Churchill Earnings Decline; Company Pursuing Options to 'Maximize' Hollywood Park Asset

Earnings for Churchill Downs Inc. in 2004 and for the fourth quarter were negatively impacted by several one-time expenses, including supporting alternative gaming initiatives, a "non-cash impairment charge" at Ellis Park, and an unrealized loss related to a note, the company reported Wednesday.

The Louisville, Ky.-based racetrack operating company reported that revenues for the year totaled $463.1 million, a 4.3% increase over revenues of $444.1 million in 2003. Net earnings totaled $0.67 per fully diluted share, compared with $1.75 per fully diluted share in 2003. Churchill reported 2004 results included a one-time, $1.6 million gain from the sale of a portion of the company's ownership in Kentucky Downs offset by $5.9 million in expenses related to alternative gaming ballot initiatives, $6.2 million in non-cash impairment charges at Ellis Park, and a $4.3 million non-cash, unrealized loss related to the terms of a convertible note issued in the fourth quarter.

For the fourth quarter of 2004, the company reported net revenues of $116.1 million, an increase of 17.5% from the $98.8 million reported during the same period in 2003. The net loss was $3.2 million, or ($0.25) per diluted share, versus a loss of $389,000 or ($0.03) per diluted share in the fourth quarter of 2003. The results include the non-cash, $4.3 million mark-to-market, unrealized loss related to the terms of a convertible note issued in the fourth quarter of 2004, according to the report.

Churchill Downs president and CEO Tom Meeker said the company's performance was strong "especially when looking beyond the unusual items that reduced our earnings by approximately $0.98 per share."

"Our 2004 performance was strong across our operations..." Meeker said. "In 2004 we grew our revenues, maintained our gross profit margin of 17% and generated EBITDA of more than $50 million. We also achieved several key objectives over the course of the year. We acquired Fair Grounds Race Course and in the process gained first quarter racing and an entry into the 'racino' business."

In 2004, Churchill and other track-operating companies were successful in getting statewide support for alternative gaming in Florida. But in a recent referendum, voters in the county where Churchill's Calder Racecourse is located rejected alternative gaming.

"We gained statewide approval to pursue alternative gaming in Florida, and despite a setback at the local level, remain hopeful that we can win an enabling vote in 2007," Meeker said.

Meeker cited continuation of the company's Customer Relationship Management platform, and the soon-to-be-completed renovations at Churchill Downs racetrack "where sales of our new luxury suites and personal seat licenses more than exceeded our expectations" as examples of developments that are positioning the company for future growth.

"We also will continue to aggressively pursue additional opportunities to build shareholder value, including ongoing development initiatives, exploration of options to maximize our Hollywood Park asset, and the potential incorporation of slot machines at Fair Grounds in 2006," Meeker said.

Meeker said Churchill has also decided to no longer provide the financial market with "guidance" on an earnings per share basis because it is more difficult and less meaningful because "of the unpredictable nature of these development-related activities, both in the coming years and the recent past...Consequently, we have made a decision to suspend our practice of assigning an EPS target to our various reporting periods. We will continue to provide updates on business trends, operational results and ongoing development initiatives, but will not attempt to quantify their impact through EPS guidance."

In a note to the earnings report, Churchill said that a review of 2004 internal controls mandated by the Sarbanes Oxley Act resulted in identification of "two material weaknesses in its controls and disclosed them in the Form 10-K filed for the period discussed in this press release. One of these issues has been resolved and is no longer a material weakness. The second involves the controls and audit procedures of our tote vendors, and will be resolved by Dec. 31, 2005."