04/23/2010 12:00AM

Breeders' Cup finances rise in 09


One year ago, Breeders' Cup Ltd. was facing a financial crisis that was unprecedented for the relatively stable organization. The value of its investment portfolio had declined 25 percent in the previous year, and it was forecasting a 25 percent drop in nomination revenue, one of its two principal sources of income, because of the contraction in the foal crop and reductions in stud fees.

Now, the organization appears to be in far better shape, according to its 2009 financial statements released on Thursday. The decline in nominations revenue proved to be accurate, falling from $21.5 million in 2008 to $16.1 million this year. But Breeders' Cup made cuts in its expenses and reduced its accounts receivable by $4.5 million while its investment portfolio benefited measurably from last year's bull market.

The organization is still not out of the woods. Late in 2008, Breeders' Cup tapped a line of credit for $5.9 million, and the debt is still not paid off. In addition, revenue from nominations are expected to decline further in 2010 as the bloodstock market continues to show weakness related to the unwillingness of banks to extend credit to buyers who want to use borrowed money to invest in horses in a down market.

Matthew Lutz, the chief financial officer of the Breeders' Cup, said the organization expects nominations revenue to decline to $12 million in 2010, and Breeders' Cup will "have to continue to identify revenue sources other than nominations in order to compete in the global marketplace, offer competitive purse levels, and provide value for our nominators and horsemen."

According to the financial statements, revenues in 2009 were $43.5 million compared with $39.6 million in 2008, an increase of 9.8 percent. That comparison is skewed by the losses and gains in the organization's investment portfolio. In 2008, Breeders' Cup had an $11.1 million paper loss in its portfolio compared with a $2.3 million gain in 2009, a swing of $13.4 million.

Non-investment revenue declined in all categories. In addition to the $5.4 million decline in nomination fees, year-end event fees declined 11 percent, from $21.2 million in 2008 to $18.8 million in 2009. Sponsorship revenue dropped 16.4 percent, from $6.7 million to $5.6 million. Including other sources, total non-investment revenue dropped approximately $9.4 million.

Breeders' Cup offset the shortfalls in two principal areas. It cut marketing costs by approximately $4.6 million, from $7.4 million to $2.8 million, and its accounts receivable balance by $4.5 million by recognizing late payments owed by the 2008 host, Santa Anita Park, Lutz said. In addition, the company cut expenses related to sponsorships by $850,000 and television expenses by $650,000.

Considering that handle on the Breeders' Cup this year was up 3 percent compared with 2008, and attendance over the two days was 96,496, an 11 percent increase over 2008, it's hard to argue with the decision to cut marketing expenses.

Lutz said that the decline in marketing costs was related to efficiencies gained by holding the event two years in a row at Santa Anita and a shift toward electronic forms of publicity and advertising.

Although the cuts restored the organization to health, the Breeders' Cup's ability to weather another decline in revenue remains tenuous. According to the financial statements, Breeders' Cup had $1.1 million in cash at the end of 2009, down from $1.2 million in 2008 - a figure that was down from $8.7 million at the end of 2007. Its current line of credit, which bears interest at 2 percentage points below the prime rate, allows it to borrow up to $15 million, and at the end of 2009, the principal amount outstanding was $5.8 million, payable on June 30 of this year.

If it faces another squeeze from declining nominations revenue, Breeders' Cup could always raise money by selling some of its investment portfolio, which rebounded in 2009 after a disastrous performance in 2008. The value of the portfolio was $32.4 million at the end of the year, a time when the stock market had rebounded almost completely from its recessionary lows.

The financial statements indicate that Breeders' Cup took significant steps to insulate the portfolio from the volatility of the stock market after some breeders complained that the stocks left the organization too exposed. In 2007, Breeders' Cup's portfolio consisted of $27.4 million in stock and $8.4 million in bonds, for a total of $35.8 million. By the end of 2009, the portfolio had $9.1 million worth of mutual funds, $11.8 million in treasury and corporate bonds, and $11.5 million in hedge funds.

The shift away from the stock market is a double-edged sword. While the portfolio's value increased by 9.8 percent during 2009, the Dow Jones Industrial Average has risen 37.5 percent and the Nasdaq has gained 47 percent.

Lutz said that Breeders' Cup relies on its investment advisor, Brian Pfeifler of Morgan Stanley, to manage the portfolio. "All funds in which BC is currently invested are meeting or exceeding their applicable market indices," Lutz said.