CHDN

Churchill Downs Inc. 10-Q Summary: Period Ended September 30, 1999

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 1999, and the nine months ended on that date. Churchill Downs Inc. operates pari-mutuel wagering facilities, including Churchill Downs (home of the Kentucky Derby), Hollywood Park, Calder Race Course, Ellis Park, and Hoosier Park. The company's business is highly seasonal, with a disproportionate share of annual earnings typically generated in the second quarter during the Kentucky Derby and Oaks.

Key Financial Metrics

Material Changes vs. Prior Period

• Acquisitions: The company significantly expanded its footprint through major acquisitions in 1999. On April 23, it acquired Calder Race Course (Florida) for approximately $89.5 million. On September 10, it acquired Hollywood Park Race Track and Casino (California) for approximately $142.5 million. It also acquired a 60% interest in Charlson Broadcast Technologies (CBT) in January 1999.
• Revenue Growth: Net revenues increased 42% ($48.8 million) for the nine-month period, driven primarily by the inclusion of Calder Race Course ($39.1 million) and Hollywood Park ($1.1 million). Organic growth at Churchill Downs and Hoosier Park also contributed.
• Debt and Liquidity: Long-term debt increased by $172.6 million compared to the prior year-end, funded by a new $250 million revolving credit facility to finance acquisitions. Cash and cash equivalents rose from $6.4 million to $27.9 million, supported by a $62.1 million common stock offering in July 1999.
• Expenses: Operating expenses rose 45% and SG&A expenses rose 41%, largely due to the integration of new facilities and increased corporate staffing.

Outlook, Risks, and Management Commentary

• Capital Resources: Management believes cash flows from operations and available borrowings are sufficient to fund 1999 requirements, including capital improvements. The new credit facility matures in 2004.
• Interest Rate Risk: The company has $183 million in variable-rate debt. To mitigate risk, it entered into interest rate swaps on $105 million of notional amounts. A 1% increase in LIBOR would reduce pre-tax earnings by approximately $0.8 million on the swapped portion and $1.8 million on the total facility.
• Year 2000 Compliance: The company reports that its owned systems and critical third-party vendors (totalisator, video, data) are Year 2000 compliant. Estimated remediation costs are less than $300,000, with approximately $225,000 incurred to date.
• Seasonality: Results for interim quarters are not indicative of full-year results due to the timing of major racing events like the Kentucky Derby.

Investor Verification Checklist

• Acquisition Integration: Verify the operational performance and revenue contribution of the newly acquired Hollywood Park and Calder Race Course against pro forma expectations.
• Debt Servicing: Confirm the impact of the increased debt load ($183 million outstanding) on future interest expense and cash flow, particularly given the variable-rate exposure.
• Goodwill Amortization: Review the amortization schedule for the $52 million in goodwill recorded from acquisitions, noting its impact on the effective tax rate (non-deductible).
• Stock Offering Proceeds: Track the utilization of the $62.1 million raised in the July 1999 public offering, specifically regarding debt repayment and capital expenditures.
• Year 2000 Contingencies: Monitor for any unforeseen costs or operational disruptions related to Year 2000 compliance in the final quarter of 1999.