CHDN

Churchill Downs Inc. 10-K Summary (Year Ended Dec 31, 1997)

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 1997. Churchill Downs Inc. operates pari-mutuel wagering on Thoroughbred and Standardbred horse racing at Churchill Downs (Louisville, KY) and Hoosier Park (Anderson, IN). The Company also operates four "Sports Spectrum" simulcast wagering facilities. In November 1997, the Company formed Churchill Downs Investment Company (CDIC) to manage minority equity investments, including Tracknet, LLC and EquiSource, LLC. The Company is the home of the Kentucky Derby and hosted the Breeders' Cup in 1998.

Key Financial Metrics

Operating Margins: Gross profit was $23.5 million (19.8% of revenue). Operating income margin was 12.1%.

Liquidity: The Company maintains a $20 million unsecured line of credit with no borrowings outstanding as of year-end. Management expects 1998 cash flows to exceed disbursements.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 10% ($11.0 million) driven by a 4% increase in pari-mutuel revenues and a 165% increase in riverboat admission revenue ($7.9 million gross increase, $3.0 million net after expenses).
• Wagering Handle: Total handle in Kentucky rose 6% to $680.6 million, led by a 12% increase in interstate simulcast sending. Indiana handle rose 6% to $186.7 million, driven by a 46% increase in interstate simulcast sending.
• Expenses: Total operating expenses increased 10% ($8.5 million). Purse expenses rose 15% ($5.3 million), largely due to riverboat-related purse obligations. Advertising and marketing expenses increased 30% ($1.2 million) due to Indiana marketing campaigns funded by riverboat subsidies.
• Profitability: Net earnings increased 13% ($1.1 million) despite higher expenses, aided by revenue growth and a slight increase in the effective tax rate (38.1% to 38.9%).

Outlook, Risks, and Unusual Items

• Competition: The Company faces significant competition from riverboat casinos in Indiana and Illinois. A new Caesars World riverboat is expected to open near Louisville in summer 1998, which studies project could materially adversely impact wagering and attendance.
• Strategic Initiatives: The Company is pursuing legislation to allow video lottery terminals at its facilities to compete with casinos and generate additional purse revenue.
• Acquisition: On March 28, 1998, the Company agreed to purchase Racing Corporation of America (Ellis Park) for approximately $22 million in cash and stock. Closing is expected in April 1998.
• Corporate Actions: A 2-for-1 stock split was authorized in March 1998. A shareholder "Rights Plan" (poison pill) was adopted to deter hostile takeovers.
• Year 2000 Issue: The Company is addressing Y2K compliance, with completion targeted for June 30, 1999. Risks include potential disruption of telecommunications links critical to pari-mutuel operations.
• Environmental: Remediation costs for underground storage tanks at the Louisville Sports Spectrum site are being managed via an escrow account and indemnity from the prior owner; no material liability is anticipated.

Investor Verification Checklist

• Verify the impact of the new Caesars World riverboat opening on 1998 Kentucky wagering and attendance figures.
• Confirm the regulatory approval status and closing date of the $22 million Ellis Park acquisition.
• Monitor the status of legislation regarding video lottery terminals in Kentucky and Indiana.
• Review the Company's progress on Year 2000 compliance for critical telecommunications systems.
• Assess the stability of the Indiana riverboat admission tax subsidy, which contributed significantly to 1997 net revenue.