the liability method of accounting for
income taxes
as specified in SFAS No. 109, “Accounting for Income Taxes,” we recognize the
amount of taxes payable or refundable for the current year and deferred
tax
assets and liabilities for the future tax consequences of events that
have been
recognized in our financial statements or tax returns.
Adjustments
to deferred taxes are determined annually based upon changes in differences
between the book basis and tax basis of our assets and liabilities,
measured by
future tax rates we estimate will be applicable when these differences
are
expected to reverse. Changes in current tax laws, enacted tax rates
or the
estimated level of taxable income or non-deductible expenses could
change the
valuation of deferred tax assets and liabilities and affect the overall
effective tax rate and tax provision.
19
In
the
past, we have utilized interest rate swap contracts to hedge exposure
to
interest rate fluctuations on our variable rate debt and have designated
these
swaps as cash flow hedges of anticipated interest payments. Our interest
rate
swap contracts matched the critical terms of the underlying debt, thus
qualifying for hedge accounting. Such critical terms include the notional
amounts, benchmark interest rate basis, interest reset dates and payment
dates.
The fair market value of the swaps was recorded on the balance sheet
as an asset
or liability with the offset recorded in accumulated other comprehensive
income
net of income taxes. Any changes in the fair market value of the swaps
were
adjusted to the asset or liability account and recorded net of the
income taxes
in other comprehensive income.
We
maintain an allowance for doubtful accounts receivable that we have
deemed to
have a high risk of collectibility. We analyze historical collection
trends and
customer creditworthiness when evaluating the adequacy of our allowance
for
doubtful accounts receivable. Any changes in our assumptions or estimates
could
impact our bad debt expense and results of operations.
For
our
business insurance renewals over the past several years, we have assumed
more
risk than in prior years, primarily through higher retentions and higher
maximum
losses for stop-loss insurance for certain coverages. Our March 1,
2006 business
insurance renewals included substantially the same coverages and retentions
as
in previous years. We estimate insurance liabilities for workers compensation
and general liability losses based on our historical loss experience,
certain
actuarial assumptions of loss development factors and current industry
trends.
Any changes in our assumptions, actuarial assumptions or loss experience
could
impact our total insurance cost and overall results of operations.
Our ability
to obtain insurance coverage at acceptable costs in future years under
terms and
conditions comparable to the current year is uncertain.
Consolidated
Net Revenues
Our
net
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, the quarter during which we typically generate
the
majority of our annual operating income.
Our
pari-mutuel revenues include commissions on pari-mutuel wagering at
our
racetracks and off-track betting facilities (net of state and local
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, video poker, lease income and other sources.
Pari-mutuel
revenues are recognized upon occurrence of the live race that is presented
for
wagering and after that live race is made official by the respective
states’
racing regulatory body. Additional non-wagering revenues such as admissions,
programs and concession revenues are recognized as delivery of the
product or
services has occurred.
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 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.
The
Company retains as revenue a predetermined percentage or commission
on the total
amount wagered on live and import simulcasting sources, and the balance
is
distributed to the winning patrons. The gross percentages retained
on live
racing and import simulcasting at our various locations range from
approximately
15% to 27%. In general, the fees earned from export simulcasting are
contractually determined and average approximately 3.5%. All
commissions and fees earned from pari-mutuel wagering are shared with
horsemen
through payment of purses based on local contracts and statutes and
average
approximately 50%.
20
Results
of Continuing Operations
The
following table sets forth, for the periods indicated, certain operating
data:
| (In thousands, except per share data and live race |
Three
months ended March 31,
|
Change
|
|||||||||||||
| days) |
2006
|
2005
|
$
|
%
|
|||||||||||
|
Total
pari-mutuel handle
|
$
|
289,139
|
$
|
493,886
|
$
|
(204,747
|
)
|
(41
|
)%
|
||||||
|
Number
of live race days
|
14
|
63
|
(49
|
)
|
(78
|
)%
|
|||||||||
|
Net
pari-mutuel revenues
|
$
|
31,496
|
$
|
39,688
|
$
|
(8,192
|
)
|
(21
|
)%
|
||||||
|
Other
operating revenues
|
13,532
|
12,194
|
1,338
|
11
|
%
|
||||||||||
|
Total
net revenues
|
$
|
45,028
|
$
|
51,882
|
$
|
(6,854
|
)
|
(13
|
)%
|
||||||
|
Gross
loss
|
$
|
(6,844
|
)
|
$
|
(5,271
|
)
|
$
|
(1,573
|
)
|
(30
|
)%
|
||||
|
Gross
margin percentage
|
(15
|
)%
|
(10
|
)%
|
|||||||||||
|
Operating
loss
|
$
|
(17,306
|
)
|
$
|
(18,026
|
)
|
$
|
720
|
4
|
%
|
|||||
|
Net
loss
|
$
|
(10,273
|
)
|
$
|
(9,858
|
)
|
$
|
(415
|
)
|
(4
|
)%
|
||||
|
Diluted
net loss per common share
|
$
|
(0.79
|
)
|
$
|
(0.77
|
)
|
|||||||||
Three
Months Ended March 31, 2006 Compared to the Three Months Ended March
31,
2005
Our
total
net revenues decreased $6.9 million primarily as a result of 49 fewer
live
racing days at Fair Grounds due to the business interruption caused
by Hurricane
Katrina. A shortened race meet was conducted at Harrah’s Louisiana Downs from
November 19, 2005 through January 22, 2006 resulting in twelve racing
days
during the three months ended March 31, 2006 as compared to 61 days
during the
three months ended March 31, 2005. The decreased revenues from Fair
Grounds were
partially offset by increased revenues of approximately $2.7 million
from
increased wagering at our video poker operations in Louisiana and by
increased
revenues of $1.4 million at Arlington Park as a result of eight more
days that
Arlington Park was appointed host track in Illinois during the three
months
ended March 31, 2006 compared to the same period of 2005. Further discussion
of
net revenue variances by our reported segments is detailed below.
Significant
items affecting comparability of operating loss, net loss and diluted
net loss
per common share included:
|
·
|
We
incurred $2.8 million of expenses related to alternative
gaming
initiatives in Florida during the three months ended March
31,
2005.
|
|
·
|
Our
year-to-date effective tax rate decreased from 44% to 39%
resulting
primarily from the non-deductibility of legislative initiative
costs
recognized during the three months ended March 31,
2005.
|
Consolidated
Expenses
The
following table is a summary of our consolidated expenses:
|
Three
months ended March 31,
|
Change
|
||||||||||||||
| (In thousands) |
2006
|
2005
|
$
|
%
|
|||||||||||
|
Purse
expense
|
$
|
14,239
|
$
|
17,110
|
$
|
(2,871
|
)
|
(17
|
)%
|
||||||
|
Depreciation
and amortization
|
5,298
|
4,413
|
885
|
20
|
%
|
||||||||||
|
Other
operating expenses
|
32,335
|
35,630
|
(3,295
|
)
|
(9
|
)%
|
|||||||||
|
SG&A
expenses
|
10,462
|
12,755
|
(2,293
|
)
|
(18
|
)%
|
|||||||||
|
Total
|
$
|
62,334
|
$
|
69,908
|
$
|
(7,574
|
)
|
(11
|
)%
|
||||||
|
Percent
of revenue
|
138
|
%
|
135
|
%
|
|||||||||||
Three
Months Ended March 31, 2006 Compared to the Three Months Ended March
31,
2005
Total
expenses decreased 11% during the three months ended March 31, 2006
primarily as
a result of 49 fewer live racing days at Fair Grounds due to the business
interruption caused by Hurricane Katrina, as well as $2.8 million of
lower
expenses related to legislative costs for alternative gaming (included
in
SG&A expenses) as mentioned above. This was partially offset by an increase
in corporate SG&A expenses of $1.5 million as more fully described below in
the discussion of expense variances by segment. Also, depreciation
expense in
the Kentucky Operations increased $1.1 million reflecting the impact
of the
facility renovation of the Churchill Downs racetrack, which was completed
during
the second quarter of 2005. Further discussion of expense variances
by our
reported segments is detailed below.
Other
Income (Expense) and Income Tax Benefit
The
following table is a summary of our other income (expense) and income
tax
benefit:
|
Three
months ended March
31,
|
Change
|
||||||||||||||
|
(In
thousands)
|
2006
|
2005
|
$
|
%
|
|
||||||||||
|
Interest
income
|
$
|
119
|
$
|
85
|
$
|
34
|
40
|
%
|
|||||||
|
Interest
expense
|
(603
|
)
|
(295
|
)
|
(308
|
)
|
(104
|
)%
|
|||||||
|
Unrealized
gain on derivative instruments
|
204
|
206
|
(2
|
)
|
(1
|
)%
|
|||||||||
|
Miscellaneous,
net
|
653
|
533
|
120
|
23
|
%
|
||||||||||
|
Other
income (expense)
|
$
|
373
|
$
|
529
|
$
|
(156
|
)
|
(29
|
)%
|
||||||
|
Income
tax benefit
|
$
|
6,660
|
$
|
7,639
|
$
|
(979
|
)
|
(13
|
)%
|
||||||
|
Effective
tax rate
|
39
|
%
|
44
|
%
|
|||||||||||
Three
Months Ended March 31, 2006 Compared to the Three Months Ended March
31,
2005
Significant
items affecting the comparability of other income and expense and income
tax
benefit include:
|
·
|
Interest
expense increased during the three months ended March 31,
2006 due to
higher borrowings for the payment of income taxes related
to the gain on
the sale of assets of Hollywood Park, which occurred during
2005 and, to a
lesser extent, a rising interest rate
environment.
|
|
·
|
Our
year-to-date effective tax rate decreased from 44% to 39%
resulting from
the non-deductibility of the legislative initiative costs
recognized
during the three months ended March 31,
2005.
|
Net
Revenues By Segment
The
following table presents net revenues, including intercompany revenues,
by our
reported segments:
|
Three
months ended March
31,
|
Change
|
||||||||||||||
|
(In
thousands)
|
2006
|
2005
|
$
|
%
|
|||||||||||
|
Kentucky
Operations
|
$
|
3,993
|
$
|
4,395
|
$
|
(402
|
)
|
(9
|
)%
|
||||||
|
Arlington
Park
|
12,427
|
11,445
|
982
|
9
|
%
|
||||||||||
|
Calder
Race Course
|
2,192
|
1,911
|
281
|
15
|
%
|
||||||||||
|
Hoosier
Park
|
8,253
|
8,910
|
(657
|
)
|
(7
|
)%
|
|||||||||
|
Louisiana
Operations
|
16,641
|
22,968
|
(6,327
|
)
|
(28
|
)%
|
|||||||||
|
CDSN
|
2,564
|
8,765
|
(6,201
|
)
|
(71
|
)%
|
|||||||||
|
Total
racing operations
|
46,070
|
58,394
|
(12,324
|
)
|
(21
|
)%
|
|||||||||
|
Other
investments
|
555
|
137
|
418
|
305
|
%
|
||||||||||
|
Corporate
revenues
|
165
|
133
|
32
|
24
|
%
|
||||||||||
|
Eliminations
|
(1,762
|
)
|
(6,782
|
)
|
5,020
|
74
|
%
|
||||||||
|
$
|
45,028
|
$
|
51,882
|
$
|
(6,854
|
)
|
(13
|
)%
|
|||||||
Three
Months Ended March 31, 2006 Compared to the Three Months Ended March
31,
2005
Significant
items affecting comparability of our revenues by segment include:
|
·
|
Louisiana
Operations and CDSN revenues decreased primarily as a result
of 49 fewer
live racing days at Fair Grounds Race Course during the three
months ended
March 31, 2006, which was partially offset by increased revenues
of
approximately $2.7 million from our video poker operations
in Louisiana.
|
|
·
|
During
January and February, when there is no live racing in Illinois,
the
Illinois Racing Board (“IRB”) designates a Thoroughbred racetrack as the
host track in Illinois. The IRB appointed Arlington Park
as the host track
in Illinois for 37 days during portions of January and February
2006
compared to 29 days during January of 2005, which resulted
in additional
revenues of $1.4 million during the three months ended March
31, 2006
compared to the same period of
2005.
|
Expenses
by Segment
The
following table presents total expenses, including intercompany expenses,
by our
reported segments:
|
Three
months ended March
31,
|
Change
|
||||||||||||||
| (In thousands) |
2006
|
2005
|
$
|
%
|
|||||||||||
|
Kentucky
Operations
|
$
|
13,552
|
$
|
12,841
|
$
|
711
|
6
|
%
|
|||||||
|
Arlington
Park
|
15,185
|
14,670
|
515
|
4
|
%
|
||||||||||
|
Calder
Race Course
|
6,296
|
8,925
|
(2,629
|
)
|
(29
|
)%
|
|||||||||
|
Hoosier
Park
|
8,507
|
8,915
|
(408
|
)
|
(5
|
)%
|
|||||||||
|
Louisiana
Operations
|
17,249
|
22,041
|
(4,792
|
)
|
(22
|
)%
|
|||||||||
|
CDSN
|
2,006
|
6,632
|
(4,626
|
)
|
(70
|
)%
|
|||||||||
|
Total
racing operations
|
62,795
|
74,024
|
(11,229
|
)
|
(15
|
)%
|
|||||||||
|
Other
investments
|
519
|
427
|
92
|
22
|
%
|
||||||||||
|
Corporate
expenses
|
5,430
|
3,915
|
1,515
|
39
|
%
|
||||||||||
|
Eliminations
|
(6,410
|
)
|
(8,458
|
)
|
2,048
|
24
|
%
|
||||||||
|
$
|
62,334
|
$
|
69,908
|
$
|
(7,574
|
)
|
(11
|
)%
|
|||||||
23
Three
Months Ended March 31, 2006 Compared to the Three Months Ended March
31,
2005
Significant
items affecting comparability of our expenses by segment include:
|
·
|
Louisiana
Operations and CDSN expenses decreased primarily as a result
of 49 fewer
live racing days at Fair Grounds Race Course during the three
months ended
March 31, 2006, which was partially offset by increased expenses
of $4.1
million from our video poker
operations.
|
|
·
|
Calder
Race Course expenses decreased $2.8 million as a result of
the alternative
gaming initiatives in Florida during the three months ended
March 31,
2005.
|
|
·
|
Corporate
expenses increased during the three months ended March 31,
2006 compared
to the three months ended March 31, 2005 as a result of increased
costs
associated with the retirement and replacement of the chief
executive
officer, increased payroll costs and increased expenses related
to various
business development initiatives.
|
Consolidated Balance
Sheet
The
following table is a summary of our overall financial position as of
March 31,
2006 and December 31, 2005:
|
|
Change
|
||||||||||||||
|
March
31, 2006
|
December
31, 2005
|
$
|
%
|
||||||||||||
|
Total
assets
|
$
|
510,761
|
$
|
515,196
|
$
|
(4,435
|
)
|
(1
|
)%
|
||||||
|
Total
liabilities
|
$
|
203,345
|
$
|
198,965
|
$
|
4,380
|
2
|
%
|
|||||||
|
Total
shareholders' equity
|
$
|
307,416
|
$
|
316,231
|
$
|
(8,815
|
)
|
(3
|
)%
|
||||||
Significant
items affecting comparability of our consolidated balance sheet
include:
|
·
|
Total
assets decreased slightly between December 31, 2005 and March
31, 2006.
Significant changes include decreases in accounts receivable
of $22.6
million offset by increases in income taxes receivable of
$9.2 million and
other current assets of $10.1 million. Accounts receivable
balances
decreased primarily due to the collection of 2005 race meet
receivables
for Calder Race Course and Fair Grounds as well as the collection
of
accounts receivables related to the 2006 Kentucky Derby and
Kentucky Oaks.
Income taxes receivable increased as a result of the net
loss that
occurred during the first quarter. Other current assets increased
primarily due to increases in prepaid insurance balances
associated with
the renewal of our insurance premiums during the first quarter
of
2006.
|
|
·
|
Total
liabilities increased slightly between December 31, 2005
and March 31,
2006. Significant changes include increases in deferred revenue
of $14.6
million, partially offset by decreases in accounts payable
of $4.5 million
and dividends payable of $6.5 million. Deferred revenue increased
primarily due to invoicing for sponsorship events and the
2006 Kentucky
Derby and Kentucky Oaks. Deferred revenue also increased
partially as a
result of future wagering related to the 2006 Kentucky Derby
and Kentucky
Oaks race days to be held in the second quarter of 2006.
Accounts payable
decreased primarily due to the payment of 2005 race meet
payables for
Calder Race Course.
|
Liquidity
and Capital Resources
The
following table is a summary of our liquidity and capital
resources:
|
Three
months ended March
31,
|
Change
|
||||||||||||||
| (In thousands) |
2006
|
2005
|
$
|
%
|
|||||||||||
|
Operating
activities
|
$
|
10,401
|
$
|
9,377
|
$
|
1,024
|
11
|
%
|
|||||||
|
Investing
activities
|
$
|
(9,953
|
)
|
$
|
(18,868
|
)
|
$
|
8,915
|
47
|
%
|
|||||
|
Financing
activities
|
$
|
(8,277
|
)
|
$
|
(3,106
|
)
|
$
|
(5,171
|
)
|
(166
|
)%
|
||||
Significant
items affecting comparability of our liquidity and capital resources
include:
|
·
|
The
increase in cash provided by operating activities is primarily
a
reflection of the sale of the assets of Hollywood Park, which
typically
generated an operating loss during the first quarter of each
year, as well
as increased profitability of the Louisiana Operations and
reduced
legislative spending on alternative gaming initiatives. These
items were
partially offset by reduced cash flows provided by operating
activities
within CDSN due to 49 fewer racing days at Fair Grounds during
2006. We
anticipate that cash flows from operations over the next
twelve months
will be adequate to fund our business operations and capital
expenditures.
|
|
·
|
Capital
expenditures decreased primarily as a result of reduced expenditures
related to the Churchill Downs racetrack facility renovation
project
referred to as the “Master Plan” offset by capital improvements at Calder
Race Course, Ellis Park and Fair Grounds to repair damages
sustained by
natural disasters during 2005.
|
|
·
|
We
made repayments in excess of our borrowings on our revolving
loan
facilities of $2.2 million during the three months ended
March 31, 2006
compared to borrowings in excess of repayments on our revolving
loan
facilities of $3.5 million during the three months ended
March 31, 2005
due to the fact that funding was needed for the facility
renovation at
Churchill Downs racetrack.
|
At
March
31, 2006, we had $13.4 million of total debt outstanding under our
revolving
credit 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 debt facilities
remains
constant, a one-percentage point increase or decrease in the LIBOR
rate would
increase or decrease annual pre-tax earnings, recorded fair value and
cash flows
by $0.1 million.
|
ITEM
4.
|
(a) Evaluation
of Disclosure Controls and Procedures
As
of the
end of the period covered by the report, the Company carried out an
evaluation
under the supervision and with the participation of the Company’s Disclosure
Committee and management, including the President and Chief Executive
Officer
(“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant
to
Exchange Act Rule 13a-15(b). Based upon this evaluation, the CEO and
the CFO
concluded that our disclosure controls and procedures were effective
as of March
31, 2006.
(b) Changes
in Internal Control over Financial Reporting
Management
of the Company has evaluated, with the participation of the Company’s CEO and
CFO, changes in the Company’s internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act)
during the first quarter of 2006. There have not been any changes in
the Company’s internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred
during the quarter ended March 31, 2006 that have materially affected,
or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
25
|
PART
II.
|
|
|
ITEM
1.
|
|
|
Not
applicable.
|
|
|
ITEM
1A.
|
|
Information
regarding risk factors appears in Part I - Item 1A of the Company’s Annual
Report on Form 10-K for the year ended December 31, 2005. Other than
described
below, there have been no material changes from the risk factors previously
disclosed in the Company’s Annual Report on Form 10-K.
Potential
Changes in Legislation and Regulation of Our Operations
Our
gaming operations exist at the discretion of the states where we conduct
business. Certain aspects of our gaming operations are also subject
to federal
statutes or regulations. All of our pari-mutuel wagering operations
are
contingent upon continued governmental approval of those operations
as forms of
legalized gaming. Legislation to limit or prohibit gaming (pari-mutuel
or
non-pari-mutuel) may be introduced in the future. Any restriction on
or
prohibition of gaming operations could have a material, adverse impact
on our
business, financial condition and results of operations. In addition,
any
expansion of our gaming operations into alternative gaming, such as
slot
machines, video lottery terminals and other forms of non-pari-mutuel
gaming,
will likely require various additional licenses, registrations, permits
and
approvals. The approval process can be time-consuming and costly, and
there is
no assurance of success. We have and continue to seek legal authority
to offer
alternative gaming at our racetracks where alternative gaming is not
currently
permitted.
We
authorize third party account wagering providers to accept pari-mutuel
wagers
from subscribers residing in states that expressly authorize or do
not expressly
prohibit account wagering. We receive host fees and source market fees
from this
activity. In the past, certain state attorneys general, district attorneys
and
other law enforcement officials have expressed concern over the legality
of
interstate account wagering. In December 2000, legislation was enacted
in the
United States that amends the Interstate Horseracing Act of 1978. We
believe
that this amendment clarifies that inter-track simulcasting, off-track
betting
and account wagering, as currently conducted by the U.S. horseracing
industry,
are authorized under U.S. federal law. The amendment may not be interpreted
in
this manner by all concerned, however, and there may be challenges
to these
activities by both state and federal law enforcement authorities, which
could
have a material, adverse impact on our business, financial condition
and results
of operations. In addition, if any proceedings were brought by governmental
or
private litigants who disagree with our interpretation of the applicable
laws,
the adverse publicity, cost of such litigation and diversion of our
management’s
focus and time away from our business operations may have a material,
adverse
impact on our business, financial condition and results of
operations.
In
2003,
the country of Antigua filed a formal complaint against the United
States with
the World Trade Organization ("WTO"), challenging the United States'
ability to
enforce certain Federal gaming laws (Sections 1084, 1952 and 1955
of Title 18 of
the United States Code known as the Wire Act, the Travel Act and
the Illegal
Gambling Business Act, respectively, and collectively the "Acts")
against
foreign companies that were accepting Internet wagers from United
States
residents. At issue was whether the United States' enforcement of
the Wire Act,
the Travel Act and the Illegal Gambling Business Act against foreign
companies
violated the General Agreement on Trade in Services ("GATS"). In
November of
2004, a WTO panel ruled that the United States, as a signatory of
GATS, could
not enforce the Acts against foreign companies that were accepting
Internet
wagers from United States residents. The United States appealed the
ruling and,
in April of 2005, the WTO's appellate body ruled that the United
States had
demonstrated that the Wire Act, the Travel Act and the Illegal Gambling
Business
Act were measures necessary to protect public morals or maintain
public order,
but that the United States did not enforce the Acts consistently
between
domestic companies and foreign companies as required by GATS. The
WTO's
appellate body specifically referenced the Interstate Horseracing
Act, which
appeared to authorize domestic companies to accept Internet wagers
on
horseracing, as being inconsistent with the United States' stated
policy against
Internet wagering. In arguments and briefs before the WTO's appellate
body, the
United States argued that the Acts, specifically the Wire Act, applies
equally
to domestic companies and foreign companies and the Interstate Horseracing
Act
does not create an exception for domestic companies to accept Internet
wagering
on horseracing. The WTO's appellate body did not rule on whether
an exception
for domestic U.S. companies was created under the Interstate Horseracing
Act,
but recommended that the WTO's Dispute Settlement Body request the
United States
bring measures found to be inconsistent with GATS into conformity
with its
obligations with GATS. The United States was given until April 3,
2006 to bring
its policies in line with the ruling, assuming it believed any changes
were
necessary. Pursuant to WTO dispute settlement procedures, at a meeting of
the Dispute Settlement Body (“DSB”) on May 18, 2005, the U.S. Government
informed the DSB that it intended to comply with the rulings and
recommendations
of the WTO. On April 10, 2006, the United States delegation to the
WTO submitted
a brief report to the Chairman of the DSB (“U.S. Report”) stating that no
changes are necessary to bring U.S. policies in line with the ruling. In
support of its position, the United States delegation informed the
DSB that on
April 5, 2006, the United States Department of Justice confirmed
the United
States Government position regarding remote wagering on horseracing
in testimony
before a subcommittee of the United States House of Representatives.
According
to the U.S. Report, in that testimony, the Department of Justice
stated its view
that regardless of the Interstate Horseracing Act of 1978, existing
criminal
statutes prohibit the interstate transmission of bets or wagers,
including
wagers on horseracing, and informed the subcommittee that it is currently
undertaking a civil investigation relating to a potential violation
of the law
regarding this activity. Antigua has not indicated what actions,
if any, it will
take in response to the U.S. Report and the United States’ position relative to
interstate wagering on horseracing. While the WTO decision does not affect
any existing federal or state law, we cannot predict what actions,
if any, the
U.S. government will take in response to the request of the WTO in
light of the
Appellate Body report and in light of the U.S. Report and what impact,
if any,
the Appellate Body report and the U.S. Report will have on our business
and
operations. One of the options available to Congress and the White
House is to
prohibit or restrict substantially the conduct of interstate simulcast
wagering
or account wagering. If the U.S. government elects to take such an
approach
(including through any action by the Department of Justice), it will
have a
material, adverse impact on our business, financial condition and
results of
operations.
The
Indiana horse racing industry currently receives a subsidy from riverboat
casinos. Currently the subsidy is distributed as follows: 40% for purse
expenses, 20% for breed development and 40% for the two existing racetrack
operators, which is divided equally. During March of 2006, the IHRC
approved
“Integrity ’06,” a program designed to improve the integrity of horse racing in
Indiana that is effective April 1, 2006. The estimated cost of complying
with
the rules and regulations created by “Integrity ‘06” will be financed by the two
existing racetrack operators in Indiana using the subsidy paid by riverboat
casinos, which is estimated to be 2% of the total subsidy. As a result,
beginning April 1, 2006, the subsidy will be distributed as follows:
39.2% for
purse expenses, 19.6% for breed development and 41.2% for the two existing
racetrack operators, which is divided equally. Any change in this arrangement
could adversely impact our operations in Indiana and the value of this
operation.
In
Illinois, the IRB has the authority to designate racetracks as "host
track" for
the purpose of receiving host track revenues generated during periods
when no
racetrack is conducting live races. Racetracks that are designated
as "host
track" obtain and distribute out of state simulcast signals for the
State of
Illinois. Under Illinois law, the "host track" is entitled to a larger
portion
of commissions on the related pari-mutuel wagering. Failure to designate
Arlington Park as "host track" during this period could have a material,
adverse
impact on our business, financial condition and results of operations.
In
addition, Arlington Park is statutorily entitled to recapture as revenues
monies
that are otherwise payable to Arlington Park's purse account. The right
to
recapture these revenues is subject to change every legislative session.
These
statutory or regulatory established revenue sources in Indiana and
Illinois are
subject to change every legislative session. The reduction or elimination
of any
one of them could have a material, adverse impact on our results of
operations.
In addition, certain revenue sources are dedicated by legislation or
regulation
and may be subject to change.
The
passage of legislation permitting alternative gaming at racetracks
can be a long
and uncertain process. As a result, there can be no assurance that
(1)
jurisdictions in which we own or operate racetracks will pass legislation
permitting alternative gaming, (2) if jurisdictions pass such legislation,
it
will be permitted at our racetracks, and (3) if alternative gaming
is permitted
at our racetracks, it will be on economically viable terms. If alternative
gaming legislation is enacted in any jurisdiction where we own or operate
a
racetrack and we proceed to conduct alternative gaming, there may be
significant
costs and other resources to be expended and there will be significant
risks
involved, including the risk of changes in the enabling legislation,
that may
have a material, adverse impact on that racetrack's business, financial
condition and results of operations.
|
ITEM
2.
|
|
|
Not
applicable.
|
|
|
ITEM
3.
|
|
|
Not
applicable.
|
|
|
ITEM
4.
|
|
| Not applicable. | |
27
|
ITEM
5.
|
|
|
Not
applicable
|
|
|
ITEM
6.
|
|
|
See
exhibit index.
|
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant
has
duly caused this report to be signed on its behalf by the undersigned
thereunto
duly authorized.
|
CHURCHILL
DOWNS INCORPORATED
|
|
|
|
|
|
May
9, 2006
|
/s/
Thomas H. Meeker
|
|
Thomas
H. Meeker
President
and Chief Executive Officer
(Principal
Executive Officer)
|
|
|
May
9, 2006
|
/s/
Michael E. Miller
|
|
Michael
E. Miller
Executive
Vice President and
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
29
|
Number
|
Description
|
By
Reference To
|
||
|
3
|
Amended
and Restated Bylaws of Churchill Downs Incorporated
|
|||
|
10(a)
|
Summary
of the Company’s Bonus Awards for the Named Executive
Officers
|
|||
|
10(b)
|
Employment
Agreement as Amended and Restated with Thomas H. Meeker
|
|||
|
31(i)(a)
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley
Act of 2002
|
|||
|
31(i)(b)
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley
Act of 2002
|
|||
|
32
|
Certification
of CEO and CFO Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
pursuant to Rule
13a - 14(b))
|
30
|
Exhibit
31(i)(a)
|
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
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 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
report;
|
| 3. |
Based
on my knowledge, the financial statements, and other financial information
included in this 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
report;
|
| 4. |
The
registrant’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
| a. |
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, 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 report is
being
prepared;
|
| b. |
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision,
to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
| c. |
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
| d. |
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
| 5. |
The
registrant’s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
| a. |
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
| b. |
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
| Date: May 9, 2006 | /s/Thomas H. Meeker |
|
Thomas H. Meeker
President and Chief Executive
Officer
|
|
Exhibit
31(i)(b)
|
CERTIFICATION
OF CHIEF FINANCIAL OFFICER
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 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
report;
|
| 3. |
Based
on my knowledge, the financial statements, and other financial information
included in this 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
report;
|
| 4. |
The
registrant’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
| a. |
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, 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 report is
being
prepared;
|
| b. |
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision,
to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
| c. |
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
| d. |
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
| 5. |
The
registrant’s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
| a. |
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
| b. |
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
| Date: May 9, 2006 | /s/Michael E. Miller |
| Michael E. Miller | |
| Executive Vice President and Chief Financial Officer | |
|
Exhibit
32
|
Certification
of CEO and CFO Pursuant to
18
U.S.C. Section 1350,
As
Adopted Pursuant to
Section
906 of the Sarbanes-Oxley Act of 2002
In
connection with the Quarterly Report on Form 10-Q of Churchill Downs
Incorporated (the "Company") for the quarterly period ended March 31, 2006
as
filed with the Securities and Exchange Commission on the date hereof (the
"Report"), Thomas H. Meeker, as President and Chief Executive Officer of the
Company, and Michael E. Miller, as Executive Vice President and Chief Financial
Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, as
adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of his
knowledge, that:
(1) The
Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
/s/Thomas
H.
Meeker_________________________
Thomas
H.
Meeker
President
and Chief Executive Officer
May
9,
2006
/s/Michael
E.
Miller___________________________
Michael
E. Miller
Executive
Vice President and Chief Financial Officer
May
9,
2006
This
certification is being furnished to the Securities and Exchange Commission
as an
exhibit to the Report and shall not be deemed filed by the Company for purposes
of § 18 of the Securities Exchange Act of 1934, as amended.
A
signed
original of this written statement required by Section 906, or other document
authenticating, acknowledging, or otherwise adopting the signature that appears
in typed form within the electronic version of this written statement required
by Section 906, has been provided to Churchill Downs Incorporated and will
be
retained by Churchill Downs Incorporated and furnished to the Securities and
Exchange Commission or its staff upon request.