CHDN

Churchill Downs Inc. 1999 Annual Report (10-K) Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 1999. Churchill Downs Inc. is a racing company conducting pari-mutuel wagering on live Thoroughbred, Standardbred, and Quarter Horse racing, as well as simulcast signals. The company owns and operates Churchill Downs (home of the Kentucky Derby), Hollywood Park (California), Calder Race Course (Florida), Ellis Park (Kentucky), and holds a majority interest in Hoosier Park (Indiana). The 1999 period was defined by significant expansion through the acquisitions of Hollywood Park and Calder Race Course.

Key Financial Metrics

Margins: Operating margin improved to approximately 12.6% in 1999 compared to 11.6% in 1998. Net margin was 5.8% in 1999 versus 7.1% in 1998, impacted by increased interest expense and non-deductible goodwill amortization.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 75% ($111.1 million) primarily due to the inclusion of Calder Race Course ($72.4 million) and Hollywood Park ($30.5 million) following their acquisitions in 1999.
• Acquisition Activity: The company acquired Hollywood Park (September 1999) and Calder Race Course (April 1999), significantly increasing the asset base and debt load. Total plant and equipment increased by $191.8 million.
• Debt Expansion: Long-term debt increased by $167.4 million to fund acquisitions. The company established a new $250 million revolving credit facility, with $178 million outstanding at year-end.
• Interest Expense: Interest expense rose from $0.9 million in 1998 to $7.8 million in 1999 due to new borrowings.
• Stock Offering: In July 1999, the company issued 2.3 million shares at $29 per share, raising $62.1 million in net proceeds.

Outlook, Risks, and Management Commentary

• Future Events: Churchill Downs is scheduled to host the Breeders' Cup Championship in November 2000, expected to have a positive impact on 2000 results.
• Planned Asset Sales: The company has definitive agreements to sell the Kentucky Horse Center (KHC) for $5 million and a 26% interest in Hoosier Park for $8.5 million. Proceeds are expected to be used to repay debt in the second quarter of 2000.
• Competition: The company faces competition from riverboat casinos, land-based casinos, and lotteries. A potential new racetrack in Indiana could impact Hoosier Park's market share and riverboat subsidy revenue.
• Regulatory Risks: Operations are subject to state racing commissions. Changes in the allocation of live racing days or gaming laws (e.g., video lottery terminals) could materially affect earnings.
• Environmental Contingencies: Hollywood Park faces storm water runoff issues (seller indemnified up to $5 million). Ellis Park requires septic system repairs (estimated under $400,000). Louisville Sports Spectrum remediation costs are covered by an escrow account and indemnity.
• Interest Rate Risk: The company has $178 million in variable-rate debt. A 1% increase in LIBOR would reduce pre-tax earnings by $1.8 million, partially mitigated by interest rate swaps.

Investor Verification Checklist

• Verify the closing dates and regulatory approvals for the pending sales of KHC and the Hoosier Park interest to confirm debt reduction timelines.
• Monitor the impact of the new Indiana racetrack proposal on Hoosier Park's riverboat subsidy revenue and handle.
• Assess the integration progress of Hollywood Park and Calder Race Course, specifically regarding operating margins and handle growth.
• Review the status of environmental remediation at Hollywood Park and Ellis Park to ensure costs remain within indemnified or estimated limits.
• Track the company's ability to secure video lottery terminal legislation in Kentucky as a strategic growth initiative.