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Churchill Downs Inc. Reports Operating Results (10-Q)

October 28, 2009 | About:
10qk

10qk

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Churchill Downs Inc. (CHDN) filed Quarterly Report for the period ended 2009-09-30.

Churchill Downs Inc. is a racing company that primarily conducts pari-mutuel wagering on live Thoroughbred Standardbred and Quarter Horse horse racing and simulcast signals of races. Additionally the company offers racing services through our other business interests. Churchill Downs Inc. has a market cap of $483.1 million; its shares were traded at around $35.27 with a P/E ratio of 24.8 and P/S ratio of 1.1. The dividend yield of Churchill Downs Inc. stocks is 1.4%.

Highlight of Business Operations:

During the three months ended September 30, 2009, the Internal Revenue Service (the IRS) proposed that the income related to the sale of the personal seat licenses is taxable during the period we received the proceeds (the Proposed Audit Adjustment). As a result, the Proposed Audit Adjustment serves to increase the amount of the income taxes due for each of the years 2005 and 2006. We intend to defend our position of deferring income related to the sale of personal seat licenses using a fast track mediation process offered by the IRS. However, it is uncertain at this time whether the fast track mediation process will be made available to us by the IRS. If the Proposed Audit Adjustment is upheld, we estimate it could have a potential total negative cash impact of up to $7.9 million plus accrued interest through September 30, 2009 of approximately $2.3 million, which represents amounts due at both the state and federal levels.

If we are unable to resolve this matter through the fast track mediation process, a decision would be made at that time as to which of the above options would be pursued. In any case, we continue to believe that our position is well supported and will vigorously contest the Proposed Audit Adjustment. However, based on current circumstances, during the three months ended September 30, 2009, we recorded a deferred tax asset and income taxes payable of $7.9 million. In addition, we recognized $2.3 million of income tax expense associated with accrued interest on the Proposed Audit Adjustment.

Additionally, the IRS proposed an adjustment to reduce the amount of a capital loss carryback claim related to the sale of Ellis Park during 2006. We have agreed to this adjustment. As a result, approximately $1.1 million of income tax expense related to the adjustment was recognized during the three months ended September 30, 2009 and is included in discontinued operations. As of September 30, 2009, total outstanding capital loss carryback claims to be received by us totaled $8.2 million.

During 2008, we discovered that an employee at Calder, during the period from 2001 through 2008, had committed theft by falsifying invoices for supplies that were not delivered and filed an employee theft claim with its insurance carrier for $2.7 million. During the three months ended September 30, 2009, we reached a settlement with its insurance carrier and received payment of $2.5 million, which represents the full payment of claims related to the losses, net of a $0.2 million deductible. We recorded this recovery as a reduction to operating expenses during the three months ended September 30, 2009.

During the three months ended September 30, 2009, we received a payment of $2.4 million from the State of Illinois related to a successful challenge by Arlington Park that real estate tax payments made for the years 2001 through 2006 were excessive. We recorded the real estate tax refund as a reduction to operating expenses during the three months ended September 30, 2009. Additionally, we received $0.3 million of interest related to the real estate tax refund, which was recorded as interest income during the three months ended September 30, 2009.

On January 29, 2008, Miami-Dade County voters approved a referendum permitting pari-mutuel facilities, including Calder, to operate up to 2,000 slot machines at each location. Under current state law, slot machine revenues are to be subject to a fifty percent tax rate. In 2008, Florida Governor Charlie Crist approved a compact with the Seminole tribe which would permit the tribe to operate certain table games and Class III slot machines in return for specified revenue to the State of Florida. The compact was voided by the Florida Supreme Court. The Florida legislature subsequently enacted legislation permitting Governor Crist to enter into a compact (the Compact) with the tribe. The legislation provided for a reduction in the tax rate for racetracks operating slot facilities in Miami-Dade and Broward Counties from fifty percent to thirty-five percent as well as a reduction in the annual license fee from $3 million to $2 million effective upon the Florida legislatures final ratification of the tribal compact. The Governor negotiated a compact, but the Florida legislature did not ratify it, and it does not appear likely that that Florida legislature will hold a special session to consider ratification during 2009. As a result, we do not believe that the tax reduction will be achieved prior to the opening of the Calder slot facility. Further, we can not determine whether a tax reduction will be achieved in the future. Other portions of the legislation, effective regardless of whether the Florida legislature ratified the Compact, also permitted the operation of slot machines at facilities that operate quarter horse meets, including those licensed but not yet operating. These provisions would permit Hialeah Racecourse, which is approximately twelve miles from Calder, to open as a quarter horse facility and operate slot machines after two consecutive years of racing. In addition, the Miami-Dade County Airport Authority has applied for a quarter horse permit to be operated at the Miami Airport, the stated purpose of which is to operate slot

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