CHDN

Churchill Downs Inc. - Q1 2003 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2003. Churchill Downs Inc. operates pari-mutuel wagering on live Thoroughbred, Quarter Horse, and Standardbred horse racing, along with simulcast signals. The company owns Churchill Downs (home of the Kentucky Derby), Ellis Park, Hollywood Park, Arlington Park, Calder Race Course, and Hoosier Park. The first quarter is historically a low-revenue period due to limited live racing days, with the majority of activity occurring in subsequent quarters.

Key Financial Metrics

Note: Total debt includes $513k current portion and $127.6M long-term portion for Q1 2003.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased by $2.8 million (9.1%) compared to Q1 2002. This was primarily driven by a $6.9 million increase in pari-mutuel revenues at Arlington Park, which was appointed the host track in Illinois for January and February 2003.
• Offsetting Declines: The revenue increase was partially offset by a $2.3 million decrease in Indiana riverboat admissions subsidy at Hoosier Park due to legislative changes requiring a revenue split with Indiana Downs. Additionally, handle and attendance decreased at most other tracks due to an Illinois horsemen's strike and economic conditions.
• Expense Increases: Operating expenses rose $3.8 million, largely due to a $5.0 million increase in purse expenses at Arlington Park corresponding to higher host track revenues.
• Cash Flow Improvement: Operating cash flow improved significantly to $10.3 million from $1.6 million in the prior year, driven by increased deposits for the Churchill Downs "Master Plan" renovation suites.

Outlook, Risks, and Management Commentary

• Capital Projects: The company is executing a "Master Plan" to renovate Churchill Downs. Capital expenditures for 2003 are projected at approximately $53.0 million ($15.5M for Phase 1 completion and $24.9M for Phase 2).
• Debt Refinancing: In April 2003 (subsequent to the period end), the company refinanced its credit facility. The new structure includes a $200 million revolving line of credit (5-year term) and $100 million in variable rate senior notes (7-year term).
• Divestiture Plans: Management is pursuing the divestiture of Ellis Park racetrack. Proceeds are intended to reduce debt. The carrying value of Ellis Park assets was previously reduced to reflect estimated fair value.
• Legislative Risks:
  • Indiana: Rules require Hoosier Park to split riverboat subsidy revenues with Indiana Downs in 2003, reducing subsidy revenue by approximately $5 million.
  • Illinois: Ongoing negotiations regarding a proposal to allow racetracks to operate slot machines in exchange for advancing state gaming taxes and forfeiting existing subsidies.
• Market Risk: The company has $120.9 million in variable rate debt. A 1% increase in LIBOR would reduce annual pre-tax earnings by $1.2 million. The company entered into interest rate swaps on $60.0 million of debt to mitigate this risk.

Investor Verification Checklist

• Seasonality Impact: Verify that Q1 losses are consistent with historical seasonal trends (low live racing days) and do not indicate structural operational issues.
• Legislative Exposure: Monitor the status of Illinois gaming legislation and Indiana subsidy allocation rules, as these directly impact revenue streams at Arlington Park and Hoosier Park.
• Capital Expenditure Execution: Track the progress and cost overruns of the Churchill Downs "Master Plan" renovation, which requires significant cash outlays ($53M projected for 2003).
• Debt Covenants: Confirm continued compliance with financial covenants (fixed charge, leverage ratios) under the new April 2003 refinancing terms.
• Ellis Park Sale: Assess the likelihood and timeline of the Ellis Park divestiture and the potential for further asset write-downs if the sale does not occur at estimated prices.