CHDN

Churchill Downs Inc. 10-Q Summary: Quarter Ended March 31, 2001

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2001, for Churchill Downs Incorporated. The Company operates pari-mutuel wagering on live Thoroughbred, Quarter Horse, and Standardbred horse racing, along with simulcast signals. Key assets include Churchill Downs (home of the Kentucky Derby), Hollywood Park, Arlington Park, Calder Race Course, Ellis Park, and Hoosier Park. The Company notes that Q1 results are seasonal and not indicative of full-year performance, as substantial earnings typically occur in Q2 and Q3 during major racing events.

Key Financial Metrics

Segment Performance: Hoosier Park was the only segment reporting positive EBITDA ($1.7 million). Churchill Downs, Hollywood Park, Calder, Arlington, and Ellis Park all reported negative EBITDA for the quarter.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 22% ($5.8 million) primarily due to the inclusion of Arlington Park (acquired Sept 2000), contributing $6.4 million in revenue. Hoosier Park also saw a $1.3 million increase due to 19 days of Standardbred live racing in 2001 versus none in 2000.
• Expense Increase: Operating expenses rose 25% ($7.9 million), driven largely by $6.9 million in expenses from the new Arlington Park operations and increased racing days at Hoosier Park.
• Working Capital: Accounts receivable decreased by $17.4 million due to collections from prior year live meets. Deferred revenue increased $9.2 million, largely due to advance sales for the 2001 Kentucky Derby and Oaks.
• Debt Reduction: Long-term debt decreased by $14.3 million compared to March 2000, attributed to a new cash management system that utilizes subsidiary cash to pay down the revolving credit line daily.

Outlook, Risks, and Management Commentary

Management Commentary: Management expects cash flows from operations and available borrowings to be sufficient to fund 2001 requirements, including capital improvements and acquisitions. The Company anticipates reclassifying approximately $1.2 million of net loss from accumulated other comprehensive income into net income as interest expense over the next twelve months due to the adoption of SFAS 133 (Accounting for Derivatives).

Risks and Contingencies:

• Seasonality: Q1 results are heavily impacted by the lack of major racing events; profitability is concentrated in Q2/Q3.
• Competition: Risks include gaming competition (lotteries, casinos) and changes in laws affecting pari-mutuel activities.
• Interest Rate Risk: The Company has $158.3 million in variable-rate debt. A 1% increase in LIBOR would reduce annual pre-tax earnings by $1.6 million, partially mitigated by interest rate swaps.
• Acquisition Integration: Risks related to the successful integration of Arlington Park and the potential issuance of additional shares contingent on the Rosemont, Illinois riverboat casino opening.

Investor Verification Checklist

• Verify the impact of the seasonal nature of the business on Q1 losses versus expected Q2/Q3 profitability.
• Confirm the status of the Rosemont, Illinois riverboat casino litigation and its potential impact on additional share issuance.
• Review the effectiveness of the new cash management system in reducing interest expense and debt levels.
• Monitor the integration progress and financial performance of the newly acquired Arlington Park segment.
• Assess the exposure to variable interest rates given the $158.3 million outstanding on the revolving credit facility.