SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q/A

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

o 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, KY 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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o

The number of shares outstanding of registrant’s common stock at August 5, 2004 was 13,298,006 shares.

EXPLANATORY NOTE

Churchill Downs Incorporated (the “Company”) recently determined that purse overpayments were improperly recorded as assets. Purse overpayments are created when, at the end of a race meeting, the purses paid to horsemen exceed the purses payable as a result of pari-mutuel operations during the race meeting. Contractual arrangements between the Company and the horsemen’s organizations at the Company’s various racetracks, which generally expire at the end of a race meeting, provide that if a purse overpayment exists at the end of a race meeting, such overpayment may be recovered through reductions of purses otherwise paid in the subsequent race meeting(s) if a subsequent contract is entered into with the horsemen’s organization. The Company has historically recorded these purse overpayments as receivables, subject to any necessary valuation allowances. The Company has now determined that these overpayments do not constitute receivables and do not meet the definition of an asset under U.S. Generally Accepted Accounting Principles, thus any purse overpayment that exists at the end of a race meeting should be expensed. Accordingly, the Company is filing this Form 10-Q/A to restate its consolidated financial statements for the effect of this error. This restatement serves to delay the recognition of the recovery until the period in which it actually occurs. Additionally, amounts recorded as revenues for Illinois purse recapture subsidies have been reclassified to operating expenses to offset purse expense.

The Items of the Company’s Form 10-Q/A for the quarter ended June 30, 2004 which are amended and restated are as follows: Part I Financial Information, Item 1 Financial Statements; Part I Financial Information, Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations; and Part I Financial Information, Item 4 Controls and Procedures.

The remaining Items contained within this Form 10-Q/A consist of all other Items originally contained in our Form 10-Q for the quarter ended June 30, 2004 in the form filed on August 8, 2004. This Form 10-Q/A does not reflect events occurring after the filing of the original Form 10-Q, nor modify or update those disclosures in any way other than as required to reflect the effects of the restatement.

CHURCHILL DOWNS INCORPORATED

I N D E X TO QUARTERLY REPORT ON FORM 10-Q/A

Part I

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets, June 30, 2004, December 31, 2003, and June 30, 2003

	Condensed Consolidated Statements of Net Earnings for the six and three months ended June 30, 2004 and 2003

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2004 and 2003

	Notes to Condensed Consolidated Financial Statements

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Item 4.	Controls and Procedures

Part II

Item 1.	Legal Proceedings (Not applicable)

Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities (Not applicable)

Item 3.	Defaults Upon Senior Securities (Not applicable)

Item 4.	Submission of Matters to a Vote of Security Holders

Item 5.	Other Information (Not applicable)

Item 6.	Exhibits and Reports on Form 8-K

Signatures

Exhibit Index

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CHURCHILL DOWNS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

	June 30, 2004		December 31, 2003			June 30, 2003
	As Restated, Note 1		As Restated, Note 1			As Restated, Note 1
	(unaudited)					(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	39,587	$	18,053		$	41,353
Accounts receivable, net of allowance for doubtful accounts of $1,147 at June 30, 2004 and $1,141 at December 31, 2003 and $975 at June 30, 2003	49,016		35,604			45,148
Deferred income taxes	3,349		3,767			3,043
Other current assets	4,828		1,613			4,885
Total current assets	96,780		59,037			94,429

Other assets	16,474		16,941			11,962
Plant and equipment, net	403,191		367,229			347,699
Goodwill, net	52,239		52,239			52,239
Other intangible assets, net	7,178		7,464			7,313
	$	575,862	$	502,910		$	513,642
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	76,723	$	35,149		$	65,288
Accrued expenses	43,918		38,491			35,853
Dividends payable	—		6,625			—
Income taxes payable	7,240		—			8,291
Deferred revenue	4,478		18,050			7,653
Long-term debt, current portion	—		5,740			472
Total current liabilities	132,359		104,055			117,557

Long-term debt, due after one year	146,079		121,096			119,811
Other liabilities	13,627		11,719			14,053
Deferred income taxes	13,318		13,327			13,103
Total liabilities	305,383		250,197			264,524

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; issued: 13,295 shares June 30, 2004, 13,250 shares December 31, 2003, and 13,183 shares June 30, 2003	129,789		128,583			126,725
Retained earnings	140,441		124,491			123,910
Accumulated other comprehensive earnings (loss)	249		(361		)	(1,517		)
	270,479		252,713			249,118
	$	575,862	$	502,910		$	513,642

The accompanying notes are an integral part of the condensed consolidated financial statements.

CHURCHILL DOWNS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF NET EARNINGS

for the six and three months ended June 30, 2004 and 2003

(Unaudited)

(In thousands, except per share data)

	Six Months Ended June 30,						Three Months Ended June 30,
	2004			2003			2004			2003
	As Restated, Note 1			As Restated, Note 1			As Restated, Note 1			As Restated, Note 1

Net revenues	$	227,364		$	223,438		$	189,635		$	187,719
Operating expenses	179,200			176,722			131,707			131,251

Gross profit	48,164			46,716			57,928			56,468

Selling, general and administrative expenses	19,163			16,909			10,085			8,731

Operating income	29,001			29,807			47,843			47,737

Other income (expense):
Interest income	201			135			85			73
Interest expense	(2,558		)	(3,306		)	(1,174		)	(1,479		)
Miscellaneous, net	840			597			504			173
	(1,517		)	(2,574		)	(585		)	(1,233		)

Earnings before provision for income taxes	27,484			27,233			47,258			46,504

Provision for income taxes	(11,534		)	(11,060		)	(19,562		)	(18,807		)

Net earnings	$	15,950		$	16,173		$	27,696		$	27,697

Net earnings per common share data:
Basic	$	1.20		$	1.23		$	2.08		$	2.10
Diluted	$	1.18		$	1.21		$	2.06		$	2.07
Weighted average shares outstanding:
Basic	13,272			13,167			13,287			13,174
Diluted	13,460			13,367			13,473			13,380

The accompanying notes are an integral part of the condensed consolidated financial statements.

CHURCHILL DOWNS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

for the six months ended June 30,

(Unaudited)

(in thousands)

	2004			2003
	As Restated, Note 1			As Restated, Note 1
Cash flows from operating activities:
Net earnings	$	15,950		$	16,173
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	10,819			10,171
Increase (decrease) in cash resulting from changes in operating assets and liabilities:
Accounts receivable	(13,412		)	(10,612		)
Other current assets	(3,215		)	(322		)
Accounts payable	39,272			34,758
Accrued expenses	10,035			1,961
Income taxes payable	7,240			8,291
Deferred revenue	(13,572		)	(7,223		)
Other assets and liabilities	2,406			1,903
Net cash provided by operating activities	55,523			55,100

Cash flows from investing activities:
Additions to plant and equipment, net	(47,828		)	(19,074		)
Net cash used in investing activities	(47,828		)	(19,074		)

Cash flows from financing activities:

Repayments of revolving loan facility for refinancing	—			(120,929		)
Proceeds from senior notes, net of expenses	—			98,229
Borrowings on bank line of credit	196,295			172,453
Repayments of bank line of credit	(175,434		)	(154,310		)
Decrease in long-term debt, net	(1,618		)	(279		)
Change in book overdraft	15			(1,915		)
Proceeds from note receivable for common stock	—			65
Payment of dividends	(6,625		)	(6,578		)
Common stock issued	1,206			682
Net cash provided by (used in) financing activities	13,839			(12,582		)

Net increase in cash and cash equivalents	21,534			23,444
Cash and cash equivalents, beginning of period	18,053			17,909
Cash and cash equivalents, end of period	$	39,587		$	41,353

Supplemental cash flow disclosures:
Interest	$	2,960		$	3,398
Income taxes	$	3,009		$	3,442
Schedule of non-cash activities:
Plant and equipment additions included in accounts payable	$	5,915		$	233

The accompanying notes are an integral part of the condensed consolidated financial statements.

CHURCHILL DOWNS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

for the six months ended June 30, 2004 and 2003 (Unaudited)

($ in thousands, except per share data)

1. Restatements of Previously Issued Consolidated Financial Statements

(1) Churchill Downs Incorporated (the “Company”) recently determined that purse overpayments were improperly recorded as assets. Purse overpayments are created when, at the end of a race meeting, the purses paid to horsemen exceed the purses payable as a result of pari-mutuel operations during the race meeting. Contractual arrangements between the Company and the horsemen’s organizations at the Company’s various racetracks, which generally expire at the end of a race meeting, provide that if a purse overpayment exists at the end of a race meeting, such overpayment may be recovered through reductions of purses otherwise paid in the subsequent race meeting(s) if a subsequent contract is entered into with the horsemen’s organization. The Company has historically recorded these purse overpayments as receivables, subject to any necessary valuation allowances. The Company has now determined that these overpayments do not constitute receivables and do not meet the definition of an asset under U.S. Generally Accepted Accounting Principles, thus any purse overpayment that exists at the end of a race meeting should be expensed. Accordingly, the Company has restated its consolidated financial statements for the effect of this error. This restatement serves to delay the recognition of the recovery until the period in which it actually occurs. Additionally, amounts recorded as revenues for Illinois purse recapture subsidies have been reclassified to operating expenses to offset purse expense.

(2) During 2004 the Company also determined that it was classifying simulcast host fees incurred inconsistently. The Company imports simulcast horse racing from other racetracks and pays a fee for the signal (simulcast host fees incurred). The Company’s accounting policy is to record the simulcast host fees incurred as an expense. However, at certain of the Company’s racetracks, simulcast host fees incurred were incorrectly netted against revenue. The 2003 condensed consolidated financial statements have been restated to reclassify simulcast host fees incurred that were netted against revenue to operating expense. There is no change in net earnings or earnings per share as a result of this restatement. Additionally, various immaterial amounts were reclassified, at certain of the Company’s racetracks, to conform to the current period presentation.

The effect of the restatements are as follows:

	As Previously Reported			Adjustment (1)				As Restated
Six Months ended June 30, 2004

Net revenues	$	228,797		$		(1,433	)	$	227,364
Operating expenses	181,079			(1,879			)	179,200
Gross profit (loss)	47,718			446				48,164

Selling, general and administrative	19,163			—				19,163
Operating income (loss)	28,555			446				29,001

Other income (expense)	(1,517		)	—				(1,517		)

Earnings (loss) before (provision) benefit for income taxes	27,038			446				27,484
(Provision) benefit for income taxes	(11,356		)	(178			)	(11,534		)
Net earnings (loss)	$	15,682		$	268			$	15,950

Net earnings per common share data:
Basic	$	1.18		$	0.02			$	1.20
Diluted	$	1.17		$	0.01			$	1.18

	As Previously Reported			Adjustment (1)			As Restated
Three Months ended June 30, 2004

Net revenues	$	191,068		$	(1,433	)	$	189,635
Operating expenses	133,586			(1,879		)	131,707
Gross profit (loss)	57,482			446			57,928

Selling, general and administrative	10,085			—			10,085
Operating income (loss)	47,397			446			47,843

Other income (expense)	(585		)	—			(585		)

Earnings (loss) before (provision) benefit for income taxes	46,812			446			47,258
(Provision) benefit for income taxes	(19,384		)	(178		)	(19,562		)
Net earnings (loss)	$	27,428		$	268		$	27,696

Net earnings (loss) per common share data:
Basic	$	2.06		$	0.02		$	2.08
Diluted	$	2.04		$	0.02		$	2.06

	As Previously Reported			Adjustment (1)			Adjustment (2)			As Restated
Six Months ended June 30, 2003

Net revenues	$	214,285		$	(1,280	)	$	10,433		$	223,438
Operating expenses	166,967			(802		)	10,557			176,722
Gross profit (loss)	47,318			(478		)	(124		)	46,716

Selling, general and administrative	16,873			70			(34		)	16,909
Operating income (loss)	30,445			(548		)	(90		)	29,807

Other income (expense)	(2,618		)	(46		)	90			(2,574		)

Earnings (loss) before (provision) benefit for income taxes	27,827			(594		)	—			27,233
(Provision) benefit for income taxes	(11,298		)	238			—			(11,060		)
Net earnings (loss)	$	16,529		$	(356	)	$	—		$	16,173

Net earnings per common share data:
Basic	$	1.26		$	(0.03	)	—			$	1.23
Diluted	$	1.24		$	(0.03	)	—			$	1.21

	As Previously Reported			Adjustment (1)			Adjustment (2)			As Restated
Three Months ended June 30, 2003

Net revenues	$	180,496		$	(1,280	)	$	8,503		$	187,719
Operating expenses	123,425			(733		)	8,559			131,251
Gross profit (loss)	57,071			(547		)	(56		)	56,468

Selling, general and administrative	8,765			—			(34		)	8,731
Operating income (loss)	48,306			(547		)	(22		)	47,737

Other income (expense)	(1,255		)	—			22			(1,233		)

Earnings (loss) before (provision) benefit for income taxes	47,051			(547		)	—			46,504
(Provision) benefit for income taxes	(19,026		)	219			—			(18,807		)
Net earnings (loss)	$	28,025		$	(328	)	$	—		$	27,697

Net earnings (loss) per common share data:
Basic	$	2.13		$	(0.03	)	—			$	2.10
Diluted	$	2.09		$	(0.02	)	—			$	2.07

The following tables represent the effect of the restatement on the condensed consolidated balance sheets:

	As Previously Reported		Adjustment (1)			As Restated
June 30, 2004

Accounts receivable, net	$	49,717	$	(701	)	$	49,016
Other current assets	$	6,261	$	(1,433	)	$	4,828
Other assets	$	15,474	$	1,000		$	16,474
Accounts payable	$	76,040	$	653		$	76,723
Income taxes payable	$	7,062	$	178		$	7,240
Retained earnings	$	142,436	$	(1,995	)	$	140,441

	As Previously Reported		Adjustment (1)			As Restated
December 31, 2003

Accounts receivable, net	$	36,693	$	(1,089	)	$	35,604
Other current assets	$	4,120	$	(2,507	)	$	1,613
Other assets	$	15,941	$	1,000		$	16,941
Accounts payable	$	34,466	$	683		$	35,149
Income taxes payable	$	1,016	$	(1,016	)	$	—
Retained earnings	$	126,754	$	(2,263	)	$	124,491

	As Previously Reported		Adjustment (1)			As Restated
June 30, 2003

Accounts receivable, net	$	45,695	$	(547	)	$	45,148
Other current assets	$	5,564	$	(679	)	$	4,885
Other assets	$	11,962	$	—		$	11,962
Accounts payable	$	64,435	$	853		$	65,288
Income taxes payable	$	8,510	$	(219	)	$	8,291
Retained earnings	$	125,770	$	(1,860	)	$	123,910

Basis of Presentation

The accompanying condensed consolidated financial statements are presented in accordance with the requirements of 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 Form 10-Q/A may wish to refer to the Company’s Form 10-K, as amended by Form 10-K/A, for the period ended December 31, 2003 for further information. The accompanying condensed consolidated financial statements have been prepared in accordance with the registrant’s customary accounting practices and have not been audited.

Certain prior-period financial statement amounts have been reclassified to conform to the current-period presentation. In the opinion of management, all adjustments necessary for a fair presentation of this information have been made and all such adjustments are of a normal recurring nature.

Our revenues and earnings are significantly influenced by our 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. We historically have very few live racing days during the first quarter, with a majority of our live racing occurring in the second, third and fourth quarters, including the running of the Kentucky Derby and Kentucky Oaks in the second quarter.

Revenue Recognition

The Company recognizes revenue from commissions or pari-mutuel wagering at the Company’s racetracks and OTBs (net of state pari-mutuel taxes), plus simulcast host fees and source market fees generated from contracts with in-home wagering providers in the period in which performance occurred. The Company also earns pari-mutuel related streams of revenues from sources that are not related to the handle wagered at the Company’s facilities. These other revenues are primarily derived from statutory racing regulations in some of the states where the Company’s facilities are located and are recognized when performance has occurred. Additional non-wagering revenues are primarily generated from Indiana riverboat admissions subsidy, admissions, concessions, sponsorship, licensing rights and broadcast fees, lease income and other sources. These non-wagering revenues are recognized in the period in which the performance has occurred.

Purse Expense

The Company recognizes purse expense from the statutorily required percentage of revenue that is required to be paid out in the form of purse to the winning owners of races run at the Company’s racetracks in the period in which performance occurs. The Company incurs a liability for all unpaid purse to be paid out. The Company may pay out purses in excess of statutorily required amounts resulting purse overpayments which are expensed as incurred. Recoveries of purse overpayments are recognized in the period they are realized.

2. Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees.” Had the compensation cost for our stock-based compensation plans been determined consistent with Statement of Financial Accounting Standards (“SFAS”) No. 123 “Accounting for Stock-based Compensation” the Company’s net earnings and net earnings per common share for the six and three months ended June 30, 2004 and 2003 would approximate the pro forma amounts presented below:

	Six Months Ended June 30,
	2004			2003
	As Restated			As Restated
Net earnings	$	15,950		$	16,173
Pro forma stock-based compensation expense, net of tax benefit	(869		)	(922		)
Pro forma net earnings	$	15,081		$	15,251

Pro forma net earnings per common share:
Basic	$	1.14		$	1.16
Diluted	$	1.12		$	1.14

	Three Months Ended June 30,
	2004			2003
	As Restated			As Restated
Net earnings	$	27,696		$	27,697
Pro forma stock-based compensation expense, net of tax benefit	(681		)	(539		)
Pro forma net earnings	$	27,015		$	27,158

Pro forma net earnings per common share:
Basic	$	2.03		$	2.06
Diluted	$	2.01		$	2.03

The effects of applying SFAS No. 123 in this pro forma disclosure are unlikely to be representative of the effects on pro forma net earnings for future years since variables such as option grants, exercises, and stock price volatility included in the disclosures may not be indicative of future activity. We anticipate making awards in the future under stock-based compensation plans.

3. Long-Term Debt

The following table presents our long-term debt, including current portion:

	As of June 30, 2004		As of December 31, 2003		As of June 30, 2003
Long-term debt, current portion:
Other notes payable	$	—	$	5,740	$	472

Long-term debt, due after one year:
$100 million variable rate senior notes	100,000		100,000		100,000
$200 million revolving credit facility	40,861		20,000		13,214
Other notes payable	5,218		1,096		6,597
Total long-term debt	$	146,079	$	126,836	$	120,283

In April 2003, the Company refinanced its $250 million revolving credit facility to meet funding needs for working capital, capital improvements and potential acquisitions. The refinancing included a new $200.0 million revolving line of credit through a bank syndicate with a five-year term and $100.0 million in variable rate senior notes with a seven-year term. Both debt facilities are collateralized by substantially all of the assets of the Company and its wholly owned subsidiaries. The interest rate on the line of credit is based upon LIBOR plus a spread of 125 to 225 basis points, determined by certain Company financial ratios. The current interest rate on the senior notes is equal to three month LIBOR plus 155 basis points. The weighted average interest rate on outstanding borrowings for the $200.0 million revolving line of credit was 2.44% and 2.51% at June 30, 2004 and 2003, respectively. The weighted average interest rate on outstanding borrowings for the $100.0 million senior notes was 2.71% and 2.66% at June 30, 2004 and 2003, respectively. These interest rates are partially hedged by the interest rate swap contracts entered into by the Company as described in Note 4. The senior notes require interest only payments during their term with principal due at maturity. Both debt facilities contain financial and other covenant requirements, including specific fixed charge and leverage ratios, as well as minimum levels of net worth.

4. Financial Instruments

In order to mitigate a portion of the market risk on variable rate debt, the Company has entered into interest rate swap contracts with major financial institutions. Under terms of these contracts the Company receives a three-month LIBOR-based variable interest rate and pays a fixed interest rate on notional amounts totaling $100.0 million. As a result of these contracts, the Company will pay a fixed interest rate of approximately 3.68% on $100.0 million of the variable rate debt described in Note 3. The interest rate received on the contracts is determined based on LIBOR near the end of each calendar quarter, which is consistent with the variable rate determination on the underlying debt. Terms of the swaps are as follows:

Notional Amount	Termination Date	Fixed Rate
$20 million	July 2006	3.24	%(1)
$20 million	March 2008	3.54	%
$15 million	March 2008	3.55	%
$25 million	March 2008	3.54	%
$20 million	March 2010	4.55	%(1)

(1) The two interest rate swap contracts noted above were entered into during June 2004.

The Company has designated its interest rate swaps as cash flow hedges of anticipated interest payments under its variable rate agreements. Gains and losses on these swaps that are recorded in other comprehensive earnings will be reclassified into net earnings as interest expense in the periods in which the related variable interest is paid.

Comprehensive earnings consist of the following:

	Six months ended June 30,
	2004		2003
	As Restated		As Restated
Net Earnings	$	15,950	$	16,173
Cash flow hedging (net of related tax provision of $417 in 2004 and tax benefit of $885 in 2003)	610		(1,295		)
Comprehensive earnings	$	16,560	$	14,878

	Three months ended June 30,
	2004		2003
	As Restated		As Restated
Net Earnings	$	27,696	$	27,697
Cash flow hedging (net of related tax provision of $902 in 2004 and tax benefit of $530 in 2003)	1,320		(763		)
Comprehensive earnings	$	29,016	$	26,934

5. Earnings Per Share

The following is a reconciliation of the numerator and denominator of the earnings per common share computations:

	Six months ended June 30,						Three months ended June 30,
	2004				2003		2004		2003
	As Restated
Numerator for basic and diluted earnings per share:	$			15,950	$	16,173	$	27,696	$	27,697

Denominator for weighted average shares of common stock outstanding per share:
Basic	13,272				13,167		13,287		13,174
Plus dilutive effect of stock options	188				200		186		206
Diluted	13,460				13,367		13,473		13,380

Earnings per common share:
Basic	$		1.20		$	1.23	$	2.08	$	2.10
Diluted	$	1.18			$	1.21	$	2.06	$	2.07

Options to purchase 145 and 178 shares for the periods ended June 30, 2004 and 2003, respectively, were not included in 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.

6. Goodwill and Other Intangible Assets

There has been no change to the carrying value of the Company’s net goodwill since January 1, 2002. Net goodwill at June 30, 2004 and 2003 for Kentucky Operations, Calder Race Course and CDSN was $4.8 million, $36.4 million and $11.0 million, respectively.

The Company’s other intangible assets are comprised of the following:

	As of June 30, 2004			As of December 31, 2003			As of June 30, 2003
Illinois Horse Race Equity fund	$	3,307		$	3,307		$	3,307
Indiana racing license	2,085			2,085			2,085
Other various intangible assets	4,093			4,133			3,790
	9,485			9,525			9,182
Accumulated amortization	(2,307		)	(2,061		)	(1,869		)
	$	7,178		$	7,464		$	7,313

Amortization expense for other intangibles of approximately $246 and $182 for the six months ended June 30, 2004 and 2003, respectively, are classified in operating expenses. Other intangible assets, which are being

amortized, are recorded at approximately $3.9 million and $4.0 million at June 30, 2004 and 2003, respectively, which are net of accumulated amortization of $2.3 million and $1.9 million at June 30, 2004 and 2003, respectively.

The Illinois Horse Race Equity fund intangible represents a future right to participate in a state provided subsidy, and has not been amortized since the Arlington Park merger.

Future estimated aggregate amortization expense on other intangible assets for each of the five fiscal years are as follows:

	Estimated Amortization Expense
2004	$	472
2005	$	472
2006	$	472
2007	$	472
2008	$	437

7. Segment Information

The Company has determined that it currently operates in the following seven segments: (1) Kentucky Operations, including Churchill Downs racetrack, Louisville Trackside and Ellis Park racetrack and its on-site simulcast facility; (2) Hollywood Park racetrack and its on-site simulcast facility; (3) Calder Race Course; (4) Arlington Park and its eight off-track betting facilities (“OTBs”); (5) Hoosier Park racetrack and its on-site simulcast facility and three Indiana OTBs; (6) CDSN, the simulcast product provider of the Company; and (7) other investments, including Churchill Downs Simulcast Productions and the Company’s various equity interests which are not material. Eliminations include the elimination of management fees and other intersegment transactions, primarily between CDSN and the racetracks.

The accounting policies of the segments are the same as those described in the “Summary of Significant Accounting Policies” in the Company’s Form 10-K, as amended by Form 10-K/A, for the year ended December 31, 2003. 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, management believes that the use of these measures enables management and investors to evaluate and compare from period to period, our 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 (as determined in accordance with accounting principles generally accepted in the United States of America) as a measure of our operating results or cash flows (as determined in accordance with accounting principles generally accepted in the United States of America) or as a measure of our liquidity.

The table below presents information about reported segments for the six months ended June 30, 2004 and 2003:

	Six Months Ended June 30,						Three Months Ended June 30,
	2004			2003			2004			2003
	As Restated (1)						As Restated (1)
Net revenues from external customers:
Kentucky Operations	$	61,625		$	57,852		$	56,892		$	52,954
Hollywood Park	45,527			44,234			40,428			39,265
Arlington Park	38,629			36,716			22,574			22,792
Calder Race Course	23,675			24,003			22,160			22,876
Hoosier Park	20,603			20,451			11,193			11,021
CDSN	36,043			37,988			35,164			37,145
Total racing operations	226,102			221,244			188,411			186,053
Other investments	238			1,253			200			725
Corporate revenues	1,024			941			1,024			941
	$	227,364		$	223,438		$	189,635		$	187,719
Intercompany net revenues:
Kentucky Operations	$	15,559		$	16,229		$	15,559		$	16,229
Hollywood Park	6,918			6,906			6,914			6,902
Arlington Park	2,200			2,732			2,200			2,732
Calder Race Course	3,276			3,585			2,992			3,337
Hoosier Park	50			37			43			33
Total racing operations	28,003			29,489			27,708			29,233
Other investments	845			899			700			755
Corporate expenses	544			552			266			269
Eliminations	(29,392		)	(30,940		)	(28,674		)	(30,257		)
	$	—		$	—		$	—		$	—
Segment EBITDA & net earnings:
Kentucky Operations	$	23,927		$	23,270		$	30,103		$	28,417
Hollywood Park	5,835			6,792			9,024			9,007
Arlington Park	3,402			888			2,998			2,427
Calder Race Course	808			1,389			3,460			4,129
Hoosier Park	1,228			1,361			554			545
CDSN	8,613			9,363			8,746			9,144
Total racing operations	43,813			43,063			54,885			53,669
Other investments	647			466			632			431
Corporate expenses	(3,794		)	(2,954		)	(1,707		)	(1,081		)
Eliminations	(6		)	—			(6		)	—
Depreciation and amortization	(10,819		)	(10,171		)	(5,457		)	(5,109		)
Interest income (expense), net	(2,357		)	(3,171		)	(1,089		)	(1,406		)
Provision for income taxes	(11,534		)	(11,060		)	(19,562		)	(18,807		)
Net earnings	$	15,950		$	16,173		$	27,696		$	27,697

The table below presents total asset information about reported segments:

	As of June 30, 2004			As of December 31, 2003			As of June 30, 2003
	As Restated (1)			As Restated (1)			As Restated (1)
Total assets:
Kentucky Operations	$	476,847		$	439,101		$	417,348
Hollywood Park	173,376			147,290			175,072
Arlington Park	86,692			81,725			81,940
Calder Race Course	88,164			88,675			86,438
Hoosier Park	37,911			34,940			35,444
CDSN	11,018			11,018			11,018
Other investments	101,929			90,735			89,558
	975,937			893,484			896,818
Eliminations	(400,075		)	(390,574		)	(383,176		)
	$	575,862		$	502,910		$	513,642

(1) The Company has restated its previously reported consolidated financial statements to reflect certain adjustments as discussed in Note 1 of the Notes to Condensed Consolidated Financial Statements in this Form 10-Q/A.

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/A 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 our 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 the Company’s 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 California racetracks within those respective markets; costs associated with our efforts in support of alternative gaming initiatives; costs associated with our Customer Relationship Management initiatives; a substantial change in law or regulations affecting our pari-mutuel activities; a substantial change in allocation of live racing days; litigation surrounding the Rosemont, Illinois, riverboat casino; changes in Illinois law that impact revenues of racing operations in Illinois; a decrease in riverboat admissions subsidy revenue from our Indiana operations; the impact of an additional Indiana racetrack and its wagering facilities 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 adequately integrate acquired businesses; market reaction to our expansion projects; any business disruption associated with our facility renovations; the loss of our totalisator companies or their inability to keep their technology current; our accountability for environmental contamination; the loss of key personnel and the volatility of our stock price.

The Company restated its 2004 and 2003 condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q/A to correct errors relating to the accounting for purse overpayments and classification of subsidies and simulcast host fees (at certain racetracks). See Note 1 to the Condensed Consolidated Financial Statements in this Form 10-Q/A for additional information. Corresponding amounts throughout this Item 2 have also been restated as appropriate.

You should read this discussion with the financial statements included in this report and the Company’s Form 10-K, as amended by Form 10-K/A, for the year ended December 31, 2003, for further information. Additionally, the Company has amended the Form 10-K for the fiscal year ended December 31, 2003 to restate the financial statements contained therein to correct the accounting for purse overpayments. See Note 1 to the Condensed Consolidated Financial Statements in this Form 10-Q/A for additional information.

Overview

We conduct pari-mutuel wagering on live thoroughbred, quarter horse and standardbred horse racing and simulcast signals of races. Additionally, we offer racing services through our other interests.

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, and Ellis Park Race Course, Inc., a

thoroughbred racing operation in Henderson, Kentucky (collectively referred to as “Kentucky Operations”). We also own and operate Hollywood Park, a thoroughbred racing operation in Inglewood, California; Arlington Park, a thoroughbred racing operation in Arlington Heights, Illinois; and Calder Race Course, a thoroughbred racing operation in Miami, Florida. Additionally, we are the majority owner and operator of Hoosier Park in Anderson, Indiana, which conducts thoroughbred, quarter horse and standardbred horse racing. We conduct simulcast wagering on horse racing at twelve simulcast wagering facilities in Kentucky, Indiana and Illinois, as well as at our six racetracks.

The Churchill Downs Simulcast Network (“CDSN”) provides the principal oversight of our interstate and international simulcast and wagering opportunities, as well as the marketing, sales, operations and data support efforts related to the Company-owned racing content.

Our revenues and earnings are significantly influenced by our racing calendar. Therefore, revenues and operating results for any interim quarter are not generally 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. We historically have very few live racing days during the first quarter of each year, with a majority of our live racing occurring in the second, third and fourth quarters, including the running of the Kentucky Derby and Kentucky Oaks in the second quarter.

Our pari-mutuel revenues include commissions on pari-mutuel wagering at our racetracks and off-track betting facilities (net of state pari-mutuel taxes), plus simulcast host fees from other wagering sites and source market fees generated from contracts with our in-home wagering providers. In addition to the commissions earned on pari-mutuel wagering, we earn pari-mutuel related streams of revenues from sources that are not related to wagering. These other revenues are primarily derived from statutory racing regulations in some of the states where our facilities are located and can fluctuate materially year-to-year. Non-wagering revenues are primarily generated from admissions, sponsorships, licensing rights and broadcast fees, Indiana riverboat admissions subsidy, concessions, lease income and other sources.

Greater than 70% of our annual revenues are generated by pari-mutuel wagering on live and simulcast racing content and in-home wagering. Live racing handle includes patron wagers made on live races at our live tracks and also wagers made on imported simulcast signals by patrons at our racetracks during our live meets. Import simulcasting handle includes wagers on imported signals at our racetracks when the respective tracks are not conducting live race meets and at our off-track betting facilities (“OTBs”) throughout the year. Export handle includes all patron wagers made on our live racing signals sent to other tracks, OTBs and in-home wagering. In-home wagering, or account wagering, consists of patron wagers through an advance deposit account.

Legislative and Regulatory Changes

During the first half of 2004, the Indiana Horse Racing Commission (“IHRC”) considered whether to prevent any Indiana betting facility from accepting wagers on thoroughbred horse races run at Kentucky racetracks, including Churchill Downs racetrack and Ellis Park, unless all Indiana betting facilities were offered the opportunity to accept wagers on such races. Pursuant to its statutory right under the Federal Interstate Horseracing Act of 1978, the Kentucky Horsemen’s Benevolent and Protective Association withheld its consent and thereby prevented the Evansville OTB and Clarksville OTB, both owned by Indiana Downs, from accepting wagers on thoroughbred horse races run at Kentucky racetracks. To assist the IHRC in reaching a determination on the matter, the IHRC asked the Indiana Department of Gaming Research (“IDGR”) to estimate the impact of simulcast wagering on live horse racing in Kentucky and Indiana. The IDGR issued a report in June 2004, which concluded the racing industry in both states would lose money if none of Indiana’s pari-mutuel facilities received Kentucky’s racing signals. As a result, at its July 1, 2004 meeting the IHRC decided not to ban Kentucky simulcast signals at Indiana racetracks. Indiana Downs has requested the IHRC to reconsider its decision.

In Florida, Yes for Local Control (formerly known as The Floridians for a Level Playing Field), a coalition of pari-mutuel facilities, including Calder Race Course, has successfully gathered the necessary petition signatures to place a question on the ballot for the November 2004 general election to allow Dade and Broward counties to hold a referendum on the installation of slot machines at existing pari-mutuel sites in those respective counties. The Florida Supreme Court upheld the constitutionality of this initiative in May, 2004. The ballot question was

officially certified as initiative number 4 by the Florida Secretary of State on July 21, 2004. On July 23, 2004, a suit was filed against the Florida Division of Elections challenging the format of the initiative petition. Calder Race Course is committed to fund a pro-rata share of the initiative costs.

In California, Hollywood Park is part of a coalition of racetracks and card clubs behind the Gaming Revenue Act of 2004, which is slated for the November 2004 ballot. If passed, this initiative would direct the governor to re-negotiate all existing compacts with Native American tribes in California. If the tribes decline to renegotiate the existing compacts, then five racetracks, including Hollywood Park, and 11 card clubs would be allowed to operate electronic gaming devices. The California Secretary of State certified the initiative, titled Proposition 68, for the ballot on June 2, 2004. Two lawsuits filed to challenge the constitutionality of the initiative have now been dismissed. However, the initiative faces opposition from Governor Schwarzenegger and numerous Indian tribes. Gov. Schwarzenegger recently signed new state compacts with five Native American tribes estimated to provide over $1 billion to the state budget while allowing tribes to expand their slot operations.

In addition to Proposition 68 noted above, Proposition 70 also known as The Indian Gaming Fair-Share Revenue Act of 2004, will be on the November ballot. Proposition 70 would permit an unlimited expansion of Native American gaming and call for tribes to pay an 8.8% tax on gaming revenue. Proposition 70 has been endorsed by members of the California Nations Indian Gaming Association. However, the initiative also faces opposition from Governor Schwarzenegger. If both Proposition 68 and Proposition 70 pass, then the proposition with the most votes would become effective.

Also in California, legislation recently passed which is estimated to generate approximately $10 million annually from a .5% increase in the commission or take out rate on exotic wagers placed on California races. The revenue will be used to pay the cost of workers compensation insurance for backstretch workers and to provide a starter participation bonus. Governor Schwarzenegger signed AB1835 on May 14, 2004.

In 1999, the state of Illinois enacted legislation that provides for pari-mutuel tax relief and related tax credits for Illinois racetracks, as well as legislation providing for subsidies to Illinois horse racing tracks from revenues generated by the relocation of a license to operate a riverboat casino gaming facility. Arlington Park’s share of subsidies from the relocation of the license under the 1999 legislation would range from $4.6 million to $8.0 million annually, based on publicly available sources. In the event Arlington Park receives such subsidies, additional shares of common stock would be issued to Duchossois Industries, Inc., to a maximum of 1.25 million shares, under our merger agreement with Arlington Park. In January 2001, the Illinois Gaming Board (“IGB”) denied a license application of Emerald Casino, Inc. to relocate the license to operate the Rosemont casino. During 2002, Emerald Casino, Inc. filed for bankruptcy and was attempting to sell its license rights subject to the approval of the IGB and the bankruptcy court. In April 2004, the IGB conducted an auction of the license and awarded that license to Isle Capri Casinos, Inc., which announced plans to locate the license to operate in Rosemont, Illinois. Both the Governor of Illinois and the Attorney General of Illinois have convened investigations of the award by the IGB. The date for final approval by the bankruptcy court of the auction and issuance of the license by the IGB is not known at this time.

As anticipated, bills were filed in the 2004 session of the Illinois legislature to eliminate the statutory right of Arlington Park and the other Illinois racetracks to recapture amounts from their purse accounts. However none of those bills advanced during the session. Since 2000, the Illinois General Assembly has appropriated money to reimburse each racetrack’s purse account for the amounts not recaptured from horsemen through reductions in future purses. However, the appropriation was vetoed by Illinois’s governor during 2002 and the General Assembly did not make the appropriations in 2003. Illinois horsemen unsuccessfully petitioned the Illinois Racing Board (“IRB”) to prevent the tracks from recapturing purse amounts in any year where Illinois does not appropriate funds for reimbursement. Illinois horsemen filed a lawsuit against the IRB and the Illinois racetracks, including Arlington Park, challenging the recapture of purse account amounts and seeking reimbursement for the amounts recaptured, and the lawsuit was dismissed in favor of the Illinois racetracks during April 2004. The case was dismissed during July 2004, and plaintiffs have until August 2004 in which to file their appeal. Additionally, Illinois horsemen have filed a new lawsuit challenging the 2004 recapture amount. We have elected to continue to recapture amounts from purses due to horsemen while the litigation is pending.

In Kentucky, racetracks with on-track average daily handle of $1.2 million or more pay an excise tax equal to 3.5% of on-track handle while tracks with on-track average daily handle that does not meet the $1.2 million threshold pay an excise tax of 1.5% of on-track handle. To mitigate the disparity of treatment between larger tracks such as Churchill Downs and other Kentucky racetracks, we successfully pursued legislation creating an excise tax credit for racetracks as part of the 2002-2004 state budget. The measure resulted in a $12,000 credit against our excise tax liability for each day of live racing starting July 1, 2003 and ending June 30, 2004. However, average daily wagering at Churchill Downs racetrack fell below the $1.2 million threshold for the state’s fiscal year ended June 30, 2004, which resulted in a drop in our excise tax rate from 3.5% to 1.5% for the year. As a result, the excise tax credit did not apply to Churchill Downs racetrack and a refund of tax payments has been requested of the Kentucky Revenue Cabinet.

We are currently pursuing the excise tax credit in the 2004-2006 state budget but due to revenue shortfalls in Kentucky, it is not anticipated that the excise tax credit will be included in the 2004-2006 Kentucky state budget. The Kentucky General Assembly adjourned in April 2004 without passing a budget. The future status of the excise tax credit will not be determined until a final budget is approved.

Critical Accounting Policies

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure 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 could differ from those estimates. Our most significant estimates relate to the valuation of property and equipment, receivables, goodwill and other intangible assets, which may be significantly affected by changes in the regulatory environment in which the company operates, and to the aggregate costs for self-insured liability and worker’s compensation claims. Our significant accounting policies are described in Note 1 to the consolidated financial statements included in Item 8 of the Company’s Form 10-K, as amended by Form 10-K/A, for the year ended December 31, 2003.

Our business can be impacted positively and negatively by legislative and regulatory changes and from alternative gaming competition. A significant negative impact from these activities could result in a significant impairment of our property and equipment and/or our goodwill and intangible assets in accordance with generally accepted accounting standards.

For our business insurance renewals in 2003 and 2002, we assumed more risk than in the prior years, primarily through higher retentions and higher maximum losses for stop-loss insurance for certain coverages. Our March 1, 2004 business insurance renewals included substantially the same coverages and retentions as in previous years. Based on our historical loss experience, management does not anticipate that this increased risk assumption will materially impact our results of operations. Our ability to obtain insurance coverage at acceptable costs in future years under terms and conditions comparable to the current years is uncertain.

RESULTS OF OPERATIONS

Pari-mutuel wagering information, including intercompany transactions, for our CDSN segment and five live racing segments including on-site simulcast facilities and separate OTBs, which are included in their respective segments, during the six months ended June 30, 2004 and 2003, is as follows ($ in thousands):

	Kentucky Operations		Hollywood Park		Calder Race Course		Arlington Park (1)		Hoosier Park		CDSN
Pari-mutuel wagering:
On-track Live
2004 handle	$	69,342	$	54,956	$	20,951	$	17,654	$	2,634	—
2004 no. of days	48		51		49		35		60		—
2003 handle	$	76,995	$	58,178	$	22,139	$	19,469	$	2,208	—
2003 no. of days	47		50		51		39		50		—

On-track Import
2004 handle	$	15,231	$	34,156	$	40,081	$	25,379	$	5,335	—
2004 no. of days	48		51		49		87		60		—
2003 handle	$	12,667	$	34,843	$	42,421	$	22,084	$	4,837	—
2003 no. of days	47		50		51		69		50		—

Import Simulcasting
2004 handle	$	51,157	$	96,231	—		$	247,840	$	57,740	—
2004 no. of days	279		129		—		1,408		612		—
2003 handle	$	54,691	$	102,039	—		$	220,593	$	59,616	—
2003 no. of days	259		130		—		1,099		620		—
Number of Trackside/OTBs	1		—		—		8		3		—

Intrastate Export
2004 handle