10-Q 1 a07-25926_110q.htm 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

( X )   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2007

 

OR

 

(   )   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from

 

 to

 

 

 

Commission file number  0-1469

 

(Exact name of registrant as specified in its charter)

 

Kentucky

 

61-0156015

(State or other jurisdiction of incorporation or organization)

 

(IRS Employer Identification No.)

 

 

 

700 Central Avenue, Louisville, Kentucky 40208

(Address of principal executive offices) (zip code)

 

 

 

(502) 636-4400

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  [X]   No  [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  [  ]   Accelerated filer  [X]   Non-accelerated filer  [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  [  ]   No  [X]

 

The number of shares outstanding of registrant’s common stock at November 2, 2007 was 13,687,407 shares.

 


 

CHURCHILL DOWNS INCORPORATED

INDEX TO QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended September 30, 2007

 

 

 

Part I – FINANCIAL INFORMATION

Page

 

 

 

Item 1.

Financial Statements

3

 

 

 

 

Condensed Consolidated Balance Sheets, September 30, 2007 and December 31, 2006 (Unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Net Earnings for the three and nine months ended September 30, 2007 and 2006 (Unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006 (Unaudited)

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

36

 

 

 

Item 4.

Controls and Procedures

36

 

 

 

 

Part II – OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

37

 

 

 

Item 1A.

Risk Factors

37

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds (Not applicable)

38

 

 

 

Item 3.

Defaults Upon Senior Securities (Not applicable)

38

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders (Not applicable)

39

 

 

 

Item 5.

Other Information (Not applicable)

39

 

 

 

Item 6.

Exhibits

39

 

 

 

 

Signatures

40

 

 

 

 

Exhibit Index

41

 

2


 

PART I.                FINANCIAL INFORMATION

 

ITEM 1.                 FINANCIAL STATEMENTS

 

CHURCHILL DOWNS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited) (in thousands)

 

 

 

September 30,

 

 

December 31,

 

 

 

2007

 

 

2006

 

ASSETS

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

15,599

 

 

$

20,751

 

Restricted cash

 

12,396

 

 

12,704

 

Accounts receivable, net of allowance for doubtful accounts of $901 at September 30, 2007 and $757 at December 31, 2006

 

30,580

 

 

42,316

 

Deferred income taxes

 

6,270

 

 

6,274

 

Income taxes receivable

 

6,030

 

 

12,217

 

Other current assets

 

10,329

 

 

8,857

 

Assets held for sale

 

-

 

 

25,422

 

Total current assets

 

81,204

 

 

128,541

 

 

 

 

 

 

 

 

Plant and equipment, net

 

355,639

 

 

336,068

 

Goodwill

 

107,034

 

 

53,528

 

Other intangible assets, net

 

39,850

 

 

16,048

 

Other assets

 

15,568

 

 

12,143

 

Total assets

 

$

599,295

 

 

$

546,328

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

31,383

 

 

$

21,476

 

Purses payable

 

15,211

 

 

18,128

 

Accrued expenses

 

38,032

 

 

40,781

 

Dividends payable

 

-

 

 

6,670

 

Deferred revenue

 

10,399

 

 

26,165

 

Liabilities associated with assets held for sale

 

-

 

 

13,671

 

Total current liabilities

 

95,025

 

 

126,891

 

 

 

 

 

 

 

 

Long-term debt

 

55,049

 

 

-

 

Convertible note payable, related party

 

14,129

 

 

13,393

 

Other liabilities

 

21,983

 

 

22,485

 

Deferred revenue

 

19,680

 

 

20,416

 

Deferred income taxes

 

13,406

 

 

13,064

 

Total liabilities

 

219,272

 

 

196,249

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

 

Preferred stock; no par value; 250 shares authorized; no shares issued

 

-

 

 

-

 

Common stock; no par value; 50,000 shares authorized; 13,683 shares issued September 30, 2007 and 13,420 shares issued December 31, 2006

 

137,254

 

 

128,937

 

Retained earnings

 

242,769

 

 

221,142

 

Total shareholders’ equity

 

380,023

 

 

350,079

 

Total liabilities and shareholders’ equity

 

$

599,295

 

 

$

546,328

 

 

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

 

3


 

CHURCHILL DOWNS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF NET EARNINGS

for the three and nine months ended September 30,

(Unaudited)  (in thousands, except per common share data)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2007

 

 

2006

 

 

2007

 

 

2006

 

Net revenues

 

$

103,905

 

 

$

97,046

 

 

$

321,680

 

 

$

296,401

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

86,264

 

 

82,845

 

 

247,766

 

 

229,178

 

Selling, general and administrative expenses

 

13,009

 

 

10,820

 

 

35,903

 

 

33,208

 

Insurance recoveries, net of losses

 

-

 

 

(1,832

)

 

(784

)

 

(12,954

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating profit

 

4,632

 

 

5,213

 

 

38,795

 

 

46,969

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

163

 

 

244

 

 

828

 

 

549

 

Interest expense

 

(1,123

)

 

(371

)

 

(2,254

)

 

(1,280

)

Equity in loss of unconsolidated investments

 

(1,278

)

 

(319

)

 

(2,271

)

 

(614

)

Miscellaneous, net

 

484

 

 

437

 

 

2,977

 

 

1,423

 

 

 

(1,754

)

 

(9

)

 

(720

)

 

78

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations before provision for income taxes

 

2,878

 

 

5,204

 

 

38,075

 

 

47,047

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

(1,741

)

 

(2,339

)

 

(15,906

)

 

(19,294

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings from continuing operations

 

1,137

 

 

2,865

 

 

22,169

 

 

27,753

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations, net of income taxes:

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) earnings from operations

 

(319

)

 

1,685

 

 

(41

)

 

(123

)

Gain (loss) on sale of business

 

-

 

 

4,197

 

 

(182

)

 

4,197

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

818

 

 

$

8,747

 

 

$

21,946

 

 

$

31,827

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings from continuing operations

 

$

0.08

 

 

$

0.21

 

 

$

1.60

 

 

$

2.05

 

Discontinued operations

 

(0.02

)

 

0.43

 

 

(0.02

)

 

0.30

 

Net earnings

 

$

0.06

 

 

$

0.64

 

 

$

1.58

 

 

$

2.35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings from continuing operations

 

$

0.08

 

 

$

0.21

 

 

$

1.59

 

 

$

2.04

 

Discontinued operations

 

(0.02

)

 

0.43

 

 

(0.01

)

 

0.29

 

Net earnings

 

$

0.06

 

 

$

0.64

 

 

$

1.58

 

 

$

2.33

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

13,509

 

 

13,149

 

 

13,436

 

 

13,116

 

Diluted

 

14,038

 

 

13,656

 

 

13,937

 

 

13,635

 

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

 

4


 

CHURCHILL DOWNS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

for the nine months ended September 30,

(Unaudited)  (in thousands)

 

 

 

2007

 

 

2006

 

Cash flows from operating activities:

 

 

 

 

 

 

Net earnings

 

$

21,946

 

 

$

31,827

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

16,759

 

 

15,670

 

Loss on sale of business

 

297

 

 

3,666

 

Equity in loss of unconsolidated investments

 

2,271

 

 

614

 

Unrealized gain on derivative instruments

 

(612

)

 

(612

)

Asset impairment loss

 

-

 

 

13,646

 

Share-based compensation

 

4,669

 

 

999

 

Gain on asset disposition

 

(1,763

)

 

(13

)

Other

 

806

 

 

316

 

Increase (decrease) in cash resulting from changes in operating assets and liabilities:

 

 

 

 

 

 

Restricted cash

 

2,993

 

 

(11,775

)

Accounts receivable

 

3,450

 

 

(4,673

)

Other current assets

 

(1,035

)

 

(5,222

)

Accounts payable

 

2,382

 

 

242

 

Purses payable

 

(429

)

 

12,287

 

Accrued expenses

 

(1,836

)

 

5,950

 

Deferred revenue

 

(5,238

)

 

(2,434

)

Income taxes receivable

 

6,188

 

 

(1,382

)

Other assets and liabilities

 

4,493

 

 

1,245

 

Net cash provided by operating activities

 

55,341

 

 

60,351

 

Cash flows from investing activities:

 

 

 

 

 

 

Additions to plant and equipment

 

(37,548

)

 

(35,393

)

Acquisition of businesses

 

(79,338

)

 

-

 

Proceeds from the sale of business, net of cash sold

 

(8,897

)

 

(347

)

Purchases of investments

 

(1,480

)

 

-

 

Proceeds on sale of plant and equipment

 

2,975

 

 

15

 

Change in deposit wagering asset

 

(3,027

)

 

-

 

Net cash used in investing activities

 

(127,315

)

 

(35,725

)

Cash flows from financing activities:

 

 

 

 

 

 

Borrowings on bank line of credit

 

250,765

 

 

217,480

 

Repayments on bank line of credit

 

(190,566

)

 

(233,082

)

Change in book overdraft

 

2,670

 

 

(4,161

)

Windfall tax benefit from share-based compensation

 

509

 

 

483

 

Payment of dividends

 

(6,670

)

 

(6,520

)

Common stock issued

 

3,140

 

 

3,549

 

Change in deposit wagering liability

 

(347

)

 

-

 

Net cash provided by (used in) financing activities

 

59,501

 

 

(22,251

)

Net (decrease) increase in cash and cash equivalents

 

(12,473

)

 

2,375

 

Cash and cash equivalents, beginning of period

 

28,072

 

 

22,488

 

Cash and cash equivalents, end of period

 

15,599

 

 

24,863

 

Cash and cash equivalents included in assets held for sale

 

-

 

 

4,924

 

Cash and cash equivalents in continuing operations

 

$

15,599

 

 

$

19,939

 

 

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

 

5


 

CHURCHILL DOWNS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

for the nine months ended September 30,

(Unaudited)  (in thousands)

 

 

 

2007

 

 

2006

 

Cash paid during the period for:

 

 

 

 

 

 

Interest

 

$

1,177

 

 

$

858

 

Income taxes

 

$

8,819

 

 

$

13,244

 

Schedule of non-cash activities:

 

 

 

 

 

 

Plant and equipment additions included in accounts payable/accrued expenses

 

$

14

 

 

$

1,483

 

Assignment of notes receivable

 

$

4,000

 

 

-

 

Issuance of common stock with restricted stock plan

 

$

8,278

 

 

$

216

 

Assets acquired and liabilities assumed in acquisition of businesses:

 

 

 

 

 

 

Accounts receivable, net

 

$

4,164

 

 

-

 

Prepaid expenses

 

$

152

 

 

-

 

Other non-current assets

 

$

5

 

 

-

 

Plant and equipment

 

$

848

 

 

-

 

Goodwill

 

$

53,506

 

 

-

 

Other intangible assets

 

$

25,000

 

 

-

 

Accounts payable

 

$

4,144

 

 

-

 

Accrued expenses

 

$

162

 

 

-

 

Deferred revenue

 

$

31

 

 

-

 

 

The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

 

6


 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.

Basis of Presentation

 

The accompanying Condensed Consolidated Financial Statements are presented in accordance with the requirements of the Quarterly Report on Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America or those normally made in Churchill Downs Incorporated’s (the “Company”) Annual Report on Form 10-K. The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. Accordingly, the reader of this Quarterly Report on Form 10-Q should refer to the Company’s Amended Annual Report on Form 10-K/A for the year ended December 31, 2006 for further information. The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with the Company’s customary accounting practices and have not been audited.

 

In the opinion of management, all adjustments necessary for a fair statement of this information have been made, and all such adjustments are of a normal and recurring nature.

 

The accompanying Condensed Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries, Churchill Downs California Company and Churchill Downs California Fall Operating Company, Calder Race Course, Inc. and Tropical Park, Inc. which hold licenses to conduct horse racing at Calder Race Course (“Calder Race Course”), Arlington Park Racecourse, LLC and Arlington Management Services, LLC (“Arlington Park”), Churchill Downs Louisiana Horseracing Company, L.L.C. (“CDI Louisiana”), Churchill Downs Louisiana Video Poker Company, L.L.C. (“CD Louisiana Video”) and its wholly owned subsidiary, Video Services, Inc. (“VSI”), collectively referred to as the Louisiana Operations, Churchill Downs Technology Initiatives Company (“CDTIC”), the owner and operator of TwinSpires.com, CDTIC Acquisition, LLC, Churchill Downs Management Company (“CDMC”), Churchill Downs Investment Company (“CDIC”) and Churchill Downs Simulcast Productions (“CDSP”). All significant intercompany balances and transactions have been eliminated in consolidation.

 

The Company’s revenues and earnings are significantly influenced by its racing calendar. Therefore, revenues and operating results for any interim quarter are generally not indicative of the revenues and operating results for the year and may not be comparable with results for the corresponding period of the previous year. The Company conducts the majority of its live racing during the second, third and fourth quarters, including the running of the Kentucky Derby and the Kentucky Oaks during the second quarter, the quarter during which the Company typically generates the majority of its annual operating profit.

 

Comprehensive Earnings (Loss)

 

The Company had no other components of comprehensive earnings (loss) and, as such, comprehensive earnings is the same as net earnings as presented in the accompanying Condensed Consolidated Statements of Net Earnings.

 

2.

Acquisitions and New Ventures

 

Slots Operations

 

Fair Grounds Race Course (“Fair Grounds”) previously received all statutory, regulatory and other authorizations to operate up to 700 slot machines in a permanent facility at the racetrack. On September 18, 2007, the Louisiana Gaming Control Board, upon the recommendation of the Louisiana State Police, approved the opening of the Fair Grounds temporary slots facility. The facility was opened to the public on September 21, 2007 with a total of 245 slot machines available. Upon commencement of the temporary slots facility, the Company was required to cease video poker operations at the on-site simulcast facility.

 

Also, in September, Fair Grounds resumed its phase one construction of its permanent facility that had been halted due to the damages to its facilities caused by Hurricane Katrina. The permanent facility is scheduled to be completed in late 2008.

 

Acquisitions Closed During the Second Quarter of 2007

 

On June 11, 2007, the Company completed its acquisition of certain assets of AmericaTab, Bloodstock Research Information Services (“BRIS”) and the Thoroughbred Sports Network (“TSN”) (collectively, “ATAB and BRIS”) for an aggregate purchase price of $80 million, plus potential earn-out payments of up to $7 million, which is based

 

7


 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

upon the financial performance of the operations of the account wagering business during the five years ended June 30, 2012. The transaction includes the acquisition of the following account wagering platforms:  winticket.com, BrisBet.com and TsnBet.com. Through these transactions, the Company has also acquired the operations of two industry-leading data services companies, BRIS and TSN, which produce handicapping and pedigree reports that are sold to racetracks, horse owners and breeders, horse players and racing-related publications. The primary reason for these acquisitions was to invest in assets with an expected yield on investment, as well as to enter one of the fastest growing segments of the pari-mutuel industry.

 

The acquisition of ATAB and BRIS were accounted for under the purchase method. Upon resolution of the aforementioned earn-out contingency payment, additional consideration will be recognized as goodwill. As of September 30, 2007, goodwill recorded in connection with the acquisition of ATAB and BRIS is included in the segment Other Investments. The Company engaged a third party specialist to perform a valuation of the acquired assets. The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of acquisition (in thousands). Such estimates are subject to refinement as additional valuation information is received.

 

 

 

Total

 

Accounts receivable, net

 

$

4,164

 

Prepaid expenses

 

152

 

Other assets

 

5

 

Plant and equipment

 

848

 

Goodwill

 

53,506

 

Other intangible assets

 

25,000

 

Total assets acquired

 

$

83,675

 

 

 

 

 

Accounts payable

 

$

4,144

 

Accrued expenses

 

162

 

Deferred revenue

 

31

 

Total liabilities acquired

 

$

4,337

 

 

 

 

 

Net cash paid

 

$

79,338

 

 

The fair value of other intangible assets consists of the following (in thousands):

 

Customer relationships

 

$

8,000

 

Technology

 

4,000

 

Favorable contracts

 

10,000

 

Tradename

 

3,000

 

Total intangible assets

 

$

25,000

 

 

Depreciation of plant and equipment acquired is calculated using the straight-line method over their estimated remaining useful lives as follows:  4 years for equipment and 2 to 3 years for furniture and fixtures. Amortization of intangible assets acquired is calculated using the straight-line method over their estimated useful lives as follows:  5 years for customer relationships, 7 years for technology and 14 years for favorable contracts. The tradename was determined to have an indefinite life and is not being amortized.

 

Pro Forma

 

The following table illustrates the effect on net revenues from continuing operations, net earnings from continuing operations, and net earnings from continuing operations per common share as if the Company had consummated the acquisition of ATAB and BRIS as of the beginning of each period presented. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that would have occurred had the acquisition of ATAB and BRIS been consummated at the beginning of the respective periods.

 

 

8


 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

Three Months
Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2006

 

 

2007

 

 

2006

 

Net revenues from continuing operations

 

$

105,441

 

 

$

347,458

 

 

$

332,633

 

Net earnings from continuing operations

 

$

3,399

 

 

$

23,337

 

 

$

29,574

 

 

 

 

 

 

 

 

 

 

 

Net earnings from continuing operations per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.25

 

 

$

1.68

 

 

$

2.18

 

Diluted

 

$

0.25

 

 

$

1.67

 

 

$

2.17

 

 

 

 

 

 

 

 

 

 

 

Shares used in computing earnings from continuing

 

 

 

 

 

 

 

 

 

operations per common share:

 

 

 

 

 

 

 

 

 

Basic

 

13,149

 

 

13,436

 

 

13,116

 

Diluted

 

13,656

 

 

13,937

 

 

13,635

 

 

New Ventures

 

On May 2, 2007, the Company launched an account wagering platform called TwinsSpires.com, which offers racing fans the opportunity to wager on racing content owned by the Company and other content providers through pre-established accounts. The Company also entered into a definitive agreement on March 4, 2007 with Magna Entertainment Corporation (“MEC”) to form a venture, Tracknet Media Group, LLC (“TrackNet”), through which racing content of the Company and MEC will be made available to third parties, including racetracks, off-track betting facilities (“OTBs”), casinos and account wagering providers. TrackNet, in which the Company has a 50% interest, will also act as agent on behalf of the Company and MEC to purchase racing content that can be made available at the outlets of the Company and MEC for wagering purposes. On March 4, 2007, the Company also acquired a 50% interest in a venture, HRTV, LLC, that owns and operates a horse racing television channel, HRTV, previously wholly-owned by MEC. The Company’s audio visual signal of its races will be distributed by HRTV through certain cable or satellite providers to homes. Finally, on March 4, 2007, the Company and MEC entered into a reciprocal content swap agreement to exchange racing content between each other. As a result of this agreement, the content of the Company and MEC will be available for wagering through the racetracks, OTBs and account wagering providers owned by each of the Company and MEC. With respect to the Company’s account wagering racing content, the racing content of Calder Race Course will be available beginning in January 2008 when its agreement with Television Games Network (“TVG”) expires. As of September 30, 2007, the Company has made cash investments of $0.3 million and $0.8 million in TrackNet and HRTV, LLC, respectively.

 

3.

Discontinued Operations

 

Sale of Hoosier Park, L.P.

 

On March 30, 2007, the Company completed the sale of its 62% ownership interest in Hoosier Park, L.P. (“Hoosier Park”) to Centaur Racing, LLC, a privately held, Indiana-based company. Hoosier Park owns the Anderson, Indiana racetrack and its three OTBs located in Indianapolis, Merrillville and Fort Wayne. Centaur had owned 38% of Hoosier Park since December 2001 and held options to purchase a greater stake in the track and its OTBs.

 

Sale of Stock of Racing Corporation of America (“RCA”)

 

On September 28, 2006, the Company completed the sale of all issued and outstanding shares of common stock of RCA, the parent company of Ellis Park Race Course (“Ellis Park”), to EP Acquisition, LLC pursuant to the Stock Purchase Agreement dated July 15, 2006.

 

Financial Information

 

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the sold businesses have been accounted for as discontinued operations. Accordingly, the results of operations of the sold businesses for all periods presented and the gains

 

9


 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

(losses) on sold businesses have been classified as discontinued operations, net of income taxes, in the Condensed Consolidated Statements of Net Earnings. Set forth below is a summary of the results of operations of sold businesses for the three and nine months ended September 30, 2007 and 2006 (in thousands):

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2007

 

 

2006

 

2007

 

 

2006

 

Net revenues

 

$

-

 

 

$

18,538

 

 

$

7,789

 

 

$

39,236

 

Operating expenses

 

463

 

 

15,304

 

 

6,883

 

 

36,779

 

Selling, general and administrative expenses

 

65

 

 

1,385

 

 

641

 

 

2,962

 

Insurance recoveries, net of losses

 

-

 

 

(1,293

)

 

-

 

 

(1,367

)

Operating (loss) profit

 

(528

)

 

3,142

 

 

265

 

 

862

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

-

 

 

28

 

 

62

 

 

85

 

Interest expense

 

-

 

 

(155

)

 

(157

)

 

(428

)

Miscellaneous, net

 

785

 

 

(21

)

 

821

 

 

361

 

Other income (expense)

 

785

 

 

(148

)

 

726

 

 

18

 

Earnings before provision for income taxes

 

257

 

 

2,994

 

 

991

 

 

880

 

Provision for income taxes

 

(576

)

 

(1,309

)

 

(1,032

)

 

(1,003

)

(Loss) earnings from operations

 

(319

)

 

1,685

 

 

(41

)

 

(123

)

Gain (loss) on sale of business, net of income taxes

 

-

 

 

4,197

 

 

(182

)

 

4,197

 

Net (loss) earnings

 

$

(319

)

 

$

5,882

 

 

$

(223

)

 

$

4,074

 

 

Set forth below is a summary of the assets held for sale, which relate to Hoosier Park, as of December 31, 2006 (in thousands):

 

 

 

December 31,

 

 

 

2006

 

Current assets:

 

 

 

Cash and cash equivalents

 

$

7,321

 

Restricted cash

 

20

 

Accounts receivable, net

 

6,401

 

Other current assets

 

239

 

Plant and equipment, net

 

11,441

 

Assets held for sale

 

25,422

 

Current liabilities:

 

 

 

Accounts payable

 

4,849

 

Purses payable

 

3,410

 

Accrued expenses

 

2,954

 

Long-term debt

 

6,022

 

Deferred income taxes

 

(3,564

)

Liabilities associated with assets held for sale

 

13,671

 

Net assets held for sale

 

$

11,751

 

 

4.

Goodwill Impairment Test

 

Goodwill is tested for impairment on at least an annual basis or when a triggering event indicates an impairment may have occurred in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.”  In assessing whether goodwill is impaired, the fair market value of the related reporting unit is compared to its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair market value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test consists of comparing the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized equal to such excess. The implied fair value of goodwill is determined in the same manner as when determining the amount of goodwill recognized in a business combination. The

 

10


 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Company completed the required annual impairment tests of goodwill and indefinite lived intangible assets as of March 31, 2007, and no adjustment to the carrying value of these assets was required.

 

5.

Income Taxes

 

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109, Accounting for Income Taxes (“FIN 48”). FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes and accounting in interim periods. FIN 48 also requires increased disclosures.

 

The Company adopted the provisions of FIN 48 on January 1, 2007. The cumulative effect of adopting FIN 48 was an increase of $0.3 million to unrecognized tax benefits, and a corresponding decrease to retained earnings at January 1, 2007. The amount of unrecognized tax benefits at January 1, 2007 was $1.3 million, all of which would impact the Company’s effective tax rate, if recognized. The Company does not anticipate any significant increase or decreases in unrecognized tax benefits during the next twelve months.

 

The Company recognizes interest accrued related to unrecognized tax benefits in interest expense and penalties in selling, general and administrative expenses in the Condensed Consolidated Statements of Net Earnings, which is consistent with the recognition of these items in prior reporting periods.

 

The Company’s effective tax rate increased from 45% during the three months ended September 30, 2006 to 60% during the three months ended September 30, 2007 primarily due to the non-deductibility of legislative initiative costs recognized during 2007 as well as increased state income tax expense.

 

The U.S. federal statute of limitation remains open for the tax year 2004 and forward. State income tax returns are generally subject to examination for a period of three years after filing of the respective form.

 

6.

Long-Term Debt

 

On May 2, 2007, we entered into Amendment No. 1 (the “First Amendment”) to the Amended and Restated Credit Agreement dated September 23, 2005 (the “Agreement”). The guarantors under the First Amendment continue to be a majority of our wholly-owned subsidiaries. The First Amendment primarily serves (i) to reduce the maximum aggregate commitment under the credit facility from $200 million to $120 million and (ii) to reduce the interest rates applicable to amounts borrowed under this facility. Given the reduction in the maximum aggregate commitment, four lenders that were originally parties to the Agreement are removed as lenders under the terms of the First Amendment. The Company recognized a loss on extinguishment of debt in the amount of $0.4 million representing the write-off of unamortized deferred financing costs related to our previous credit facility during the second quarter of 2007. All other major terms of the Agreement remain the same including the facility termination date of September 23, 2010. Subject to certain conditions, the Company may at any time increase the aggregate commitment up to an amount not to exceed $170 million.

 

Generally, borrowings made pursuant to the First Amendment will bear interest at a LIBOR-based rate per annum plus an applicable percentage ranging from 0.50% to 1.50% depending on certain of the Company’s financial ratios. In addition, under the First Amendment, the Company agreed to pay a commitment fee at rates that range from 0.10% to 0.25% of the available aggregate commitment, depending on the Company leverage ratio.

 

The First Amendment contains customary financial and other covenant requirements, including specific interest coverage and leverage ratios, as well as minimum levels of net worth. The First Amendment adds a negative covenant that imposes a $100 million cap on the amount of any investment that the Company may make to construct a gaming and/or slot machine facility in Florida in the event that laws in the state permit and the Company obtains authority to engage in such activities. The First Amendment also modifies two of the financial covenants, providing for a one-time increase in the maximum leverage ratio for a period of eight consecutive quarters in the event that the

 

11


 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Company constructs a gaming and/or slot facility in Florida and increasing the baseline for the minimum consolidated net worth covenant from $190 million to $290 million.

 

7.

Earnings Per Share

 

The following is a reconciliation of the numerator and denominator of the net earnings from continuing operations per common share computations (in thousands, except per share data):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2007

 

 

2006

 

 

2007

 

 

2006

 

Numerator for basic net earnings from continuing operations per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings from continuing operations

 

$

1,137

 

 

$

2,865

 

 

$

22,169

 

 

$

27,753

 

Net earnings from continuing operations allocated to convertible note payable

 

(37

)

 

(95

)

 

(722

)

 

(926

)

Numerator for basic net earnings from continuing operations per common share

 

$

1,100

 

 

$

2,770

 

 

$

21,447

 

 

$

26,827

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator for basic net earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

818

 

 

$

8,747

 

 

$

21,946

 

 

$

31,827

 

Net earnings allocated to convertible note payable

 

(27

)

 

(291

)

 

(715

)

 

(1,062

)

Numerator for basic net earnings per common share

 

$

791

 

 

$

8,456

 

 

$

21,231

 

 

$

30,765

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator for diluted net earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings from continuing operations

 

$

1,137

 

 

$

2,865

 

 

$

22,169

 

 

$

27,753

 

Discontinued operations, net of income taxes

 

(319

)

 

5,882

 

 

(223

)

 

4,074

 

Net earnings

 

$

818

 

 

$

8,747

 

 

$

21,946

 

 

$

31,827

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for net earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

13,509

 

 

13,149

 

 

13,436

 

 

13,116

 

Plus dilutive effect of stock options

 

76

 

 

54

 

 

48

 

 

66

 

Plus dilutive effect of convertible note payable

 

453

 

 

453

 

 

453

 

 

453

 

Diluted

 

14,038

 

 

13,656

 

 

13,937

 

 

13,635

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings from continuing operations

 

$

0.08

 

 

$

0.21

 

 

$

1.60

 

 

$

2.05

 

Discontinued operations

 

(0.02

)

 

0.43

 

 

(0.02

)

 

0.30

 

Net earnings

 

$

0.06

 

 

$

0.64

 

 

$

1.58

 

 

$

2.35

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings from continuing operations

 

$

0.08

 

 

$

0.21

 

 

$

1.59

 

 

$

2.04

 

Discontinued operations

 

(0.02

)

 

0.43

 

 

(0.01

)

 

0.29

 

Net earnings

 

$

0.06

 

 

$

0.64

 

 

$

1.58

 

 

$

2.33

 

 

Options to purchase six thousand and two thousand shares for the three and nine months ended September 30, 2007, respectively, and options to purchase 69 thousand and 36 thousand shares for the three and nine months ended September 30, 2006, respectively, are excluded from the computation of earnings per common share assuming dilution because the options’ exercise prices were greater than the average market price of the common shares during the respective periods.

 

12

 


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

8.

Segment Information

 

The Company has determined that it currently operates in the following five segments:  (1) Churchill Downs Racetrack, which includes its on-site simulcast facility and training facility; (2) Calder Race Course; (3) Arlington Park and nine OTBs; (4) Louisiana Operations, including Fair Grounds and its slot operations, its nine OTBs and Video Services Inc. (“VSI”); and (5) other investments, including Churchill Downs Simulcast Productions (“CDSP”), TwinSpires.com, ATAB and BRIS and the Company’s various equity interests, including TrackNet, HRTV and Racing World Limited. Eliminations include the elimination of intersegment transactions.

 

The accounting policies of the segments are the same as those described in the “Summary of Significant Accounting Policies” in the Company’s Amended Annual Report on Form 10-K/A for the year ended December 31, 2006. The Company uses revenues and EBITDA (defined as earnings before interest, taxes, depreciation and amortization) as key performance measures of results of operations for purposes of evaluating performance internally. Furthermore, the Company believes that the use of these measures enables management and investors to evaluate and compare from period to period, the Company’s operating performance in a meaningful and consistent manner. Because the Company uses EBITDA as a key performance measure of financial performance, the Company is required by accounting principles generally accepted in the United States of America to provide the information in this footnote concerning EBITDA. However, these measures should not be considered as an alternative to, or more meaningful than, net earnings (loss) (as determined in accordance with accounting principles generally accepted in the United States of America) as a measure of the Company’s operating results or operating cash flows (as determined in accordance with accounting principles generally accepted in the United States of America) as a measure of the Company’s liquidity.

 

In connection with the formation of TrackNet, the Company’s internal management reporting structure was adjusted to eliminate the segment formerly known as Churchill Downs Simulcast Network (“CDSN”). CDSN previously sold the racing signals of the racetracks owned by the Company for wagering and simulcast purposes, but this function will be performed by TrackNet going forward. Activity previously disclosed for CDSN for the three and nine months ended September 30, 2006 has been allocated to the other segments as follows (in thousands):

 

13


 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

 

Three Months

 

 

Nine Months

 

 

 

Ended

 

 

Ended

 

 

 

September 30,
2006

 

 

September 30,
2006

 

Net revenues from external customers:

 

 

 

 

 

 

Churchill Downs Racetrack

 

$

2,958

 

 

$

24,225

 

Arlington Park

 

6,788

 

 

10,480

 

Calder Race Course

 

4,744

 

 

8,522

 

Louisiana Operations

 

-

 

 

1,820

 

Corporate

 

471

 

 

1,382

 

Discontinued operations

 

2,540

 

 

2,540

 

Total CDSN

 

$

17,501

 

 

$

48,969

 

 

 

 

 

 

 

 

Intercompany net revenues:

 

 

 

 

 

 

Churchill Downs Racetrack

 

$

(2,234

)

 

$

(18,290

)

Arlington Park

 

(5,091

)

 

(7,860

)

Calder Race Course

 

(3,559

)

 

(6,392

)

Louisiana Operations

 

-

 

 

(1,365

)

Discontinued operations

 

(1,923

)

 

(1,923

)

Eliminations

 

12,807

 

 

35,830

 

Total CDSN

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

Segment EBITDA and net earnings:

 

 

 

 

 

 

Churchill Downs Racetrack

 

$

725

 

 

$

5,932

 

Arlington Park

 

1,697

 

 

2,620

 

Calder Race Course

 

1,186

 

 

2,130

 

Louisiana Operations

 

-

 

 

455

 

Corporate

 

225

 

 

260

 

Discontinued operations

 

617

 

 

617

 

Total CDSN

 

$

4,450

 

 

$

12,014

 

 

Total asset information previously disclosed for CDSN as of December 31, 2006 has been allocated to the other segments as follows (in thousands):

 

Total assets:

 

 

 

Churchill Downs Racetrack

 

$

1,327

 

Calder Race Course

 

9,691

 

Total CDSN

 

$

11,018

 

 

14


 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The table below presents information about reported segments for the three and nine months ended September 30, 2007 and 2006 (in thousands):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2007

 

 

2006

 

 

2007

 

 

2006

 

Net revenues from external customers:

 

 

 

 

 

 

 

 

 

 

 

 

Churchill Downs Racetrack

 

$

7,271

 

 

$

11,055

 

 

$

102,117

 

 

$

104,386

 

Arlington Park

 

38,100

 

 

35,370

 

 

80,052

 

 

74,739

 

Calder Race Course

 

33,046

 

 

34,228

 

 

60,879

 

 

63,188

 

Louisiana Operations

 

15,014

 

 

15,048

 

 

63,327

 

 

50,800

 

Total racing operations

 

93,431

 

 

95,701

 

 

306,375

 

 

293,113

 

Other investments

 

9,863

 

 

998

 

 

13,626

 

 

1,741

 

Corporate

 

611

 

 

471

 

 

1,631

 

 

1,544

 

Net revenues from continuing operations

 

103,905

 

 

97,170

 

 

321,632

 

 

296,398

 

Discontinued operations

 

-

 

 

18,414

 

 

7,837

 

 

39,239

 

 

 

$

103,905

 

 

$

115,584

 

 

$

329,469

 

 

$

335,637

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intercompany net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Churchill Downs Racetrack

 

$

339

 

 

$

172

 

 

$

2,041

 

 

$

1,114

 

Arlington Park

 

551

 

 

311

 

 

807

 

 

507

 

Calder Race Course

 

293

 

 

214

 

 

483

 

 

376

 

Louisiana Operations

 

6

 

 

-

 

 

238

 

 

23

 

Total racing operations

 

1,189

 

 

697

 

 

3,569

 

 

2,020

 

Other investments

 

351

 

 

443

 

 

1,006

 

 

1,281

 

Eliminations

 

(1,540

)

 

(1,264

)

 

(4,527

)

 

(3,298

)

 

 

-

 

 

(124

)

 

48

 

 

3

 

Discontinued operations

 

-

 

 

124

 

 

(48

)

 

(3

)

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment EBITDA and net earnings:

 

 

 

 

 

 

 

 

 

 

 

 

Churchill Downs Racetrack

 

$

(3,951

)

 

$

(2,606

)

 

$

36,625

 

 

$

35,270

 

Arlington Park

 

8,526

 

 

4,112

 

 

10,726

 

 

3,839

 

Calder Race Course

 

4,940

 

 

8,041

 

 

5,662

 

 

8,436

 

Louisiana Operations

 

(330

)

 

1,211

 

 

5,502

 

 

16,027

 

Total racing operations

 

9,185

 

 

10,758

 

 

58,515

 

 

63,572

 

Other investments

 

1,177

 

 

472

 

 

(667

)

 

1,170

 

Corporate

 

(383

)

 

(1,120

)

 

(1,644

)

 

(2,836

)

Total EBITDA from continuing operations

 

9,979

 

 

10,110

 

 

56,204

 

 

61,906

 

Eliminations

 

-

 

 

(65

)

 

56

 

 

103

 

Depreciation and amortization

 

(6,141

)

 

(4,714

)

 

(16,759

)

 

(14,231

)

Interest income (expense), net

 

(960

)

 

(127

)

 

(1,426

)

 

(731

)

Provision for income taxes

 

(1,741

)

 

(2,339

)

 

(15,906

)

 

(19,294

)

Net earnings from continuing operations

 

1,137

 

 

2,865

 

 

22,169

 

 

27,753

 

Discontinued operations, net of income taxes

 

(319

)

 

5,882

 

 

(223

)

 

4,074

 

Net earnings

 

$

818

 

 

$

8,747

 

 

$

21,946

 

 

$

31,827

 

 

15


 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The table below presents total asset information about reported segments (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2007

 

 

2006

 

Total assets:

 

 

 

 

 

 

Churchill Downs Racetrack

 

$

270,440

 

 

$

442,724

 

Arlington Park

 

97,832

 

 

80,956

 

Calder Race Course

 

101,642

 

 

103,217

 

Louisiana Operations

 

98,770

 

 

98,053

 

Other investments

 

241,794

 

 

154,301

 

Assets held for sale

 

-

 

 

25,422

 

 

 

810,478

 

 

904,673

 

Eliminations

 

(211,183

)

 

(358,345

)

 

 

$

599,295

 

 

$

546,328

 

 

 

 

Nine Months Ended September 30,

 

 

 

2007

 

 

2006

 

Capital expenditures:

 

 

 

 

 

 

Churchill Downs Racetrack

 

$

5,727

 

 

$

5,189

 

Arlington Park

 

16,843

 

 

1,984

 

Calder Race Course

 

1,395

 

 

7,630

 

Louisiana Operations

 

11,285

 

 

12,818

 

Hoosier Park

 

227

 

 

300

 

Ellis Park

 

-

 

 

7,196

 

Other investments

 

2,071

 

 

276

 

 

 

$

37,548

 

 

$

35,393

 

 

16


 

ITEM 2.                 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Information set forth in this discussion and analysis contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Private Securities Litigation Reform Act of 1995 (the “Act”) provides certain “safe harbor” provisions for forward-looking statements. All forward-looking statements made in this Quarterly Report on Form 10-Q are made pursuant to the Act. The reader is cautioned that such forward-looking statements are based on information available at the time and/or management’s good faith belief with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in the statements. Forward-looking statements speak only as of the date the statement was made. We assume no obligation to update forward-looking information to reflect actual results, changes in assumptions or changes in other factors affecting forward-looking information. Forward-looking statements are typically identified by the use of terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “predict,” “project,” “should,” “will,” and similar words, although some forward-looking statements are expressed differently. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from expectations include: the effect of global economic conditions; the effect (including possible increases in the cost of doing business) resulting from future war and terrorist activities or political uncertainties; the economic environment; the impact of increasing insurance costs; the impact of interest rate fluctuations; the effect of any change in our accounting policies or practices; the financial performance of our racing operations; the impact of gaming competition (including lotteries and riverboat, cruise ship and land-based casinos) and other sports and entertainment options in those markets in which we operate; the impact of live racing day competition with other Florida and Louisiana racetracks within those respective markets; costs associated with our efforts in support of alternative gaming initiatives; costs associated with customer relationship management initiatives; a substantial change in law or regulations affecting pari-mutuel and gaming activities; a substantial change in allocation of live racing days; changes in Illinois law that impact revenues of racing operations in Illinois; the presence of wagering facilities of Indiana racetracks near our operations; our continued ability to effectively compete for the country’s top horses and trainers necessary to field high-quality horse racing; our continued ability to grow our share of the interstate simulcast market; our ability to execute our acquisition strategy and to complete or successfully operate planned expansion projects; our ability to successfully complete any divestiture transaction; our ability to execute on our temporary and permanent slot facilities in Louisiana; market reaction to our expansion projects; the loss of our totalisator companies or their inability to provide us assurance of the reliability of their internal control processes through Statement on Auditing Standards No. 70 audits or to keep their technology current; the need for various alternative gaming approvals in Louisiana; our accountability for environmental contamination; the loss of key personnel; the impact of natural disasters, including Hurricanes Katrina, Rita and Wilma on our operations and our ability to adjust the casualty losses through our property and business interruption insurance coverage; any business disruption associated with a natural disaster and/or its aftermath; our ability to integrate businesses we acquire, including our ability to maintain revenues at historic levels and achieve anticipated cost savings; the impact of wagering laws, including changes in laws or enforcement of those laws by regulatory agencies; the effect of claims of third parties to intellectual property rights; and the volatility of our stock price.

 

You should read this discussion in conjunction with the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q and the Company’s Amended Annual Report on Form 10-K/A for the year ended December 31, 2006 for further information, including Part I – Item 1A for a discussion regarding some of the reasons that actual results may be materially different from those we anticipate, as modified by Part II – Item 1A of this Quarterly Report on Form 10-Q.

 

Overview

 

We conduct pari-mutuel wagering on live Thoroughbred horse racing and simulcast signals of races. Additionally, we offer racing services through our other interests as well as alternative gaming through slot machines and video poker machines in Louisiana.

 

We operate the Churchill Downs Racetrack in Louisville, Kentucky, which has conducted Thoroughbred racing since 1875 and is internationally known as the home of the Kentucky Derby. We also own and operate Arlington Park, a Thoroughbred racing

 

17


 

operation in Arlington Heights, Illinois; Calder Race Course, a Thoroughbred racing operation in Miami Gardens, Florida; Fair Grounds Race Course (“Fair Grounds”), a Thoroughbred racing operation in New Orleans, Louisiana and the owner and operator of 245 slot machines; and Video Services Inc. (“VSI”), the owner and operator of more than 600 video poker machines in Louisiana. We conduct simulcast wagering on horse racing at 19 simulcast wagering facilities in Kentucky, Illinois and Louisiana, as well as at our four racetracks.

 

During 2006, we sold all of the issued and outstanding shares of common stock (the “Stock”) of RCA, the parent company of Ellis Park Race Course (“Ellis Park”). On March 30, 2007, we sold our ownership interest in Hoosier Park. We made the decision to sell Ellis Park and Hoosier Park in order to dispose of two assets which we considered to be underperforming and to provide us with additional opportunities and resources to focus on our other assets and operations. As of the date of the filing of this Quarterly Report on Form 10-Q, we do not anticipate further dispositions of our racing operations. The sold businesses discussed above have been accounted for as discontinued operations in our Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q. Please refer to further sections of the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this Item 2 as well as our Condensed Consolidated Financial Statements included in Item 1 of this Quarterly Report on Form 10-Q for further details regarding these dispositions.

 

Recent Developments

 

Empire Racing

 

On October 10, 2007, the Company withdrew from and terminated its relationship and agreements with Empire Racing Associates, an entity established to bid for the New York racing franchise.

 

Slots Operations

 

Fair Grounds previously received all statutory, regulatory and other authorizations to operate up to 700 slot machines in a permanent facility at the racetrack. On September 18, 2007, the Louisiana Gaming Control Board, upon the recommendation of the Louisiana State Police, approved the opening of the Fair Grounds temporary slots facility. The facility was opened to the public on September 21, 2007 with a total of 245 slot machines available. Upon commencement of the temporary slots facility, we were required to cease video poker operations at the on-site simulcast facility.

 

Also, in September, Fair Grounds resumed its phase one construction of its permanent facility that had been halted due to the damages to its facilities caused by Hurricane Katrina. The permanent facility is scheduled to be completed in late 2008.

 

Acquisitions

 

On June 11, 2007, the Company completed its acquisition of certain assets of AmericaTab, Bloodstock Research Information Services (“BRIS”) and the Thoroughbred Sports Network (“TSN”) (collectively, “ATAB and BRIS”) for an aggregate purchase price of $80 million, plus potential earn-out payments of up to $7 million. The transaction includes the acquisition of the following account wagering platforms:  winticket.com, BrisBet.com and TsnBet.com. Through these transactions, the Company has also acquired the operations of two industry-leading data services companies, BRIS and TSN, which produce handicapping and pedigree reports that are sold to racetracks, horse owners and breeders, horse players and racing-related publications.

 

New Ventures

 

On May 2, 2007, we launched an account wagering platform called TwinSpires.com, which offers racing fans the opportunity to wager on racing content owned by the Company and other sources. We also entered into a definitive agreement on March 4, 2007 with Magna Entertainment Corporation (“MEC”) to form a venture, TrackNet Media Group, LLC (“TrackNet”), through which the racing content of the Company and MEC will be made available to third parties, including racetracks, off-track betting facilities (“OTBs”), casinos and account wagering providers through pre-established accounts. TrackNet will also act as agent on behalf of the Company and MEC to purchase racing content that can be made available at the outlets of the Company and MEC for wagering purposes. On March 4, 2007, we also acquired a 50% interest in a venture, HRTV, LLC, that owns and operates a horse racing television channel, HRTV, previously wholly-owned by MEC. The Company’s audio visual signal of its races will be

 

18


 

distributed by HRTV through certain cable or satellite providers to homes. Finally, on March 4, 2007, the Company and MEC entered into a reciprocal content swap agreement to exchange racing content between each other. As a result of this agreement, the content of the Company and MEC will be available for wagering through the racetracks, OTBs and account wagering providers owned by each of the Company and MEC. With respect to the Company’s account wagering racing content, the racing content of Calder Race Course will be available beginning in January 2008 when its agreement with Television Games Network (“TVG”) expires.

 

Legislative and Regulatory Changes

 

Federal

 

WTO

 

In 2003, the country of Antigua filed a formal complaint against the United States with the World Trade Organization (“WTO”), challenging the United States’ ability to enforce certain Federal gaming laws (Sections 1084, 1952 and 1955 of Title 18 of the United States Code known as the Wire Act, the Travel Act and the Illegal Gambling Business Act, respectively, and collectively the “Acts”) against foreign companies that were accepting Internet wagers from United States residents. At issue was whether the United States’ enforcement of the Acts against foreign companies violated the General Agreement on Trade in Services (“GATS”). In November 2004, a WTO panel ruled that the United States, as a signatory of GATS, could not enforce the Acts against foreign companies that were accepting Internet wagers from United States residents. The United States appealed the ruling and, in April 2005, the WTO’s appellate body ruled that the United States had demonstrated that the Acts were measures necessary to protect public morals or maintain public order, but that the United States did not enforce the Acts consistently between domestic companies and foreign companies as required by GATS. The WTO’s appellate body specifically referenced the Interstate Horseracing Act (“IHA”), which appeared to authorize domestic companies to accept Internet wagers on horse racing, as being inconsistent with the United States’ stated policy against Internet wagering. In arguments and briefs before the WTO’s appellate body, the United States argued that the Acts, specifically the Wire Act, apply equally to domestic companies and foreign companies and the IHA does not create an exception for domestic companies to accept Internet wagering on horse racing. The WTO’s appellate body did not rule on whether an exception for domestic U.S. companies was created under the IHA, but recommended that the WTO’s Dispute Settlement Body request the United States to bring measures found to be inconsistent with GATS into conformity with its obligations under GATS. The United States was given until April 3, 2006 to bring its policies in line with the ruling, assuming it believed any changes were necessary. On April 10, 2006, the United States delegation to the WTO submitted a brief report to the Chairman of the Dispute Settlement Body (“U.S. Report”) stating that no changes are necessary to bring U.S. policies in line with the ruling. In support of its position, the United States delegation informed the Dispute Settlement Body that on April 5, 2006, the United States Department of Justice confirmed the United States Government position regarding remote wagering on horse racing in testimony before a subcommittee of the United States House of Representatives. According to the U.S. Report, in that testimony, the Department of Justice stated its view that regardless of the IHA, existing criminal statutes prohibit the interstate transmission of bets or wagers, including wagers on horse racing, and informed the subcommittee that it is currently undertaking a civil investigation relating to a potential violation of law regarding this activity. On January 25, 2007, the WTO compliance panel issued its interim finding in response to the U.S. Report and found that the United States has failed to comply with previous WTO rulings regarding restrictions on access to the U.S. Internet gaming market. On March 30, 2007, the final report was issued upholding all lower panel decisions. On May 4, 2007, the United States Trade Representative (the “USTR”) announced that it had initiated the formal process by the United States of withdrawing its GATS commitment to clarify an error that it had made in 1994 by including gambling services in its schedule of commitments. The USTR stated that the United States will use the WTO procedures for clarifying its commitments under the GATS.  The USTR also stated that the United States intends to modify its services schedule by clearly defining gambling as an excluded commitment under the GATS.  The result of withdrawal would be that the United States would not be obligated to provide foreign providers of gambling services access to the United States market. At this time, the only remaining issue before the WTO appears to be appropriate compensation to affected members of the treaty.  The U.S. Government has made offers of compensation to WTO members affected by the decision of the U.S. to rule out any market access commitments regarding cross-border gambling services. The WTO arbitrators are due to issue their ruling by the end of November 2007. The USTR has made no specific statement regarding how this will impact interstate gambling on horse racing. When the United States submits its proposed modification to the service schedule, we will be able to assess the impact, if any, on our business and results of operations. One of the options available to

 

19


 

Congress and the White House is to prohibit or restrict substantially the conduct of interstate simulcast wagering or account wagering. If the U.S. government elects to take such an approach (including through any action by the Department of Justice), it will have a material, adverse impact on our business, financial condition and results of operations.

 

Other Federal Legislation/Regulation

 

On October 13, 2006, President Bush signed into law “The Unlawful Internet Gambling Enforcement Act of 2006 (“UIGEA”).” This act prohibits those involved in the business of betting or wagering from accepting any financial instrument, electronic or otherwise, for deposit that is intended to be utilized for unlawful Internet gambling. This act declares that nothing in the act may be construed to prohibit any activity allowed by the IHA. This act also contains a “Sense of Congress” which explicitly states that it is not intended to criminalize any activity currently permitted by federal law. The Secretary of the Treasury was directed to promulgate regulations to enforce the provisions of this act within 270 days. The Secretary was further directed to ensure the regulations do not prohibit any activity which is excluded from the definition of unlawful Internet gambling, including those activities legal under the IHA. On October 1, 2007, the Treasury Department published proposed rules and regulations that require U.S. financial firms participating in designated payment systems to have policies and procedures reasonably designed to prevent payments being made to gambling businesses in connection with “unlawful internet gambling.”  Activities permitted under IHA are specifically excluded from the definition of “unlawful Internet gambling.”  Comments on the proposed rules will be accepted through December 12, 2007. We are working with other industry representatives to review the proposed regulations and determine what comments, if any, to provide to the Treasury Department.

 

Florida

 

On November 2, 2004, Amendment 4, a slot machine question which sought to allow voters in Miami-Dade and Broward counties to hold local referenda on the issue, passed by a margin of 1.4%. On March 8, 2005, voters in Miami-Dade and Broward counties voted in separate local referenda to decide whether slot machines could be installed at the seven existing pari-mutuel sites in those counties, including Calder Race Course. Although the measure passed in Broward County, home of Gulfstream Park, it was unsuccessful in Miami-Dade County, where Calder Race Course is located. Slot machine gaming was approved by the Florida legislature during a special session of the Florida legislature on December 9, 2005. Slot operations are expected to commence in a staggered manner at Broward’s four pari-mutuel wagering facilities. Gulfstream Park commenced slot operations in the fall of 2006. The remaining facilities are expected to commence slot operations in a staggered manner through 2008. On July 10, 2007, the Miami-Dade County Commission approved a second referendum for slot machines in local pari-mutuel facilities in Miami-Dade County. The referendum will take place on January 29, 2008, Florida’s presidential primary date. We will support this referendum. We anticipate the cost of our support of the referendum to be $3 million to $5 million. In addition, a statewide initiative designed to lower property taxes will be on the ballot. The impact on our results of operations and financial position of the operation of slot machines at pari-mutuel wagering facilities in Broward County is uncertain at this time.

 

On August 8, 2006, the District Court of Appeals, First District, State of Florida rendered a decision in the case of Floridians Against Expanded Gambling (“FAEG”), et. al versus Floridians for a Level Playing Field, et. al. FAEG challenged the process by which signatures were collected in order to place a constitutional amendment on the ballot in 2004 allowing Miami-Dade and Broward County voters to approve slot machines in pari-mutuel facilities. The District Court of Appeals reversed a decision of the Florida trial court, which granted summary judgment and dismissed the challenge, and remanded the case back to the trial court for an evidentiary hearing to determine whether sufficient signatures were collected in the petition process. A motion for rehearing by the entire Court of Appeals or in the alternative a motion for certification to the Florida Supreme Court was filed. The case was re-heard by the entire Court of Appeals and the panel’s decision was upheld. The question of law has been certified to the Florida Supreme Court, which initially accepted jurisdiction. However, after oral arguments were made on September 17, 2007, the District Court of Appeals issued an opinion on September 27, 2007, which held the case was not properly put before the District Court of Appeals, and therefore upheld the lower court’s decision to remand the case back to the trial court for an evidentiary hearing to determine whether sufficient signatures were collected in the petition process. The case has not yet been scheduled for trial, and we are reviewing our legal options moving forward.

 

20


 

Legislation permitting an additional 500 slot machines (from 1,500 to 2,000) in Broward County, permitting ATM machines at the pari-mutuel facilities, and extending hours of operation became law in Florida in 2007.  Should voters in Miami-Dade County approve slot machines at pari-mutuel facilities, the provisions of this legislation would apply to Calder Race Course.  In addition, legislation allowing year-round operation of poker rooms and raising the maximum wager on poker from $2 to $5 successfully passed both chambers of the Florida legislature.  At this time, it is unclear what impact this legislation will have on our results of operations.

 

During December 2005, Calder Race Course and Gulfstream Park entered into an agreement to allow year-round simulcasting at both facilities in the Miami area.  The agreement was the result of a Florida appellate court decision in a case brought by Gulfstream Park invalidating a statute that prohibited a racetrack from simulcasting when it was not conducting live racing.  The Division of Pari-Mutuel Wagering appealed the decision to the Florida Supreme Court and, in mid-January 2006, the Florida Supreme Court issued a stay ordering Calder  Race Course to cease simulcast operations until the case is decided.  On September 6, 2007, the Florida Supreme Court upheld the Florida appellate court decision and invalidated that statute.  As a result of that ruling, effective September 21, 2007, all pari-mutuel facilities in Dade and Broward counties, including Calder Race Course, will be permitted to enter into contractual arrangements that allow the host facility to send its live and imported simulcast products to other facilities in the two counties.  The impact of this ruling on Calder Race Course's results of operation are uncertain at this time.

 

Illinois

 

Pursuant to the Illinois Horse Racing Act, Arlington Park and all other Illinois racetracks are permitted to receive a payment commonly known as purse recapture. Generally, in any year that wagering on Illinois horse races at Arlington Park is less than 75% of wagering both in Illinois and at Arlington Park on Illinois horse races in 1994, Arlington Park is permitted to receive 2% of the difference in wagering in the subsequent year. The payment is funded from the Arlington Park purse account. Under the Illinois Horse Racing Act, the Arlington Park purse account is to be repaid via an appropriation by the Illinois General Assembly from the Illinois General Revenue Fund. However, this appropriation has not been made since 2001. Subsequently, Illinois horsemen unsuccessfully petitioned the Illinois Racing Board (“IRB”) to prevent Illinois racetracks from receiving this payment in any year that the Illinois General Assembly did not appropriate the repayment to the racetrack’s purse accounts from the General Revenue Fund. Further, the Illinois horsemen filed lawsuits seeking, among other things, to block payment to Illinois racetracks, as well as to recover the 2002 and 2003 amounts already paid to the Illinois racetracks. These lawsuits filed by the Illinois horsemen challenging the 2002 and 2003 reimbursements have been resolved in favor of Arlington Park and the other Illinois racetracks. Several bills were filed in the 2003, 2004 and 2005 sessions of the Illinois legislature that, in part, would eliminate the statutory right of Arlington Park and the other Illinois racetracks to continue to receive this payment. None of these bills passed. Since the statute remains in effect, Arlington Park continues to receive the recapture payment from the purse account. If Arlington Park loses the statutory right to receive this payment, there would be a material, adverse impact on Arlington Park’s results of operations.

 

Under previously enacted legislation, the Illinois Horse Racing Equity fund was scheduled to receive a portion (up to 15% of adjusted gross receipts) of wagering tax from the tenth riverboat casino license issued. The grant of the tenth riverboat license is currently the subject of numerous legal and regulatory challenges and, as such, is currently not an operational riverboat license. The funds were scheduled to be utilized for purses and track discretionary spending. Because the tenth license has never been operational, the Illinois Horse Racing Equity fund has never had any funds to distribute.

 

In the Spring of 2006 session of the Illinois General Assembly, legislation was passed to create and fund the Horse Racing Equity Trust fund. The Horse Racing Equity Trust fund is to be funded from revenues of Illinois riverboat casinos that meet a certain threshold. Sixty percent of the funds is to be used for horsemen’s purses (57% for thoroughbred meets and 43% for standardbred meets). The remaining 40% is to be distributed to racetracks (30.4% of that total for Arlington Park) and is to be used for improving, maintaining, marketing and operating Arlington Park and may be used for backstretch services and capital improvements. The legislation expires two years after its immediate effective date. The governor of Illinois signed the legislation on May 26, 2006 as Public Act 94-0805.

 

In an effort to prevent implementation of Public Act 94-0805, the four Illinois riverboat casinos that meet the threshold to contribute to the Horse Racing Equity Trust fund filed a complaint on May 30, 2006 in the Circuit Court of Will County, Illinois. The complaint was filed against the State Treasurer and the IRB to enjoin the imposition and collection of the 3% “surcharge” from the casinos, which was to be deposited in the Horse Racing Equity Trust fund. The Will County Circuit Judge ruled in April 2007 that the law was unconstitutional as the law only affects the four suburban casinos and not the five downstate casinos. The Attorney General is filing an appeal of this ruling to the Illinois Supreme Court. The riverboats have been paying the monies into a special escrow account and have demanded that the monies not be distributed. A temporary restraining order was granted to prevent distribution of these monies. The complaint alleges that Public Act 94-0805 is unconstitutional. The Illinois Attorney General is representing Illinois on this matter, and the litigation is on going. As of the date of the filing of this Quarterly Report on Form 10-Q, management does not know the impact that the ultimate outcome of this matter will have on our consolidated financial position and results of operations.

 

Arlington Park will continue to seek authority to conduct alternative gaming at the racetrack. The 2007 session of

 

21


 

the Illinois legislature is currently in extended session in an effort to enact a statewide budget. As part of the budget process, several alternative bills are being considered that could impact Arlington Park, including permitting slot machines at the racetracks, extension of the Horse Racing Equity Trust Fund and potentially a Chicago stand-alone casino. At this point, though the legislature remains in extended session, it is too early to determine whether those initiatives will be successful.

 

During January, February and a portion of March when there is no live racing in Illinois, the IRB designates a Thoroughbred racetrack as the host track in Illinois, for which the host track receives a higher percentage of earnings from pari-mutuel activity throughout Illinois. The IRB appointed Arlington Park the host track in Illinois during January 2008 for eighteen days, which is a decrease of twelve days compared to the same period of 2006. In addition, Arlington Park was appointed the host track for twenty-nine days in February 2008, which is an increase of fourteen days compared to the same period of 2007. Also, Arlington Park was appointed the host track for two days in March 2008, which is an increase of two days compared to the same period of 2007. Arlington Park’s future designation as the host track is subject to the annual designation by the IRB. A change in the number of days that Arlington Park is designated “host track” could have a material, adverse impact on our results of operations.

 

Kentucky

 

The Kentucky horse industry continues to seek legal authority to offer alternative forms of gaming at Kentucky’s eight existing racetracks. Alternative forms of gaming would enable our Kentucky racetrack to better compete with neighboring gaming venues by providing substantial new revenues for purses and capital improvements. Several alternative gaming bills were filed in the 2006 and 2007 session of the Kentucky General Assembly. The Kentucky Equine Education Project (“KEEP”), an alliance of the Commonwealth’s equine industry leaders, including our Company, supported legislation in 2006 that called for a statewide voter referendum in the Fall of 2006 to amend the State constitution to allow Kentucky’s eight racetracks to offer full casino gaming. None of these bills were successful. Kentucky’s gubernatorial election was held on November 6, 2007. The incumbent republican Governor made his opposition to expanded gaming a central theme of the early campaign. The democratic opponent publicly stated his support for limited gaming at racetracks and a few other select locations as a key revenue enhancement strategy for Kentucky. The democratic challenger, Steve Beshear, was elected by a margin of 59% to 41% and is expected to seek legislation in the 2008 General Assembly permitting casino gaming at Kentucky’s racetracks.

 

Louisiana

 

Senate Bill No. 190, Act No. 469 (“SB 190”) was signed into law by the Louisiana Governor on July 11, 2007 effective July 1, 2008. SB 190 changes the calculation of the video poker franchise tax from a tax based on gross revenues to a tax based on gross revenues less purse expenses. SB 190 will have a favorable impact on our video poker results of operations beginning July 1, 2008.

 

Indiana

 

The 2007 Indiana General Assembly approved the operation of slot machines at Indiana’s horse racetracks.  Each racetrack is granted permission to operate up to 2,000 slot machines.  In order to operate these slot machines, Hoosier Park paid a $150 million licensing fee prior to November 1, 2007 and will be required to invest $100 million in capital improvements and pay an additional $100 million licensing fee by November 1, 2008. We completed the sale of our interest in Hoosier Park on March 30, 2007.  As part of that agreement, the Company is entitled to payments of up to $15 million once slot machines are operational.  The Governor of Indiana signed this legislation into law.  Hoosier Park has secured funding for the $250 million licensing fee, and officials have indicated they intend to move forward with construction and operation of an appropriate slots facility.

 

Critical Accounting Policies

 

Our Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America. Accordingly, we are required to make estimates, judgments and assumptions that we believe are reasonable based on our historical experience, contract terms, observance of known trends in our company and the industry as a whole, and information available from other outside sources. Our estimates affect the reported amounts of assets and

 

22


 

liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those initial estimates.

 

Our most significant estimates relate to the valuation of plant and equipment, receivables, goodwill and other intangible assets, which may be significantly affected by changes in the regulatory environment in which we operate, and to the aggregate costs for self-insured liability and workers’ compensation claims. Additionally, estimates are used for determining income tax liabilities and other derivative instruments.

 

We evaluate our goodwill, intangible and other long-lived assets in accordance with the Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Intangible Assets” and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  For goodwill and intangible assets, we review the carrying values at least annually during the first quarter of each year or whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. We completed the required annual impairment tests of goodwill and indefinite lived intangible assets as of March 31, 2007, and no adjustment to the carrying value of these assets was required. We assign estimated useful lives to our intangible assets based on the period of time the asset is expected to contribute directly or indirectly to future cash flows. We consider certain factors when assigning useful lives such as legal, regulatory, competition and other economic factors. Intangible assets with finite lives are amortized using the straight-line method.

 

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes–an interpretation of FASB Statement No. 109, Accounting for Income Taxes (“FIN 48”). FIN 48 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under FIN 48, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. FIN 48 also provides guidance on derecognition, classification, interest and penalties on income taxes and accounting in interim periods. FIN 48 also requires increased disclosures.

 

The Company adopted the provisions of FIN 48 on January 1, 2007. The cumulative effect of adopting FIN 48 was an increase of $0.3 million to unrecognized tax benefits, and a corresponding decrease to retained earnings at January 1, 2007. The amount of unrecognized tax benefits at January 1, 2007 was $1.3 million, all of which would impact our effective tax rate, if recognized.

 

23


 

THREE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2006

 

Pari-mutuel Financial Data by Segment

 

The following table sets forth, for the periods indicated, pari-mutuel financial data by our reported segments (in thousands):

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

September 30,

 

 

Change

 

 

 

2007

 

 

2006

 

 

$

 

 

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Churchill Downs Racetrack

 

 

 

 

 

 

 

 

 

 

 

 

Total handle

 

$

68,321

 

 

$

119,087

 

 

$

(50,766

)

 

(43)%

 

Net pari-mutuel