CHDN

Churchill Downs Inc. 10-K Summary (Year Ended Dec 31, 1998)

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 1998. Churchill Downs Inc. is a racing company operating pari-mutuel wagering on live Thoroughbred and Standardbred horse racing and simulcast video feeds. Key operations include the flagship Churchill Downs racetrack (home of the Kentucky Derby) in Louisville, Kentucky; Ellis Park Race Course in Henderson, Kentucky; and Hoosier Park in Anderson, Indiana (majority-owned). The company also manages simulcast wagering facilities and holds minority investments in telecommunications and procurement services for the equine industry.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 24% ($28.4 million) primarily due to the acquisition of Ellis Park and the Kentucky Horse Center in April 1998, which contributed $17.4 million in revenue. Hoosier Park revenues rose 15% driven by increased simulcast revenues and a $5.1 million increase in the Indiana riverboat admissions subsidy.
• Expense Increases: Operating expenses rose 25% ($23.7 million), largely attributable to the inclusion of Ellis Park operations and increased purses/marketing expenses at Hoosier Park linked to the riverboat subsidy.
• Debt Expansion: Long-term debt increased significantly from $2.7 million to $13.7 million. The company borrowed $22 million on its line of credit during 1998 to finance the Ellis Park acquisition and fund operating expenses.
• Asset Base: Total assets grew by $28.8 million, driven by a $22.0 million increase in plant and equipment and a $6.5 million increase in intangible assets related to the acquisitions.

Outlook, Risks, and Management Commentary

• Strategic Acquisitions: Management highlighted the strategic significance of the Ellis Park acquisition and the January 1999 purchase of a 60% interest in Charlson Broadcast Technologies ($4.9 million cost) to enhance simulcast products. An agreement was also announced in January 1999 to acquire Calder Race Course for approximately $86 million.
• Competition: The company faces competition from riverboat casinos and lotteries. A new riverboat casino opened near Louisville in November 1998, and five others operate near the Merrillville, Indiana facility. Management notes that while the full impact is difficult to determine, studies project potential adverse effects on wagering and attendance.
• Regulatory Environment: Operations are subject to state racing commissions. A substantial change in the allocation of live racing days could adversely impact earnings. The company is actively pursuing legislation to allow video lottery terminals at Kentucky racetracks to compete with casinos.
• Year 2000 Compliance: The company is addressing Y2K issues for owned systems and third-party providers (totalisator, video services). Management expects compliance by mid-1999 and estimates remediation costs will not be material.
• Liquidity: The company maintains a $100 million line of credit ($89 million available at year-end) and is arranging a new $250 million facility expected to close in Q2 1999.

Investor Verification Checklist

• Acquisition Integration: Verify the financial performance of Ellis Park and the Kentucky Horse Center post-acquisition to ensure they meet projected returns.
• Riverboat Impact: Monitor handle and attendance figures at Churchill Downs and Hoosier Park to assess the actual impact of new and existing riverboat casinos.
• Debt Servicing: Review the terms of the new $250 million credit facility and the company's ability to service the increased debt load ($13.7 million long-term) while maintaining dividend payments.
• Regulatory Changes: Track legislative progress regarding video lottery terminals in Kentucky and potential caps on the Indiana riverboat admissions subsidy.
• Y2K Contingencies: Confirm the successful completion of Year 2000 remediation for critical third-party vendors (e.g., United Tote) to avoid operational disruptions.