CHDN

Churchill Downs Inc. 10-Q Summary: Period Ended June 30, 2000

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2000, and the six months ended on that date. Churchill Downs Inc. operates five major racetracks (Churchill Downs, Hollywood Park, Calder Race Course, Ellis Park, and Hoosier Park) and off-track betting facilities. The second quarter is historically the most significant for the company due to the Kentucky Derby and Kentucky Oaks. The company recently acquired Hollywood Park (September 1999) and Calder Race Course (April 1999), which significantly impacts year-over-year comparability.

Key Financial Metrics

Liquidity: The company reported a working capital deficiency of $4.9 million at June 30, 2000, attributed to seasonal business cycles. Total debt outstanding under the revolving credit facility was $164.0 million.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 55% ($55.8 million) for the six-month period, driven primarily by the inclusion of Hollywood Park ($50.9 million contribution) and increased wagering at Churchill Downs due to record attendance at the Kentucky Derby and Oaks.
• Expense Increases: Operating expenses rose 61% ($45.9 million) and SG&A expenses rose 88% ($6.1 million). These increases are largely due to the consolidation of newly acquired entities (Hollywood Park and Calder) and increased corporate staffing.
• Interest Expense: Interest expense increased significantly to $7.7 million for the six months (from $2.2 million in 1999) due to borrowings used to finance the 1999 acquisitions.
• Balance Sheet: Net plant and equipment increased $142.9 million year-over-year, primarily due to the Hollywood Park acquisition. Restricted cash increased $30.4 million due to the classification of assets related to Hollywood Park's racing meet.

Outlook, Risks, and Contingencies

Pending Transactions:

• Hollywood Park Sale: The company agreed to sell a 26% interest in Hoosier Park, LP to Centaur, Inc. for $8.5 million. Closing is expected in Q3 2000.
• Arlington Merger: A definitive agreement was reached to merge with Duchossois Industries Inc. (owner of Arlington International Racecourse). The deal involves issuing 3.15 million shares plus potential additional shares. Closing is expected in September 2000, subject to regulatory approvals.

Regulatory and Market Risks:

• Legislation: New Kentucky legislation provides an excise tax credit effective July 1, 2000, and eliminates excise tax on Breeders' Cup wagering (effective Jan 1, 2001).
• Competition: Risks include gaming competition (lotteries, casinos), changes in racing laws, and the ability to attract top horses and trainers.
• Interest Rate Risk: The company has $164 million in variable-rate debt. A 1% increase in LIBOR would reduce pre-tax earnings by $1.6 million, partially mitigated by interest rate swaps.

Investor Verification Checklist

• Acquisition Integration: Verify the operational performance and integration costs of Hollywood Park and Calder Race Course, which are driving current revenue and expense figures.
• Merger Approval: Monitor the status of regulatory approvals for the Arlington International Racecourse merger, specifically from the Illinois Racing Board and Florida regulators.
• Debt Servicing: Assess the impact of high interest expenses ($7.7M for six months) on future profitability as the company carries significant debt from recent acquisitions.
• Seasonality: Confirm that Q2 results, which include the Kentucky Derby, are not indicative of full-year performance due to the seasonal nature of the business.
• Working Capital: Review the $4.9 million working capital deficiency and the company's reliance on its $250 million credit line to fund operations and future acquisitions.