UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(X)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2005
(
) 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)
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Kentucky
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61-0156015
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(State
or other jurisdiction of incorporation or organization)
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(IRS
Employer Identification No.)
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700
Central Avenue, Louisville, Kentucky 40208
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(502)
636-4400
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(Address
of principal executive offices) (zip code)
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(Registrant's
telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the Act:
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None
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None
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(Title
of each class registered)
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(Name
of each exchange on which registered)
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Securities
registered pursuant to Section 12(g) of the Act:
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Common
Stock, No Par Value
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(Title
of class)
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Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
Yes
[
] No [X]
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months
and (2) has been subject to such filing requirements for the past 90 days.
Yes
[X] No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K. [ ]
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.
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]
As
of
March 8, 2006, 13,178,848 shares of the Registrant's Common Stock were
outstanding. As of June 30, 2005, (based upon the closing sale price for such
date on the NASDAQ National Market), the aggregate market value of the shares
held by non-affiliates of the Registrant was $365,867,878.
Portions
of the Registrant's Proxy Statement for its Annual Meeting of Shareholders
to be
held on June 15, 2006, are incorporated by reference herein in response to
Items
10, 11, 12, 13 and 14 of Part III of Form 10-K. The exhibit index is located
on
pages 81-85.
2
CHURCHILL
DOWNS INCORPORATED
For
the Year Ended December 31, 2005
3
Return
to
Index|
A.
|
Introduction
|
Churchill
Downs Incorporated (the "Company") is principally a racing company that conducts
pari-mutuel wagering on live Thoroughbred, Quarter Horse and Standardbred horse
racing and simulcasts signals of races. Additionally, we offer racing services
through our other business interests as well as alternative gaming through
video
poker operations in Louisiana. We were organized as a Kentucky corporation
in
1928. Our principal executive offices are located at 700 Central Avenue,
Louisville, Kentucky, 40208.
We
operate our flagship operation, Churchill Downs racetrack ("Churchill Downs"),
in Louisville, Kentucky. Churchill Downs has conducted Thoroughbred racing
continuously since 1875 and is internationally known as the home of the Kentucky
Derby. The Churchill Downs operation also encompasses an on-site simulcast
facility. In addition, the management of Churchill Downs oversees Ellis Park
Race Course, Inc. ("Ellis Park"), which operates a Thoroughbred track in
Henderson, Kentucky.
Churchill
Downs Management Company ("CDMC") manages all of our operations including:
Churchill Downs; Ellis Park; Arlington Park, a Thoroughbred racing operation
in
Arlington Heights along with eight off-track betting facilities ("OTBs") in
Illinois; Calder Race Course ("Calder"), a Thoroughbred racing operation in
Miami Gardens, Florida; Fair Grounds Race Course ("Fair Grounds"), a
Thoroughbred racing operation in New Orleans along with eleven OTBs in
Louisiana; and Video Services, Inc. ("VSI"), the owner and operator of more
than
700 video poker machines in Louisiana. Fair Grounds and VSI were acquired in
October 2004. On September 23, 2005, Churchill Downs California Company
("CDCC"), a wholly owned subsidiary of the Company, completed the sale of
Hollywood Park, a Thoroughbred racing operation in Inglewood,
California.
Additionally,
CDMC manages Hoosier Park at Anderson in Anderson, Indiana ("Hoosier Park").
Hoosier Park conducts Thoroughbred, Quarter Horse and Standardbred horse racing,
and operates three OTBs in Indiana. Hoosier Park is owned by Hoosier Park,
L.P.
("HPLP"), an Indiana limited partnership. Anderson Park, Inc. ("Anderson"),
a
wholly owned subsidiary of CDMC, is the sole general partner of HPLP. Anderson
owns a 62% interest in HPLP and continues to manage its day-to-day operations.
Centaur Racing, LLC owns 38% of HPLP and, through a Partnership Interest
Purchase Agreement, has an option to purchase an additional 11% partnership
interest from us, which expires on December 31, 2007.
We
formed
Churchill Downs Investment Company ("CDIC"), a wholly owned subsidiary, to
oversee other industry related investments. CDIC holds a 30% interest in NASRIN
Services, LLC ("NASRIN"), a telecommunications service provider for the
pari-mutuel and simulcasting industries. During 2004, the Company sold a 19%
interest in Kentucky Downs, LLC ("Kentucky Downs"), a Franklin, Kentucky,
racetrack that conducts a limited Thoroughbred race meet in September, as well
as year-round simulcasting. After consummation of the sale, the Company retained
a 5% interest in Kentucky Downs. Our investments in NASRIN and Kentucky Downs
are not material to the Company's financial position or results of operations.
The
Company directly or indirectly holds a 100% interest in Churchill Downs
Simulcast Productions ("CDSP"), which provides television production and
integration of computer graphic software to the racing industry. The simulcast
signal produced by CDSP displays odds, statistical data and other racing
information on television in real-time for patrons at racetracks and OTBs.
Our
ownership in CDSP is not material to the Company's financial position or results
of operation.
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B.
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Live
Racing and Alternative Gaming
Operations
|
We
conduct live horse racing at Churchill Downs, Calder, Fair Grounds, Arlington
Park, Hoosier Park and Ellis Park. The following is a summary of our significant
live racing events and a description of our properties.
4
Return
to IndexThe
Kentucky Derby and the Kentucky Oaks, both held at Churchill Downs, continue
to
be our premier racing events. The 2006 Kentucky Derby will offer a minimum
$2.0
million in purse money, and the Kentucky Oaks offers a minimum $0.5 million
in
purse money. The Kentucky Derby is the first race of the annual series of races
for 3-year-old Thoroughbreds known as the Triple Crown. In addition, Churchill
Downs offers a $0.8 million purse
for
the
Stephen Foster Handicap. Calder is home to The Festival of the Sun and the
nationally prominent Summit of Speed, offering approximately $1.9 million in
total purse money. Hollywood Park was home to the Hollywood Gold Cup during
2005, which offered $0.8 million in purse money. The Arlington Million, which
is
run during the International Festival of Racing at Arlington Park, with a purse
of $1.0 million, is one of three North American stops for the World Series
Racing Championship. Fair Ground's Winter Meet during 2005 was highlighted
by
Louisiana Derby Day, the richest day in Louisiana racing, that was headlined
by
the $0.6 million Louisiana Derby, a major prep race for the Kentucky Derby.
Other significant racing events are the Indiana Derby for Thoroughbreds and
the
Dan Patch Invitational and Hoosier Cup for Standardbreds held at Hoosier Park,
as well as the Gardenia Stakes for older fillies and mares held at Ellis Park.
Arlington
Park hosted the Breeders' Cup World Thoroughbred Championship ("Breeders' Cup")
in 2002. Churchill Downs has hosted the Breeders' Cup on five occasions and
has
also been selected as the site to host the event in 2006. Breeders' Cup Limited,
a tax-exempt organization chartered to promote Thoroughbred racing and breeding,
sponsors Breeders' Cup races, which currently feature $14.0 million in purses.
These races are held annually for the purpose of determining Thoroughbred
champions in eight different events. Racetracks across North America compete
for
the privilege of hosting the prestigious Breeders' Cup races each
year.
Churchill
Downs
The
Churchill Downs racetrack site and improvements ("Churchill facility") are
located in Louisville, Kentucky. The Churchill facility consists of
approximately 147 acres of land with a one-mile dirt track, a seven-eighths
(7/8) mile turf track, permanent grandstands, luxury suites and a stabling
area.
Our facility accommodates approximately 52,000 persons in our clubhouse,
grandstand, Jockey Club Suites and Finish Line Suites. The facility also
includes a state-of-the-art simulcast wagering facility designed to accommodate
1,500 persons, a general admission area, and food and beverage facilities
ranging from fast food to full-service restaurants. The site also has a saddling
paddock, accommodations for groups and special events, parking areas for the
public, and our racetrack and corporate office facilities. The stable area
has
barns sufficient to accommodate approximately 1,400 horses, a 114-room dormitory
and other facilities for backstretch personnel.
To
supplement the facilities at Churchill Downs, we provide additional stabling
facilities sufficient to accommodate 500 horses and a three-quarter (3/4) mile
dirt track, which is used for training Thoroughbreds, at the OTB known as
Trackside Louisville. The facilities provide a year-round base of operation
for
many horsemen and enable us to attract new horsemen to race at Churchill
Downs.
We
have
made numerous capital improvements to the Churchill facility in order to better
serve our horsemen and patrons. During the first quarter of 2002 we began a
$121.8 million renovation to restore and modernize key areas at the Churchill
facility, referred to as our "Master Plan." The $26.3 million Phase I, which
was
substantially completed during 2003, included renovation of the historic Jockey
Club and construction of 61 new luxury suites, a ballroom, new meeting rooms
and
kitchen facilities. The $95.5 million Phase II of the Master Plan was completed
during the second quarter of 2005 and included the demolition and rebuilding
of
a large section of the clubhouse area and the addition of 15 new luxury
suites.
As
part
of the financing for the Master Plan, in 2002 we transferred title to the
Churchill facility to the City of Louisville, Kentucky and leased back the
facility. Subject to the terms of the lease agreement, we can re-acquire the
facility at any time for $1.00. This transaction has no significant impact
on
our current financial position or results of operations.
5
Calder
Race Course
The
Calder racetrack and improvements are located in Miami-Dade County. The Calder
facility is adjacent to Dolphin Stadium, home of the Florida Marlins and Miami
Dolphins, and consists of approximately 220 acres of land with a one-mile dirt
track, a seven-eighths (7/8) mile turf track, a training area with a
five-eighths (5/8) mile training track, permanent grandstands and a stabling
area. The facility includes clubhouse and grandstand seating for approximately
15,000 persons, a general admission area, and food and beverage facilities
ranging from concessions to full-service restaurants. The stable area consists
of a receiving barn, feed rooms, tack rooms, detention barns and living quarters
and can accommodate approximately 1,800 horses. The Calder Race Course facility
also features a saddling paddock, parking areas for the public and office
facilities. On October 24, 2005, Hurricane Wilma caused significant damage
to
Calder's clubhouse facility and parts of its stable area. We carry property
and
casualty insurance and are currently working with our insurance carriers to
determine to what extent insurance proceeds will
offset
any losses. Full restoration of the facility is currently under way and is
expected to be completed prior to the beginning of the race meeting in
2006.
Fair
Grounds Race Course and VSI
On
October 14, 2004, we completed our acquisition of the Fair Grounds racetrack
and
its affiliated operations, including eleven OTBs. The Fair Grounds racetrack
facility, located in New Orleans, Louisiana, consists of approximately 145
acres
of land, a one mile dirt track, a seven-eighths (7/8) mile turf track, permanent
grandstands and a stabling area. The facility includes clubhouse and grandstand
seating for approximately 5,000 persons, a general admissions area, and food
and
beverage facilities ranging from concessions to clubhouse dining. The stable
area consists of a receiving barn, feed rooms, tack rooms, detention barns
and
living quarters and can accommodate approximately 2,000 horses. The Fair Grounds
facility also features a saddling paddock, parking areas for the public and
office facilities. In connection with the acquisition of Fair Grounds racetrack
and its affiliated operations, we expected to make numerous capital improvements
to the Fair Grounds facility in order to better serve our horsemen and patrons.
Fair Grounds has received the requisite state and local approvals for the
construction of a slot-machine gaming facility at the racetrack property
offering up to 700 slot machines. VSI is the exclusive operator of more than
700
video poker machines at Fair Grounds and nine of its OTBs. On August 29, 2005,
Hurricane Katrina caused significant damage to the Fair Grounds racetrack
facility and its affiliated OTBs. The Fair Grounds racetrack, its on-site OTB
and three other OTBs remain closed as of the date of the filing of this Annual
Report on Form 10-K. We carry property and casualty insurance and are currently
working with our insurance carriers to determine to what extent proceeds will
offset any losses. Restoration is underway, but the full extent of restoration
to the various facilities, including Fair Grounds racetrack, is yet to be
determined.
Arlington
Park
The
Arlington Park racetrack was constructed in 1927 and reopened its doors in
1989
after a devastating fire four years earlier. The racetrack sits on 325 acres,
has a one and one-eighth (1 1/8) mile dirt track, a one-mile turf track and
a
five-eighths (5/8) mile training track. The facility includes permanent
clubhouse, grandstand and suite seating for 6,045 persons, and food and beverage
facilities ranging from fast food to full-service restaurants. Arlington Park
has 34 barns able to accommodate approximately 2,200 horses. The Arlington
Park
facility also features a saddling paddock, parking areas for the public and
office facilities.
Ellis
Park
The
Ellis
Park racetrack and improvements, located in Henderson, Kentucky, consist of
approximately 250 acres
of
land just north of the Ohio River with a one and one-eighths (1 1/8) mile dirt
track, a one-mile turf track and a stabling area for 1,140 horses. The facility
includes clubhouse and grandstand seating for 8,000 people, a general admission
area, and food and beverage facilities ranging from fast food to full-service
restaurants. The Ellis Park facility also features a saddling paddock, parking
areas for the public and office facilities. On November 6, 2005, a tornado
caused significant damage to the Ellis Park racetrack and improvements,
including its stable areas as well as several other buildings. We carry property
and casualty insurance and are currently working with our insurance carriers
to
determine to what extent insurance proceeds will offset any losses. We
anticipate restoring the facility in time for racing during the summer of
2006.
6
Hoosier
Park
Hoosier
Park is located in Anderson, Indiana, about 40 miles northeast of downtown
Indianapolis. Hoosier Park leases the land under a long-term lease from the
city
of Anderson and owns all of the improvements on the site. The Hoosier Park
facility consists of approximately 110 acres of leased land with a seven-eighths
(7/8) mile dirt track, permanent grandstands and a stabling area. The facility
includes seating for approximately 2,400 persons, a general admission area,
and
food and beverage facilities ranging from fast food to a full-service
restaurant. The site also has a saddling paddock, parking areas for the public
and office facilities. The stable area has barns sufficient to accommodate
980
horses and other facilities for backstretch personnel.
|
C.
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Simulcast
Operations
|
We
generate a significant portion of our revenues by transmitting signals of races
from our racetracks to other facilities ("export") and receiving signals from
other tracks ("import"). Revenues are earned through pari-mutuel wagering on
signals that we both import and export.
The
Churchill Downs Simulcast Network ("CDSN") was developed in 2002 to focus on
the
distribution of the Company's simulcast signal. 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. CDSN will present over
500
racing programs from our six racetracks to wagering outlets during
2006.
Arlington
Park and Calder conduct on-site simulcast wagering only during live race meets,
while Churchill Downs, Fair Grounds, Hoosier Park and Ellis Park offer
year-round simulcast wagering at the racetracks. The
OTBs located in Indiana, Illinois and Louisiana conduct
simulcast wagering year-round.
Off-Track
Betting Facilities
Twelve
of
our OTBs are collectively branded "Trackside" to create a common identity for
our OTB operations. Trackside Louisville, which is open for simulcast wagering
only on big events days, such as the Kentucky Derby and the Kentucky Oaks and
Breeders' Cup when Churchill Downs hosts the event, is located approximately
five miles from the Churchill facility. This 100,000-square-foot property,
on
approximately 88 acres of land, is a Thoroughbred training and stabling annex
that has audiovisual capabilities for pari-mutuel wagering, seating for
approximately 3,000 persons, parking, offices and related facilities for
simulcasting races.
Arlington
Park operates eight OTBs that accept wagers on races at Arlington Park as well
as on races simulcast from other locations. One OTB is located on the Arlington
Park property. Another is located in Rockford, Illinois consisting of
approximately 8.6 acres, and a third is located in East Moline, Illinois on
approximately 232.6 acres. Arlington Park also leases two OTBs located in
Waukegan, Illinois consisting of approximately 25,000 square feet, and Chicago,
Illinois consisting of approximately 19,700 square feet. Arlington Park operates
three OTBs within existing non-owned Illinois restaurants under license
agreements. These three OTBs are located in South Elgin, McHenry and South
Beloit, which opened in December 2002, June 2003 and February 2004,
respectively. The McHenry OTB was moved to a different non-owned restaurant
in
McHenry, Illinois and reopened during December 2005.
Hoosier
Park operates three OTBs providing a statewide distribution system for Hoosier
Park's racing signal, and additional simulcast markets for our products. These
OTBs are located in: Merrillville, located about 30 miles southeast of Chicago,
which consists of approximately 27,300 square feet of space; Fort Wayne which
consists of approximately 15,750 square feet of space; and downtown Indianapolis
where Hoosier Park leases approximately 24,800 square feet of space.
7
Fair
Grounds operates 11 OTBs that accept wagers on races at Fair Grounds as well
as
on races simulcast from other locations. One OTB is located on the Fair Grounds
property. Another is located in Kenner, Louisiana consisting of approximately
4.26 acres. Fair Grounds also leases nine OTBs located in these southeast
Louisiana communities: Covington, consisting of approximately 7,000 square
feet
of space; Elmwood, which consists of approximately 14,000 square feet of space;
Gretna, which consists of approximately 20,000 square feet of space; Houma,
which consists of approximately 10,000 square feet of space; Laplace, which
consists of approximately 7,000 square feet of space; Metairie, which consists
of approximately 9,000 square feet of space; St. Bernard which consists of
approximately 12,000 square feet of space; Slidell, which consists of
approximately 9,000 square feet of space; and Thibodaux, which consists of
approximately 5,000 square feet of space. Video poker is offered at the on-site
OTB, Kenner, Elmwood, Gretna, Houma, LaPlace, Metairie, St. Bernard and
Thibodaux. On August 29, 2005, Hurricane Katrina caused significant damage
to
the OTBs affiliated with Fair Grounds. As of the date of the filing of this
Annual Report on Form 10-K, all OTBs have reopened except the Fair Grounds
OTB,
the Metairie OTB, the St. Bernard OTB and the Slidell OTB. The status of these
closed OTBs remains uncertain. We carry property and casualty insurance and
are
currently working with our insurance carriers to determine to what extent
insurance proceeds will offset any losses.
Kentucky
Off-Track Betting, LLC
We
are a
50% owner in Kentucky Off-Track Betting, LLC ("KOTB”), with 25% of this
ownership through our Ellis Park racetrack and the other 25% of this ownership
through our Churchill Downs racetrack. KOTB's purpose is to own and operate
facilities for the simulcasting of races and the acceptance of wagers on such
races at Kentucky locations other than a racetrack. These OTBs may be located
no
closer than 75 miles from an existing racetrack without the racetrack's consent
and in no event closer than 50 miles to an existing racetrack. Each OTB must
first be
approved
by the Kentucky Horse Racing Authority (“KHRA”) and the local government where
the facility is to be located. KOTB currently owns or leases and operates OTBs
in Corbin, Maysville, Jamestown and Pineville, Kentucky that conduct simulcast
wagering year-round.
OTBs
developed by KOTB provide additional markets for the intrastate simulcasting
of
and wagering on Churchill Downs' and Ellis Park's live races and interstate
simulcasting of and wagering on out-of-state signals. KOTB did not contribute
significantly to our operations in 2005 and is not anticipated to have a
substantial impact on our operations in the future. Our investment in KOTB
is
not material to our financial position or results of operations.
In-Home
Wagering
In-home
wagering, or account wagering, allows patrons to place wagers through an advance
deposit account established with an operating company. Most operating companies
provide distribution of the live racing product and accept wagers through a
broadcast medium such as television or the Internet. We have entered into
agreements with Television Games Network ("TVG"), affiliated with Gemstar-TV
Guide International, Inc., which licensed to TVG the rights to broadcast our
live racing products as part of TVG's programming content, as well as accept
wagers on the products. Such agreements expire on various dates between March
2007 and April 2008. We receive a simulcast host fee and a source market fee
for
these licenses.
We
believe that in-home wagering will attract both new patrons and existing racing
fans who will use account wagering in addition to the live track and OTB
operations. We view this distribution channel as a potential source of future
growth in the off-track market in states where it is not expressly prohibited
and we intend to continue to pursue the expansion of in-home
wagering.
|
D.
|
Sources
of Revenue
|
Our
pari-mutuel revenues include commissions on pari-mutuel wagering at our
racetracks and OTBs (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, video
poker, lease income and other sources.
8
Financial
information about our segments required by this Item is incorporated by
reference from the information contained in the Notes to Consolidated Financial
Statements included in Item 8 of this Annual Report on Form 10-K.
|
E.
|
Licenses
and Live Race Dates
|
The
following table is a summary of our live racing dates and the number of live
racing days for each of our six racetracks and Hollywood Park during the portion
of 2005 that it was under our ownership. Racing dates are generally approved
by
the respective state racing authorities:
|
2006
|
2005
|
||||||||
|
Racetrack
|
Racing
Dates
|
#
of Days
|
Racing
Dates
|
#
of Days
|
|||||
|
Churchill
Downs
|
|||||||||
|
Spring
Meet
|
April
29 - July 16
|
57
|
April
30 - July 10
|
52
|
|||||
|
Fall
Meet
|
Oct.
29 - Nov. 25
|
21
|
|
Oct.
30 - Nov. 26
|
21
|
||||
|
78
|
73
|
||||||||
|
Calder
Race Course
|
|||||||||
|
Calder
Meet
|
April
25 - Oct. 15
|
112
|
April
25 - Oct. 16
|
120
|
|||||
|
Tropical
Meet 05/06
|
Jan.
1 - Jan. 2
|
2
|
Jan.
1 - Jan. 2.
|
2
|
|||||
|
Tropical
Meet 06/07
|
Oct.
16 - Dec. 31
|
58
|
Oct.
17 - Dec. 31
|
53
|
|||||
|
172
|
175
|
||||||||
|
Arlington
Park
|
May
5 - Sept. 14
|
94
|
May
13 - Sept. 18
|
94
|
|||||
|
Ellis
Park
|
July
19 - Sept. 4
|
36
|
July
13 - Sept. 5
|
41
|
|||||
|
Hoosier
Park
|
|||||||||
|
Standardbred
Meet
|
April
1 - June 24
|
60
|
April
2 - June 25
|
61
|
|||||
|
Thoroughbred
Meet
|
Sept.
2 - Nov. 25
|
61
|
Sept.
3 - Nov. 25
|
57
|
|||||
|
121
|
118
|
||||||||
|
Fair
Grounds
|
|||||||||
|
Winter
Meet 04/05
|
Jan.
1 - March 27
|
61
|
|||||||
|
Winter
Meet 05/06*
|
Jan.
1 - Jan. 22
|
12
|
Nov.
19 - Dec. 31
|
25
|
|||||
|
Winter
Meet 06/07**
|
Nov.
23 - Dec. 31
|
23
|
|||||||
|
35
|
86
|
||||||||
|
Hollywood
Park
|
|||||||||
|
Spring/Summer
Meet
|
N/A
|
April
22 - July 17
|
64
|
||||||
*
Temporary
live race meeting conducted at Louisiana Downs.
**
Due
to
damage sustained by Hurricane Katrina, we have not yet determined whether live
racing will resume at Fair Grounds on its scheduled date.
Kentucky's
racetracks, including Churchill Downs and Ellis Park, are subject to the
licensing and regulation of the KHRA. The KHRA is responsible for overseeing
horse racing and regulating the state equine industry. Licenses to conduct
live
Thoroughbred race meets and to participate in simulcasting are approved annually
by the KHRA based upon applications submitted by the racetracks in Kentucky.
To
some extent Churchill Downs and Ellis Park compete with other racetracks in
Kentucky for the award of racing dates, however, the KHRA is required by state
law to consider and seek to preserve each racetrack's usual and customary live
racing dates. Generally, there is no substantial change from year to year in
the
racing dates awarded to each racetrack. For 2006, approximately one week of
live
racing was transferred from Ellis Park to Churchill Downs.
9
Return
to
Index
In Florida, licenses to conduct live Thoroughbred racing and to participate in simulcasting are approved by the Department of Business and Professional Regulation, Division of Pari-Mutuel Wagering ("DPW"). The DPW is responsible for overseeing the network of state offices located at every pari-mutuel wagering facility, as well as issuing the permits necessary to operate a pari-mutuel wagering facility. The DPW also issues annual licenses for Thoroughbred, Standardbred and Quarter Horse races.
In Florida, licenses to conduct live Thoroughbred racing and to participate in simulcasting are approved by the Department of Business and Professional Regulation, Division of Pari-Mutuel Wagering ("DPW"). The DPW is responsible for overseeing the network of state offices located at every pari-mutuel wagering facility, as well as issuing the permits necessary to operate a pari-mutuel wagering facility. The DPW also issues annual licenses for Thoroughbred, Standardbred and Quarter Horse races.
Calder
may face direct competition from other Florida racetracks, including Miami-area
racetracks, and may be subject to an increase or decrease in live racing dates
in the future. During 2006, Calder has opted to conduct eight fewer days of
live
racing in order to increase purses and maximize the quality of the racing
product.
During
December of 2005, Calder and Gulf Stream 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 DPW appealed the decision to the Florida
Supreme Court and, in mid-January of 2006, the Florida Supreme Court issued
a
stay ordering Calder to cease simulcast operations until the case is
decided.
In
Illinois, licenses to conduct live Thoroughbred racing and to participate in
simulcasting are approved by the Illinois Racing Board ("IRB"). Generally,
there
is no substantial change from year to year in the number of racing dates awarded
to each racetrack.
In
Indiana, licenses to conduct live Standardbred and Thoroughbred race meets,
including Quarter Horse races, and to participate in simulcasting are approved
annually by the Indiana Horse Racing Commission (“IHRC”) based upon applications
submitted by Indiana racetracks. Indiana law requires live racing for at least
120 days each year in order to simulcast races. A second racetrack in Indiana,
Indiana Downs, was opened on December 6, 2002, resulting in changes to Hoosier
Park's traditional racing dates. The addition of a second racetrack in Indiana,
located approximately 32 miles from Hoosier Park, also negatively impacts
Hoosier Park's share of the riverboat admissions revenue and creates an increase
in competition in the market. These factors have had an adverse impact on future
profitability of the facility.
In
Louisiana, licenses to conduct live Thoroughbred racing and to participate
in
simulcasting are approved by the Louisiana State Racing Commission ("LSRC").
The
LSRC is responsible for overseeing the awarding of licenses for the conduct
of
live race meets, the conduct of Thoroughbred horse racing, the types of wagering
which may be offered by pari-mutuel facilities and the disposition of revenue
generated from wagering. Off-track wagering is also regulated by the LSRC.
Louisiana law requires live racing for at least 80 days over a 20 week period
each year to maintain the license and to conduct alternative gaming. Failure
to
maintain the racing license would result in the loss of the alternative gaming
licenses. During 2005, the LSRC granted Fair Grounds a temporary license to
conduct live racing at Louisiana Downs following the aftermath of Hurricane
Katrina. The LSRC also relieved the minimum number of days required to race
under the license for the 2005-2006 race meeting.
The
manufacture, distribution, servicing and operation of video draw poker devices
("Devices") in Louisiana are subject to the Louisiana Video Draw Poker Devices
Control Law and the rules and regulations promulgated thereunder (the "Louisiana
Act"). Licensing and regulatory control is maintained by a single gaming control
board for the regulation of gaming in Louisiana. This Board, created on May
1,
1996, is called the Louisiana Gaming Control Board (the "Louisiana Board")
and
oversees all licensing for all forms of legalized gaming in Louisiana (including
all regulatory enforcement and supervisory authority that exists in the state
as
to gaming on Native American lands). The Video Gaming Division of the Gaming
Enforcement Section of the Office of the State Police within the Department
of
Public Safety and Corrections (the "Division") performs the investigative
functions for the Louisiana Board. The laws and regulations of Louisiana are
based on policies of maintaining the health, welfare and safety of the general
public and protecting the video gaming industry from elements of organized
crime, illegal gambling activities and other harmful elements, as well as
protecting the public from illegal and unscrupulous gaming to ensure the fair
play of devices.
The
total
number of days on which each racetrack conducts live racing fluctuates annually
according to each calendar year. A substantial change in the allocation of
live
racing days at any of our six racetracks could significantly impact our
operations and earnings in future years.
10
|
F.
|
Competition
|
Competition
with other racetracks or OTBs for live, on-track patron attendance depends
upon
the geographic separation of facilities or differences in seasonal timing of
meets. We believe that a new OTB opened in Evansville, Indiana by a competitor
has had a negative impact on Ellis Park. Also, we believe that an OTB opened
in
Clarksville, Indiana in 2004 has had a negative impact on Churchill Downs
racetrack and simulcast operations. In addition, Calder competes directly with
other Miami-based racetracks. The Miami-based pari-mutuel wagering facilities
located in Broward County have received authorization to operate slot machines.
The timing of the operation of slot machines at those facilities is uncertain
at
this time. The Hoosier Park market has also had an increase in competition
with
the opening of Indiana Downs. In addition, we may face competition from other
racetracks for live racing days. We face competition from a variety of sources
for discretionary consumer spending including spectator sports and other
entertainment and gaming options, including riverboat casinos, racetracks that
offer casino-style gaming, cruise ships with casinos, land-based casinos and
state lotteries. Additionally, the industry faces increasing competition for
overall wagering dollars from Internet wagering services, which are often
established off-shore and avoid regulation under U.S. state and federal
laws.
There
are
currently five riverboat casinos operating on the Ohio River along Kentucky's
border and five riverboat casinos operating along the Indiana shore of Lake
Michigan, and an 11th
casino
approved for construction in Orange County, Indiana. Another four riverboat
casinos are situated in Illinois near Chicago. There are also Native American
gaming operations in Wisconsin and Florida, which have drawn patrons from the
Arlington Park and Calder Race Course markets, respectively. Fair Grounds
competes in the New Orleans area with three riverboat casinos, one land-based
casino and video poker operations located at various truck stops and
restaurants. These competitors have been adversely impacted by Hurricane
Katrina, and their reestablishment is uncertain at this time.
In
response to the continued increased competition from other gaming options,
the
horse racing industry continues to search for new sources of revenue. Several
recent developments are anticipated to be key contributors to overall growth
within the industry. The repeal of a Federal withholding tax on foreign wagers
removes an impediment for U.S. racetracks seeking to penetrate international
markets. Other developments focus on increasing the core customer base and
developing new fans through new technology to increase the distribution of
racing content, and through developing better identification of existing
customers to increase revenues from existing sources. Finally, the industry
continues to seek additional ways to draw new and existing customers to live
racing venues. Each of these developments is highly dependent on the regulatory
environment and legal developments within individual state
jurisdictions.
Alternative
Gaming
The
National Thoroughbred Racing Association (“NTRA”), the representative body for
the racing industry, supports the alternative gaming movement at racetracks
and
is working with regulators and legislators to pass alternative gaming
legislation. Alternative gaming refers to the operation of slot machines or
electronic gaming devices within a racing facility or OTB. In general, the
NTRA
and the racing industry believe that alternative gaming will result in the
following benefits:
| · |
Higher
racetrack revenues and purse levels with pass through benefits to
breed
developers and breeding farms;
|
| · |
Increased
tax revenues for states and local municipalities;
and
|
| · |
Increased
attendance at live track facilities driven primarily by "casual fans,"
or
those who are patrons of traditional gaming operations such as casinos
but
are not racing customers.
|
11
|
G.
|
Legislative
Changes
|
Federal
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 Wire
Act,
the Travel Act and the Illegal Gambling Business Act against foreign companies
violated the General Agreement on Trade in Services ("GATS"). In November of
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 of 2005, the WTO's appellate body ruled that the United States had
demonstrated that the Wire Act, the Travel Act and the Illegal Gambling Business
Act 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, 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, applies equally
to domestic companies and foreign companies and the Interstate Horseracing
Act
does not create an exception for domestic companies to accept Internet wagering
on horseracing. The WTO's appellate body did not rule on whether an exception
was created, but recommended that the WTO's Dispute Settlement Body request
the
United States bring measures found to be inconsistent with GATS into conformity
with its obligations with GATS. The United States has until April 3, 2006,
to
bring its policies in line with the ruling, assuming it believes any changes
are
necessary. The effect of this ruling on the ability of domestic companies to
accept Internet wagers and other account wagers on horse racing is unclear.
The
NTRA, on behalf of its members, including Churchill Downs Incorporated, is
currently in discussions with the U.S. Trade Representative on various
alternatives the United States may choose to take both administratively and
legislatively in the wake of the appellate ruling.
Indiana
During
April of 2005, Senate Enrolled Act 92 ("SEA 92"), a bill that makes it a Class
D
Felony for an operator to use the Internet to engage in unlawful gambling in
Indiana or with a person located in Indiana, passed both chambers of the Indiana
General Assembly and was signed by the Governor. An "operator", as defined
by
SEA 92, is a person who owns, maintains or operates an Internet site that is
used for interactive gambling. Under SEA 92, effective July 1, 2005, an operator
is guilty of professional gambling if it uses the Internet to accept, or offer
to accept, for profit, money or other property risked in gambling in Indiana
or
in a transaction directly involving a person located in Indiana. We receive
source market fees from various in-home wagering providers for the licensing
of
our live racing products in the distribution of such products through broadcast
mediums such as television or the Internet. TVG, one of our major in-home
providers in Indiana, ceased operations in Indiana due to legal uncertainty.
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. Although the measure passed in Broward County, home of
Gulfstream Park, it was unsuccessful in Miami-Dade County, where Calder 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 at Broward's four pari-mutuels in early summer of
2006.
We believe that the failure of the local referendum to pass in Miami-Dade County
was due primarily to Governor Bush's active opposition to the measure during
the
final days of the campaign. We are preparing a strategy to seek passage in
Miami-Dade County when the issue can again be placed on the ballot. The earliest
that it can be placed on the ballot is 2007. We are currently determining when
it can be placed on the ballot. The impact on our results of operations and
financial position of the failed referendum in Miami-Dade County and the
operation of slot machines at pari-mutual wagering facilities in Broward County
is uncertain at this time.
12
Return to IndexIllinois
Pursuant
to the Illinois Horse Racing Act, Arlington Park (and all other Illinois
racetracks) is 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. As the legal right still exists, Arlington Park has elected to
continue 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.
Arlington
Park is entitled under law to share in the proceeds of the Illinois Horse
Racing
Equity Fund. The Illinois Horse Racing Equity Fund is to be funded by the
10th
riverboat license issued in Illinois at a rate of 15% of the adjusted gross
receipts. The grant of the 10th
riverboat license is currently the subject of numerous legal challenges and,
as
such, is currently not an operational riverboat license. At such time should
the
10th
riverboat license in Illinois be granted and a riverboat become operational,
Arlington Park would be entitled to receive additional revenue, which could
be
significant. As an alternative, a proposal has been made during the 2006
Spring
session of the Illinois legislature that would direct 3% of adjusted gross
receipts from most riverboat casinos to be placed into the Illinois Horse
Racing
Equity Fund. All Illinois racetracks and horsemen groups support the proposal.
The riverboat casinos are lobbying against the proposal.
During
January and February when there is no live racing in Illinois, the IRB
designates a Thoroughbred racetrack as the host track in Illinois. The IRB
appointed Arlington Park as the host track in Illinois during January 2005,
which resulted in pari-mutuel revenues comparable to the same period in 2004.
The IRB did not appoint Arlington Park as the host track in Illinois for
February 2005, which resulted in a decrease of $1.8 million in pre-tax earnings
for the month of February of 2005 compared to the same period of 2004. The
IRB
appointed Arlington Park the host track in Illinois during January 2006 for
29
days, which is the same as January 2005. In addition, Arlington Park was
appointed the host track for eight days during February of 2006. Arlington
Park's future designation as the host track is subject to the annual appointment
by the IRB. A change in the number of days that Arlington Park is designated
"host track" could have an 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 racetracks to better compete with neighboring
gaming venues by providing substantial new revenues for purses and capital
improvements. Several alternative gaming bills have been filed in the 2006
session of the Kentucky General Assembly, including two bills filed in
the House
and in the Senate. The Kentucky Equine Education Project ("KEEP"), an alliance
of the Commonwealth's equine industry leaders, including our Company, supports
legislation that calls 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. The Commonwealth's share of the new revenue would be earmarked
for education, healthcare, local development and environmental concerns
benefiting the entire Commonwealth under the KEEP plan. The Senate President
has
continued to be publicly opposed to alternative gaming. The Governor, on
the
other hand, states that he would not stop legislation authorizing alternative
forms of gaming if it were passed by the House and Senate, but he continues
to
publicly question the economics. Legislation is not expected to successfully
pass during the 2006 legislative session.
Louisiana
We
have
received statutory, regulatory and other authorizations to operate slot machines
at Fair Grounds. Failure to maintain the necessary gaming licenses to own and
operate slot machines at Fair Grounds could have a material, adverse impact
on
our results of operations. Under the Louisiana statute, Fair Grounds may operate
500 slot machines. As a result of Hurricane Katrina, the agreement between
Harrah's Casino in New Orleans and the State of Louisiana has been amended
to
eliminate the $350.0 million gaming revenue threshold before Fair Grounds may
operate 700 slot machines. Fair Grounds is currently pursuing a conforming
statutory amendment. Due to Hurricane Katrina, we are currently evaluating
the
feasibility of beginning construction of a new slot facility.
Churchill
Downs Louisiana Horseracing Company, LLC has completed the process to seek
the
necessary local zoning change and permits. On August 18, 2005, the New Orleans
City Council passed ordinances approving hours of operation for slot machines
at
Fair Grounds as part of its conditional use permit. The ordinances also
established additional provisos negotiated by Churchill Downs Louisiana
Horseracing Company, LLC and the New Orleans City Council relating to other
conditional use activities.
In
April
2005, the New Orleans City Council instructed the city attorney to file a
declaratory judgment action to determine if installation of slot machines at
Fair Grounds would violate the City Charter. The Louisiana Attorney General
has
expressed an opinion that the addition of slots at the racetrack would not
violate the City Charter. In June 2005, a resident living near Fair Grounds
filed a lawsuit alleging, among other claims, that slot machines at the
racetrack
would be a violation of the City Charter, which limits New Orleans to one
land-based casino. Based upon an opinion from the Louisiana Attorney General
and
other legal advice, we do not believe the installation of slot machines at
Fair
Grounds violates the City Charter.
California
In
California, Hollywood Park was part of a coalition of racetracks and card clubs
supporting Proposal 68 on the November 2004 ballot. The proposal failed to
pass
by a margin of 16% to 84%. If passed, this initiative would have directed the
governor to renegotiate all existing compacts with Native American tribes in
California. If the tribes had declined to renegotiate the existing compacts,
then five racetracks, including Hollywood Park, and 11 card clubs would have
been allowed to operate electronic gaming devices. We continue to work with
other members of the California horse industry on a long-term strategy for
developing a legislative agenda that addresses the competitive advantages
afforded to Native American casinos due to the fact that we entered into a
reinvestment agreement related to the Hollywood Park Racetrack business in
accordance with the sale of the assets of Hollywood Park (as more fully
described in Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”).
Additional
information regarding how our facilities could be impacted by legislative
changes is included in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of this Annual Report on Form
10-K.
|
H.
|
Environmental
Matters
|
The
septic system at our Ellis Park facility must be replaced with a hook-up to
city
sewers. The project is currently being evaluated by assessing the benefits
of
different options for remediation. It is unknown at this time when the project
will begin or what the ultimate cost to the Company will be, but once the
project occurs, it is estimated that the cost will exceed $1.5
million.
It
is not
anticipated that we will have any material liability as a result of
non-compliance with environmental laws with respect to any of our properties.
Compliance with environmental laws has not materially affected the ability
to
develop and operate our properties and we are not otherwise subject to any
material compliance costs in connection with federal or state environmental
laws.
14
Return to Index|
I.
|
Service
Marks
|
We
hold
numerous state and federal service mark registrations on specific names and
designs in various categories including the entertainment business, apparel,
paper goods, printed matter and house wares and glass. We license the use of
these service marks and derive revenue from such license
agreements.
|
J.
|
Employees
|
As
of
December 31, 2005, we employed approximately 1,350 full-time employees
Company-wide. Due to the seasonal nature of our live racing business, the number
of seasonal and part-time persons employed will vary throughout the year. During
2005, average full-time and seasonal employment per pay period was approximately
2,550 individuals Company-wide.
|
K.
|
Internet
Access
|
Copies
of
our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 are available
free of charge on or through our website (www.churchilldownsincorporated.com)
as soon
as reasonably practicable after we electronically file the material with, or
furnish it to, the Securities and Exchange Commission.
|
ITEM
1A.
|
Risks
Related to the Company
In
addition to risks and uncertainties in the ordinary course of business that
are
common to all businesses, important factors that are specific to our industry
and company could materially impact our future performance and results. The
factors described below are the most significant risks that could materially
impact our business, financial condition and results of operations. Additional
risks and uncertainties that are not presently known to us, that we currently
deem immaterial or that are similar to those faced by other companies in our
industry or business in general may also impair our business and operations.
Should any risks or uncertainties develop into actual events, these developments
could have a material, adverse impact on our business, financial condition
and
results of operations.
Competition
We
operate in a highly competitive industry. While some of our facilities do not
compete directly with other racetracks or OTBs for live, on-track patron
attendance due to geographic separation of facilities or differences in seasonal
timing of meetings, other of our facilities compete with other racetracks and
off-track wagering facilities, some of which offer alternative forms of gaming,
such as slot machines, that provide these facilities with the advantage of
additional entertainment options. For example, Hoosier Park's market experienced
an increase in competition when Indiana Downs, another racetrack, opened near
Hoosier Park, and Indiana Downs' OTBs in Evansville and Clarksville, Indiana
have had a negative impact on patron attendance at Ellis Park and Churchill
Downs and their simulcast operations, respectively. In Florida, Calder Race
Course may face competition directly from other Miami-based racetracks in the
future.
There
has
been a general decline in the number of people attending and wagering on live
horse races at North American racetracks due to a number of factors, including
increased competition discussed above, unwillingness of customers to travel
a
significant distance to racetracks and the increasing availability of off-track
wagering. Declining attendance at live horse racing events has prompted
racetracks to rely increasingly on revenues from inter-track, off-track and
account wagering markets. The industry-wide focus on inter-track, off-track
and
account wagering markets has increased competition among racetracks for outlets
to simulcast their live races. A continued decrease in attendance at live events
and in on-track wagering, as well as increased competition in the inter-track,
off-track and account wagering markets, has lead to a decrease in the amount
wagered at our facilities and on races conducted at our racetracks and may
materially, adversely impact our business, financial condition, results of
operation and prospects.
15
Return to IndexAn
apparent decline in the popularity of horse racing, as evidenced by decreased
industry handle generated during 2005, could adversely impact our business.
The
continued popularity of horse racing is important to our growth plans and our
operating results. Our business plan anticipates attracting new customers to
our
racetracks and OTBs and off-track betting facilities. Even if we are successful
in making acquisitions and expanding and improving our current operations,
we
may not be able to attract a sufficient number of new customers to achieve
our
business plan. Public tastes are unpredictable and subject to change. Any
decline in the interest in horse racing or any change may adversely impact
our
revenues and, therefore, our results of operations. Declining on-track
attendance and increasing competition in simulcasting may have a material,
adverse impact on our results of operations.
We
also
compete for patrons with other sports, entertainment and gaming operations,
including land-based, riverboat, cruise ship and Native American casinos and
state lotteries.
While
we
currently receive revenues from wagering activity on our racing content over
certain third party account wagering sites, we face competition from gaming
companies that operate on-line and Internet-based gaming services. These
services allow patrons to wager on a wide variety of sporting events from home.
Unlike most on-line and Internet-based gaming companies, our business requires
significant and ongoing capital expenditures for both its continued operation
and expansion. We also could face significantly greater costs in operating
our
business compared to these gaming companies. We cannot offer the same number
of
gaming options as on-line and Internet-based gaming companies. In addition,
many
on-line and Internet gaming companies are based off-shore and avoid regulation
under U.S. state and federal laws. These companies may divert wagering dollars
from legitimate wagering venues such as our racetracks. Competition in the
gaming industry is likely to increase due to limited opportunities for growth
in
new markets. Our inability to compete successfully with these competitors could
have a material, adverse affect on our business.
We
Face Extensive Regulation from Various Authorities
The
operation of pari-mutuel wagering and gaming facilities is subject to extensive
state and local regulation. We depend on continued state approval of legalized
gaming in states where we operate. Our wagering and racing facilities must
meet
the licensing requirements of various regulatory authorities, including the
KHRA, the IHRC, the Florida DPW, the LSRC, the Louisiana Board and the IRB.
In
Louisiana, our gaming operations must meet the licensing requirements of the
Louisiana Gaming Control Board. As part of this regulatory framework, licenses
to conduct live horse racing and to participate in simulcast wagering are
granted annually, and gaming licenses in Louisiana are granted every five years.
To date, we have obtained all governmental licenses, registrations, permits
and
approvals necessary for the operation of our racetracks and gaming facilities.
However, we may be unable to maintain our existing licenses. In Louisiana,
gaming licenses are contingent upon maintaining the racing license, and we
must
conduct 80 live race days within a 20 week period in order to maintain the
racing license. In Indiana, we must conduct 120 live race days in order to
conduct simulcasting. The loss of or material change in our licenses,
registrations, permits or approvals may materially limit the number of races
we
conduct and could have a material, adverse impact on our results of operations.
The high degree of regulation in the gaming industry is a significant obstacle
to our growth strategy.
Potential
Changes in Legislation and Regulation of Our Operations
Our
gaming operations exist at the discretion of the states where we conduct
business. Certain aspects of our gaming operations are also subject to federal
statutes or regulations. All of our pari-mutuel wagering operations are
contingent upon continued governmental approval of those operations as forms
of
legalized gaming. Legislation to limit or prohibit gaming (pari-mutuel or
non-pari-mutuel) may be introduced in the future. Any restriction on or
prohibition of gaming operations could have a material, adverse impact on our
results of operations. In addition, any expansion of our gaming operations
into
alternative gaming, such as slot machines, video lottery terminals and other
forms of non-pari-mutuel gaming, will likely require various additional
licenses, registrations, permits and approvals. The approval process can be
time-consuming and costly, and there is no assurance of success. We have and
continue to seek legal authority to offer alternative gaming at our racetracks
where alternative gaming is not currently permitted.
16
The
Indiana horse racing industry currently receives a subsidy from riverboat
casinos. Currently the subsidy is distributed as follows: 40% for purse
expenses, 20% for breed development and 40% for the two existing racetrack
operators, which is divided equally. During March of 2006, the IHRC approved
“Integrity ’06,” a program designed to improve the integrity of horse racing in
Indiana that is effective April 1, 2006. The estimated cost of complying with
the rules and regulations created by “Integrity ‘06” will be financed by the two
existing racetrack operators in Indiana using the subsidy paid by riverboat
casinos, which is estimated to be 2% of the total subsidy. As a result,
beginning April 1, 2006, the subsidy will be distributed as follows: 39.2%
for
purse expenses, 19.6% for breed development and 41.2% for the two existing
racetrack operators, which is divided equally. Any change in this arrangement
could adversely impact our operations in Indiana and the value of this
operation.
In
Illinois, the IRB has the authority to designate racetracks as "host track"
for
the purpose of receiving host track revenues generated during periods when
no
racetrack is conducting live races. Racetracks that are designated as "host
track" obtain and distribute out of state simulcast signals for the State of
Illinois. Under Illinois law, the "host track" is entitled to a larger portion
of commissions on the related pari-mutuel wagering. Failure to designate
Arlington Park as "host track" during this period could have an adverse impact
on our results of operations. In addition, Arlington Park is statutorily
entitled to recapture as revenues monies that are otherwise payable to Arlington
Park's purse account. The right to recapture these revenues is subject to change
every legislative session.
These
statutory or regulatory established revenue sources are subject to change every
legislative session. The reduction or elimination of any one of them could
have
a material, adverse impact on our results of operations. In addition, certain
revenue sources are dedicated by legislation or regulation and may be subject
to
change.
The
passage of legislation permitting alternative gaming at racetracks can be a
long
and uncertain process. As a result, there can be no assurance that (1)
jurisdictions in which we own or operate racetracks will pass legislation
permitting alternative gaming, (2) if jurisdictions pass such legislation,
it
will be permitted at our racetracks, and (3) if alternative gaming is permitted
at our racetracks, it will be on economically viable terms. If alternative
gaming legislation is enacted in any jurisdiction where we own or operate a
racetrack and we proceed to conduct alternative gaming, there may be significant
costs and other resources to be expended and there will be significant risks
involved, including the risk of changes in the enabling legislation, that may
have a material, adverse impact on that racetrack's results of
operations.
We
May
Not be Able to Attract Quality Horses and Trainers
To
provide high quality horse racing, we must attract the country's top horses
and
trainers. Our success in attracting the top horses and trainers largely depends
on the overall horse population available for racing and our ability to offer
and fund competitive purses. Various factors have led to declines in the horse
population in certain areas of the country, including competition from
racetracks in other areas and Mare Reproductive Loss Syndrome ("MRLS") which
caused a large number of mares in Kentucky to sustain late term abortions or
early embryonic loss in 2001. With respect to MRLS, the number of foals
registered in 2005 was the same as the number registered in 2004, indicating
a
stabilization of the foal crop. The number of Thoroughbreds registered has
an
impact on the number of horses available to participate in live racing. The
stabilization of bloodstock sales during 2005 is primarily attributed to an
improving economy, favorable tax law changes for horse purchasers and the
strength of foreign currencies against the U.S. dollar which helped drive
increased participation by overseas buyers. We also face increased competition
for horses and trainers from racetracks that are licensed to operate slot
machines and other electronic gaming machines that provide these racetracks
an
advantage in generating new additional revenues for race purses and capital
improvements.
Any
decline in the number of suitable race horses could prevent us from attracting
top horses and trainers and may require us to reduce the number of live races
we
present. A reduction in suitable race horses could force us to increase the
size
of our purses or other benefits we offer, to conduct fewer races or to accept
horses of a lower quality.
17
We
Experience Significant Seasonal Fluctuations in Operating
Results
We
experience significant fluctuations in quarterly and annual operating results
due to seasonality and other factors. We have a limited number of live racing
days at our racetracks, and the number of live racing days varies from year
to
year. The number of live racing days we can offer directly affects our operating
results. A significant decrease in the number of live racing days and/or live
races could have a material, adverse impact on our results of operations. Our
live racing schedule dictates that we earn a substantial portion of our net
earnings in the second quarter of each year, when the Kentucky Derby and the
Kentucky Oaks races are run over the first weekend in May. Business
interruption, such as weather conditions, could affect our ability to conduct
our material races. Any adverse impact on our races, including the Kentucky
Derby, the Kentucky Oaks and the key races at our other tracks could have a
material, adverse impact on our results of operations.
Our
Business Depends on Providers of Totalisator Services
In
purchasing and selling our pari-mutuel wagering products, our customers depend
on information provided by United Tote Company, Scientific Games Racing and
AmTote International, Inc. These totalisator companies
provide the computer systems that accumulate wagers, record sales, calculate
payoffs and display wagering data in a secure manner. These are the only three
major vendors that provide this service in North America. The loss of any one
of
these vendors as a provider of this critical service would decrease competition
and could result in an increase in the cost to obtain these services. Because
of
the highly specialized nature of these services, replicating these totalisator
services would be expensive.
In
addition, we rely upon the totalisator company's computer systems to ensure
the
integrity of our wagering process. A perceived lack of integrity in the wagering
systems could result in a decline in bettor confidence and could lead to a
decline in the amount wagered on horse racing. The failure of totalisator
companies to keep their technology current could limit our ability to serve
patrons effectively or develop new forms of wagering and/or affect the security
of the wagering process, thus affecting patron confidence in our
product.
We
May
be Held Responsible for Contamination, Even if We Did Not Cause the
Contamination
Our
business is subject to a variety of federal, state and local governmental laws
and regulations relating to the use, storage, discharge, emission and disposal
of hazardous materials. In addition, environmental laws and regulations could
hold us responsible for the cost of cleaning up hazardous materials
contaminating real property that we own or operate or properties at which we
have disposed of hazardous materials, even if we did not cause the
contamination. We believe that we are currently in compliance with the
applicable environmental laws and have no material cleanup obligations. However,
if we fail to comply with environmental laws or if contamination is discovered,
a court or government agency could impose severe penalties or restrictions
on
our operations or assess us with the costs of taking remedial
actions.
Inclement
Weather and Other Conditions
Since
horse racing is conducted outdoors, unfavorable weather conditions, including
extremely high and low temperatures, storms, tornadoes and hurricanes, could
cause races to be cancelled and/or wagering to suffer. Our operations are
subject to reduced patronage, disruptions or complete cessation of operations
due to severe weather conditions, natural disasters and other casualties. During
2005, we sustained disruption to our operations at Calder Race Course in
Florida, Fair Grounds Race Course and our OTB locations in Louisiana, and Ellis
Park in Kentucky due to the damage caused by hurricanes and a tornado. Although
we were able to run a shortened Fair Grounds race meet at another location,
this
facility remains closed due to the extent of the damage suffered from Hurricane
Katrina. The timing of the re-opening of this facility and three of the OTBs
in
Louisiana remains uncertain. We are also restoring Ellis Park for operation
of
its 2006 summer meet. Any flood or other severe weather condition that could
lead to the loss of use of our other facilities for an extended period could
have a material, adverse impact on our results of operations.
We
May
Not be Able to Complete Acquisition or Expansion Projects on Time, on Budget
or
As Planned
We
expect
to pursue expansion and acquisition opportunities, and we regularly evaluate
opportunities for development, including acquisition of other properties and
ways to expand our business operations, which evaluations may include
discussions and the review of confidential information after the execution
of
nondisclosure agreements with potential acquisition candidates and/or
development partners.
18
Return to IndexWe
could
face challenges in identifying development projects that fit our strategic
objectives, identifying potential acquisition candidates and/or development
partners, negotiating projects on acceptable terms, and managing and integrating
the acquisition or development projects. The integration of new operations
and
any other properties we may acquire or develop will require the dedication
of
management resources that may temporarily divert attention from our day-to-day
business. The process of integrating new properties or projects may also
interrupt the activities of those businesses, which could have a material,
adverse impact on our business, financial condition and results of operations.
We cannot assure that any new properties or developments will be completed
or
integrated successfully.
Management
of new properties or business operations, especially in new geographic areas,
may require that we increase our managerial resources. We cannot assure that
we
will be able to manage the combined operations effectively or realize any of
the
anticipated benefits of our acquisitions or developments.
We
Depend on Agreements with Our Horsemen
The
U.S.
Interstate Horseracing Act of 1978, as well as various state racing laws,
require that we have written agreements with the horsemen at our racetracks
in
order to simulcast races, and in some cases conduct live racing. We also have
written agreements with horse owners with regards to the proceeds of gaming
machines in Louisiana. The failure to maintain agreements with our horsemen
and
industry associations on satisfactory terms could have a material, adverse
impact on our results of operations.
We
Depend on Key Personnel
We
are
highly dependant on the services of Thomas H. Meeker, our President and Chief
Executive Officer, and other members of our senior management team. We have
initiated a formal succession plan to hire the successor to Mr. Meeker who
plans
to retire from the Company when his employment contract expires in March of
2007. Our inability to successfully replace Mr. Meeker and hire and retain
key
personnel could have a material, adverse impact on our results of operations.
We
May
Not be Able to Adequately Insure Our Properties
The
significant damage and resulting insurance claims caused by (i) Hurricane
Katrina to the New Orleans, Louisiana area and our Fair Grounds facility and
OTBs; (ii) Hurricane Wilma to South Florida and our Calder Race Course facility;
and (iii) a tornado that struck our Ellis Park facility, will increase the
costs
of obtaining property coverage for our facilities and significantly impact
our
ability to obtain and maintain adequate property coverage at our facilities.
Our
ability to obtain and maintain adequate property coverage at reasonable prices
could have a material, adverse impact on our results of operations.
Other
Risks
Many
other risks beyond our control could seriously disrupt our operations,
including:
• 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 interest rate fluctuations;
•
The
financial performance of our racing operations;
•
Costs
associated with our efforts in support of alternative gaming
initiatives;
•
Costs
associated with Customer Relationship Management initiatives; and
•
Our
accountability for environmental contamination.
|
ITEM
1B.
|
None.
19
|
ITEM
2.
|
Information
concerning property owned by us required by this Item is incorporated by
reference to the information contained in Item 1. "Business" of this
Report.
Our
real
and personal property (but not including the property of Hoosier Park, CDSP,
KOTB, NASRIN or Kentucky Downs) is encumbered by liens securing our $200 million
revolving line of credit facility. The shares of stock of and ownership
interests in certain of our subsidiaries are also pledged to secure this debt
facility.
The
Kentucky Derby Museum is located on property that is adjacent to, but not owned
by, Churchill Downs. The Museum is owned and operated by the Kentucky Derby
Museum Corporation, a tax-exempt organization under Section 501(c)(3) of the
Internal Revenue Code of 1986.
|
ITEM
3.
|
LEGAL
PROCEEDINGS
|
On
March
2, 2005, the Company commenced litigation in the United States District Court
for the Western District of Kentucky against the Jockey's Guild, a trade
organization associated with many of the jockeys who race at the Company's
tracks. The case was filed due to certain actions by the Jockey's Guild at
certain of the Company's tracks that interfered with the Company's operations.
In the case, the Company asserts claims under the antitrust laws and seeks
injunctive relief along with damages. The Jockey Guild has filed a counterclaim
asserting various claims, including claims for alleged violations of the
antitrust laws by the Company, and seeks injunctive relief along with
damages.
There
are
no other material pending legal proceedings, other than ordinary routine
litigation incidental to our business, to which we are a party or of which
any
of our property is the subject and no such proceedings are known to be
contemplated by governmental authorities.
No
matter
was submitted to a vote of our shareholders during the fourth quarter of the
fiscal year covered by this report.
|
ITEM
5.
|
Our
common stock is traded on the NASDAQ National Market under the symbol CHDN.
As
of March 8, 2006, there were approximately 3,744 shareholders of
record.
The
following table sets forth the high and low sale prices, as reported by NASDAQ,
and dividend payment information for our common stock during the last two
years:
|
2005
- By Quarter
|
2004
- By Quarter
|
|||||||||
|
1st
|
2nd
|
3rd
|
4th
|
1st
|
2nd
|
3rd
|
4th
|
|||
|
High
Sale
|
$48.30
|
$45.63
|
$48.40
|
$39.19
|
$40.02
|
$40.95
|
$40.73
|
$47.61
|
||
|
Low
Sale
|
$36.99
|
$36.58
|
$32.91
|
$31.07
|
$34.79
|
$35.51
|
$33.76
|
$33.31
|
||
|
Dividend
per share:
|
$0.50
|
$0.50
|
||||||||
We
presently expect that comparable annual cash dividends (adjusted for any stock
splits or other similar transactions) will continue to be paid in the
future.
20
The
following table provides information with respect to shares of common stock
repurchased by the Company during the quarter ended December 31,
2005:
|
Period
|
Total
Number of
Shares
Purchased
|
Average
Price
Paid
Per Share
|
Total
Number of
Shares
Purchased
as
Part of Publicly Announced Plans
or
Programs
|
Approximate
Dollar
Value
of Shares That
May
Yet Be
Purchased
Under the
Plans
or Programs
|
|||
|
Period
1
|
|||||||
|
10/1/05
- 10/31/05
|
-
|
-
|
-
|
-
|
|||
|
Period
2
|
|||||||
|
11/1/05
- 11/30/05
|
5,456
(1)
|
$36.30
|
-
|
-
|
|||
|
Period
3
|
|||||||
|
12/1/05
- 12/31/05
|
-
|
-
|
-
|
-
|
|||
|
Total
|
5,456
|
$36.30
|
-
|
-
|
|
(1)
|
Shares
of common stock were acquired from a stock option plan participant
in
payment of the exercise price on exercised stock
options.
|
21
|
ITEM
6.
|
|
(In
thousands, except per share data)
|
Years
ended December 31,
|
||||||||||||||||||
|
2005
|
2004
|
2003
|
2002
|
2001
|
|
||||||||||||||
|
Operations:
|
|||||||||||||||||||
|
Net
revenues
|
$408,801
|
$361,187
|
$348,505
|
$356,886
|
$341,333
|
||||||||||||||
|
Operating
income
|
$20,887
|
$24,583
|
$37,066
|
$31,496
|
$37,279
|
||||||||||||||
|
Net
earnings from continuing operations
|
$12,810
|
$9,769
|
$23,308
|
$17,528
|
21,904
|
||||||||||||||
|
Discontinued
operations, net of income taxes
|
$66,098
|
$(854
|
)
|
$71
|
2,107
|
$(364
|
)
|
||||||||||||
|
Net
earnings
|
$78,908
|
$8,915
|
$23,379
|
$19,635
|
$21,540
|
||||||||||||||
|
Basic
net earnings from continuing operations per common share
|
$0.98
|
$0.74
|
$1.77
|
$1.35
|
$1.67
|
||||||||||||||
|
Basic
net earnings per common share
|
$5.92
|
$0.67
|
$1.77
|
$1.50
|
$1.65
|
||||||||||||||
|
Diluted
net earnings from continuing operations per common share
|
$0.96
|
$0.73
|
$1.74
|
$1.31
|
$1.66
|
||||||||||||||
|
Diluted
net earnings per common share
|
$5.86
|
$0.67
|
$1.75
|
$1.47
|
$1.63
|
||||||||||||||
|
Annual
dividends paid per common share
|
$0.50
|
$0.50
|
$0.50
|
$0.50
|
$0.50
|
||||||||||||||
|
Balance
Sheet Data at Period End:
|
|||||||||||||||||||
|
Total
assets
|
$514,542
|
$642,277
|
$502,910
|
$467,934
|
$473,418
|
||||||||||||||
|
Working
capital (deficiency) surplus
|
$(35,929
|
)
|
$115,081
|
$91,169
|
$111,805
|
$107,251
|
|||||||||||||
|
Long-term
debt
|
$33,793
|
$242,770
|
$126,836
|
$123,348
|
$133,348
|
||||||||||||||
|
Other
Data:
|
|||||||||||||||||||
|
Shareholders'
equity
|
$316,231
|
$238,428
|
$251,350
|
$232,130
|
$215,702
|
||||||||||||||
|
Shareholders'
equity per common share
|
$24.08
|
$18.48
|
$18.97
|
$17.64
|
$16.47
|
||||||||||||||
|
Additions
to racing plant and equipment, exclusive of business acquisitions,
net
|
$43,238
|
$77,172
|
$40,855
|
$22,723
|
$14,626
|
||||||||||||||
22
The
selected financial data presented above is subject to the following
information:
|
(1)
|
During
2005, the Company recognized a gain of $69.9 million, net of income
taxes,
on the sale of the assets of Hollywood
Park.
|
|
(2)
|
During
2004, the Company recorded a $4.3 million loss representing an unrealized
loss on derivative instruments embedded in a convertible promissory
note,
a $1.6 million gain on the sale of our 19% interest in Kentucky Downs
and
a $6.2 million asset impairment loss recorded to write down the assets
of
Ellis Park (part of our Kentucky Operations segment) to its estimated
fair
value.
|
|
(3)
|
During
2003, the Company recorded a $4.1 million gain related to an Illinois
real
estate tax settlement. The amount recorded, net of attorney's fees
and
other reductions, approximates $3.1 million reflected as a reduction
in
operating expenses and $1.0 million in earned interest income.
|
|
(4)
|
During
2002, an asset impairment loss of $4.5 million was recorded to write
down
the assets of Ellis Park (part of our Kentucky Operations segment)
to
their estimated fair value.
|
|
(5)
|
On
January 1, 2002, we adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" which required us
to
discontinue the amortization of goodwill. In 2001, goodwill amortization
amounted to $1.4 million.
|
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 Annual Report on Form 10-K 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 those factors
described in Item 1A, “Risk Factors” of this Annual Report on Form
10-K.
You
should read this discussion with the financial statements and other financial
information included in this report. Our significant accounting polices are
described in Note 1 to the Consolidated Financial Statements included in Item
8
of this Annual Report on Form
10-K.
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 as well as alternative gaming
through 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, and Ellis Park Race Course, Inc., a Thoroughbred
racing operation in Henderson, Kentucky (collectively referred to as "Kentucky
Operations"). We also own and operate Arlington Park, a Thoroughbred racing
operation in Arlington Heights, Illinois; and Calder Race Course, a Thoroughbred
racing operation in Miami Gardens, Florida. During October 2004, we purchased
the assets of Fair Grounds Race Course ("Fair Grounds"), a Thoroughbred racing
operation in New Orleans, Louisiana and the stock of Video Services Inc.
("VSI"), the owner and operator of more than 700 video poker machines in
Louisiana. 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 23
simulcast wagering facilities in Kentucky, Indiana, Illinois and Louisiana,
as
well as at our six racetracks.
23
Return to IndexThe
Churchill Downs Simulcast Network ("CDSN") was developed in 2002 to focus on
the
distribution of our simulcast signal. 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.
Recent
Developments
Sale
of Assets of Hollywood Park
On
September 23, 2005, Churchill Downs California Company ("CDCC"), a wholly-owned
subsidiary of the Company, completed the disposition of the Hollywood Park
Racetrack horse racing facility and the Hollywood Park Casino facility located
in Inglewood, California ("Hollywood Park"), to Hollywood Park Land Company,
LLC
(the "Purchaser") pursuant to the Asset Purchase Agreement (the "Purchase
Agreement") dated July 6, 2005. Pursuant to the Purchase Agreement, the
Purchaser acquired substantially all of the assets of CDCC used in its operation
of the Hollywood Park Racetrack, which includes land, buildings, improvements
and equipment, and the building in which the Hollywood Park Casino is operated
and related fixtures for a purchase price of $260.0 million cash (the "Assets"),
and, in addition, the Purchaser agreed to assume certain liabilities of CDCC
related to the Assets, subject to certain adjustments contained in the Purchase
Agreement as described below. The actual cash proceeds received by CDCC on
September 23, 2005, including the amounts applied to pay off indebtedness,
was
$254.6 million after the adjustments described below, which excludes transaction
costs of $5.4 million and cash sold of $856.8 thousand.
In
connection with the closing of the transactions contemplated by the Purchase
Agreement, as amended, between CDCC and Bay Meadows Land Company, LLC ("Bay
Meadows"), CDCC and the Purchaser, the assignee of Bay Meadows, entered into
a
letter agreement (the "Letter Agreement") modifying the Purchase Agreement
between CDCC and Bay Meadows. Pursuant to the Letter Agreement, the parties
agreed at closing of the Purchase Agreement to reduce the purchase price of
the
assets acquired by the Purchaser by $2.5 million to address environmental
remediation issues and to provide a working capital adjustment in favor of
the
Purchaser in the amount of $2.5 million. In addition, as of the closing, the
parties agreed that CDCC would retain certain immaterial liabilities and certain
simulcast receivables and payables.
Also,
in
connection with the closing of the transactions contemplated by the Purchase
Agreement, Bay Meadows, Stockbridge Real Estate Fund II-A, LP, Stockbridge
Real
Estate Fund II-B, L.P., Stockbridge Real Estate Fund II-T, LP, Stockbridge
Hollywood Park Co-Investors, LP, Stockbridge HP Holdings Company, LLC and
Churchill Downs Investment Company entered into a reinvestment agreement (the
"Reinvestment Agreement"). Pursuant to the Reinvestment Agreement, Churchill
Downs Investment Company, a wholly-owned subsidiary of the Company, will have
the option to reinvest in the Hollywood Park Racetrack business, in the event
of
certain triggering events which would allow the Hollywood Park Racetrack
business to engage in electronic gaming, or other significant gaming and/or
subsidies not currently authorized.
Hurricane
Katrina
On
August
29, 2005, Hurricane Katrina caused significant damage to the metropolitan New
Orleans, Louisiana area ("New Orleans"). Our Louisiana Operations, including
Fair Grounds, its 11 OTBs and Video Services, Inc., the exclusive operator
of
more than 700 video poker machines, closed as a result of this disaster. On
October 26, 2005, five OTBs, including four that offer video poker, reopened
to
the public. Two additional OTBs, both of which offer video poker, reopened
to
the public on each of December 16, 2005 and February 2, 2006. Also, on September
13, 2005, we reached an agreement with Harrah's Bossier City Investment Company,
L.L.C., d/b/a Harrah's Louisiana Downs, for a shortened Fair Grounds race meet
from November 19, 2005 through January 22, 2006, for a total of 37 race dates.
Under the agreement, the 37 race dates were conducted at Harrah's Louisiana
Downs in Bossier City, Louisiana. Due to the fact that Hurricane Katrina had
a
significant impact on New Orleans, the Company is currently evaluating if or
when the remaining portion of its Louisiana Operations will recommence.
24
Return to IndexA
significant portion of the assets of our Louisiana Operations has suffered
damages from Hurricane Katrina. We carry property and casualty insurance as
well
as business interruption insurance. We are currently working with our insurance
carriers to determine to what extent insurance proceeds will offset any losses.
As of December 31, 2005, we have received $4.0 million in insurance proceeds
in
advance. Approximately $2.2 million of the proceeds was recorded as a reduction
of selling, general and administrative expenses against losses related to the
interruption of business caused by Hurricane Katrina that were actually incurred
through December 31, 2005, that management determined are probable of recovery
under an existing business interruption insurance policy. The remaining $1.8
million of proceeds has been recorded as a current liability in our Consolidated
Balance Sheet as of December 31, 2005 until such time that management identifies
additional future business interruption or property and casualty losses that
are
deemed probable of recovery under existing insurance policies. We have not
yet
determined the ultimate impact that Hurricane Katrina will have on our results
of operations. However, under existing policies, we are required to pay a $500.0
thousand deductible related to any recoveries for damages.
Hurricane
Wilma
On
October 24, 2005, Hurricane Wilma caused significant damage to Miami as well
as
other parts of South Florida. Calder Race Course sustained damage to its
clubhouse facility and parts of its stable area. Calder Race Course also lost
power during the storm and closed as a result. On October 29, 2005, Calder
Race
Course reopened for simulcast wagering. On October 30, 2005, Calder Race Course
reopened for a reduced number of live turf races. We resumed a full card of
normal live racing on November 3, 2005.
A
significant portion of the assets of Calder Race Course has suffered damages
from Hurricane Wilma. We carry property and casualty insurance as well as
business interruption insurance. We are currently working with our insurance
carriers to determine to what extent insurance proceeds will offset any losses.
We do not believe that Hurricane Wilma will have a material, adverse impact
on
our results of operations. We further believe that Calder will be fully restored
prior to the beginning of the race meeting in 2006. Under existing policies,
we
are required to pay a deductible equal to 2% of the total insured value on
an
insurable unit basis related to any recoveries for damages.
Tornado
Damage
On
November 6, 2005, a tornado caused significant damage to portions of
southwestern Indiana and northwestern Kentucky, including Henderson, Kentucky,
the location of Ellis Park racetrack and its on-site simulcast facility. Ellis
Park sustained damage to its stable area as well as several other buildings
at
the racetrack. Ellis Park also lost power during the storm and closed as a
result. Simulcast operations at Ellis Park resumed on November 16, 2005, and
Ellis Park will conduct its scheduled racing meet during 2006. We carry property
and casualty insurance as well as business interruption insurance. We do not
believe that the tornado damage will have a material, adverse impact on our
results of operations.
2006
Insurance Renewals
In
late
February of 2006, we renewed our property, workers' compensation and general
liability coverages with substantially the same levels of coverage. However,
for
our property insurance renewal, our deductible increased to 5% of the total
insured value on an insurable unit basis for wind losses in Florida and
Louisiana, compared to 2% of the total insured value on an insurable unit basis
in Florida last year and $500 thousand in Louisiana last year. Additionally,
our
renewal premiums for property insurance increased by more than three times
last
year's premiums, or $2.8 million.
25
Legislative
and Regulatory Changes
Federal
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 Wire
Act,
the Travel Act and the Illegal Gambling Business Act against foreign companies
violated the General Agreement on Trade in Services ("GATS"). In November of
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 of 2005, the WTO's appellate body ruled that the United States had
demonstrated that the Wire Act, the Travel Act and the Illegal Gambling Business
Act 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, 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, applies equally
to domestic companies and foreign companies and the Interstate Horseracing
Act
does not create an exception for domestic companies to accept Internet wagering
on horseracing. The WTO's appellate body did not rule on whether an exception
was created, but recommended that the WTO's Dispute Settlement Body request
the
United States bring measures found to be inconsistent with GATS into conformity
with its obligations with GATS. The United States has until April 3, 2006 to
bring its policies in line with the ruling, assuming it believes any changes
are
necessary. The effect of this ruling on the ability of domestic companies to
accept Internet wagers and other account wagers on horse racing is unclear.
The
National Thoroughbred Racing Association, on behalf of its members, including
Churchill Downs Incorporated, is currently in discussions with the U.S. Trade
Representative on various alternatives the United States may choose to take
both
administratively and legislatively in the wake of the appellate
ruling.
Indiana
During
April of 2005, Senate Enrolled Act 92 ("SEA 92"), a bill that makes it a Class
D
Felony for an operator to use the Internet to engage in unlawful gambling in
Indiana or with a person located in Indiana, passed both chambers of the Indiana
General Assembly and was signed by the Governor. An "operator", as defined
by
SEA 92, is a person who owns, maintains or operates an Internet site that is
used for interactive gambling. Under SEA 92, effective July 1, 2005, an operator
is guilty of professional gambling if it uses the Internet to accept, or offer
to accept, for profit, money or other property risked in gambling in Indiana
or
in a transaction directly involving a person located in Indiana. We receive
source market fees from various in-home wagering providers for the licensing
of
our live racing products in the distribution of such products through broadcast
mediums such as television or the Internet. TVG, one of our major in-home
providers in Indiana, has ceased operations in Indiana due to legal uncertainty.
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. Although the measure passed in Broward County, home of
Gulfstream Park, it was unsuccessful in Miami-Dade County, where Calder 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 at Broward's four pari-mutuels in early Summer of
2006.
We believe that the failure of the local referendum to pass in Miami-Dade County
was due primarily to Governor Bush's active opposition to the measure during
the
final days of the campaign. We are preparing a strategy to seek passage in
Miami-Dade County when the issue can again be placed on the ballot. The earliest
that it can be placed on the ballot is 2007. We are currently determining when
it can be placed on the ballot. The impact on our results of operations and
financial position of the failed referendum in Miami-Dade County and the
operation of slot machines at pari-mutuel wagering facilities in Broward County
is uncertain at this time.
26
Return to IndexIllinois
Pursuant
to the Illinois Horse Racing Act, Arlington Park (and all other Illinois
racetracks) is 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. As the legal right still exists, Arlington Park has elected to
continue 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.
Arlington
Park is entitled under law to share in the proceeds of the Illinois Horse Racing
Equity Fund. The Illinois Horse Racing Equity Fund is to be funded by the
10th
riverboat license issued in Illinois at a rate of 15% of the adjusted gross
receipts. The grant of the 10th
riverboat license is currently the subject of numerous legal challenges and,
as
such, is currently not an operational riverboat license. At such time should
the
10th
riverboat license in Illinois be granted and a riverboat become operational,
Arlington Park would be entitled to receive additional revenue, which could
be
significant. As an alternative, a proposal has been made during the 2006 Spring
session of the Illinois legislature that would direct 3% of adjusted gross
receipts from most riverboat casinos to be placed into the Illinois Horse Racing
Equity Fund. All Illinois racetracks and horsemen groups support the proposal.
The riverboat casinos are lobbying against the proposal
During
January and February when there is no live racing in Illinois, the IRB
designates a Thoroughbred racetrack as the host track in Illinois. The IRB
appointed Arlington Park as the host track in Illinois during January 2005,
which resulted in pari-mutuel revenues comparable to the same period in 2004.
The IRB did not appoint Arlington Park as the host track in Illinois for
February 2005, which resulted in a decrease of $1.8 million in pre-tax earnings
for the month of February of 2005 compared to the same period of 2004. The
IRB
appointed Arlington Park the host track in Illinois during January 2006 for
29
days, which is the same as January 2005. In addition, Arlington Park was
appointed the host track for eight days during February of 2006. Arlington
Park's future designation as the host track is subject to the annual appointment
by the IRB. A change in the number of days that Arlington Park is designated
"host track" could have an 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 racetracks to better compete with neighboring
gaming venues by providing substantial new revenues for purses and capital
improvements. Several alternative gaming bills have been filed in the 2006
session of the Kentucky General Assembly, including two bills filed in the
House
and in the Senate. The Kentucky Equine Education Project ("KEEP"), an alliance
of the Commonwealth's equine industry leaders, including our Company, supports
legislation that calls 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. The Commonwealth's share of the new revenue would be earmarked
for education, healthcare, local development and environmental concerns
benefiting the entire Commonwealth under the KEEP plan. The Senate President
has
continued to be publicly opposed to alternative gaming. The Governor, on
the
other hand, states that he would not stop legislation authorizing alternative
forms of gaming if it were passed by the House and Senate, but he continues
to
publicly question the economics. Legislation is not expected to successfully
pass during the 2006 legislative session.
27
Louisiana
We
have
received statutory, regulatory and other authorizations to operate slot machines
at Fair Grounds. Failure to maintain the necessary gaming licenses to own and
operate slot machines at Fair Grounds could have a material, adverse impact
on
our results of operations. Under the Louisiana statute, Fair Grounds may operate
500 slot machines. As a result of Hurricane Katrina, the agreement between
Harrah's Casino in New Orleans and the State of Louisiana has been amended
to
eliminate the $350.0 million gaming revenue threshold before Fair Grounds may
operate 700 slot machines. Fair Grounds is currently pursing a conforming
statutory amendment. Due to Hurricane Katrina, we are currently evaluating
the
feasibility of beginning construction of a new slot facility.
Churchill
Downs Louisiana Horseracing Company, LLC has completed the process to seek
the
necessary local zoning change and permits. On August 18, 2005, the New Orleans
City Council passed ordinances approving hours of operation for slot machines
at
Fair Grounds as part of its conditional use permit. The ordinances also
established additional provisos negotiated by Churchill Downs Louisiana
Horseracing Company, LLC and the New Orleans City Council relating to other
conditional use activities.
In
April
2005, the New Orleans City Council instructed the city attorney to file a
declaratory judgment action to determine if installation of slot machines at
Fair Grounds would violate the City Charter. The Louisiana Attorney General
has
expressed an opinion that the addition of slots at the racetrack would not
violate the City Charter. In June 2005, a resident living near Fair Grounds
filed a lawsuit alleging, among other claims, that slot machines at the
racetrack would be a violation of the City Charter, which limits New Orleans
to
one land-based casino. Based upon an opinion from the Louisiana Attorney General
and other legal advice, we do not believe the installation of slot machines
at
Fair Grounds violates the City Charter.
California
In
California, Hollywood Park was part of a coalition of racetracks and card clubs
supporting Proposal 68 on the November 2004 ballot. The proposal failed to
pass
by a margin of 16% to 84%. If passed, this initiative would have directed the
governor to renegotiate all existing compacts with Native American tribes in
California. If the tribes had declined to renegotiate the existing compacts,
then five racetracks, including Hollywood Park, and 11 card clubs would have
been allowed to operate electronic gaming devices. We continue to work with
other members of the California horse industry on a long-term strategy for
developing a legislative agenda that addresses the competitive advantages
afforded to Native American casinos due to the fact that we entered into a
reinvestment agreement related to the Hollywood Park Racetrack business in
accordance with the sale of the assets of Hollywood Park (as more fully
described above under "Recent Developments").
Critical
Accounting Policies and Estimates
Our
Consolidated Financial Statements have been prepared in conformity with
accounting principles generally accepted in the United States. 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 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. In general, however, our estimates have
historically approximated actual results.
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, the
valuation of interest rate risk derivative contracts (interest rate swaps)
and
other derivative instruments.
28
We
evaluate our goodwill, intangible and other long-lived assets in accordance
with
the application of Statement of Financial Accounting Standards ("SFAS") No.
142,
"Goodwill and Intangible Assets" ("SFAS No. 142") 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
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.
While
we
believe that our estimates of future revenues and cash flows are reasonable,
different assumptions could materially affect our assessment of useful lives
and
fair values. Changes in assumptions may cause modifications to our estimates
for
amortization or impairment, thereby impacting our results of operations. If
the
estimated lives of our intangible assets were to decrease based on the factors
mentioned above, amortization expense could increase significantly.
Our
business can be impacted positively and negatively by legislative and regulatory
changes and by alternative gaming competition. A significant negative impact
from these activities could result in a significant impairment of our plant
and
equipment and/or our goodwill and intangible assets in accordance with generally
accepted accounting principles.
Additional
information regarding how our business can be impacted by competition and
legislative changes is included in Items 1F and 1G, respectively, in this Annual
Report on Form 10-K.
During
the third quarter of 2004, we recognized a fixed asset impairment charge of
$4.4
million and an intangible asset impairment charge of $1.8 million at our Ellis
Park facility. The asset impairment charges were triggered as a result of Ellis
Park's poor live race meet performance during the third quarter of 2004. Our
review, based on consideration of current fiscal year operating results and
the
forecasted operating results of the facility, indicated that the estimated
future undiscounted cash flows were insufficient to recover the carrying value
of long-lived assets. Accordingly, we adjusted the carrying value of these
long-lived assets, including grandstands and buildings ($3,549), furniture
and
fixtures ($85), equipment ($217), improvements ($512) and goodwill ($1,839),
to
management's estimated fair value. We anticipate that the current carrying
value
of Ellis Park will be supported by ongoing operations, however, should plans
for
expected operating results at Ellis Park not be realized, an additional write
down of these assets could occur.
In
connection with losses incurred from natural disasters, insurance proceeds
are
collected on existing business interruption and property and casualty insurance
policies. When losses are sustained in one period and the amounts to be
recovered are collected in a subsequent period, management uses estimates and
judgment to determine the amounts that are probable of recovery under such
policies as specified in Financial Accounting Standards Board Interpretation
No.
30, "Accounting for Involuntary Conversions of Nonmonetary Assets to Monetary
Assets."
We
also
use estimates and judgments for financial reporting to determine our current
tax
liability, as well as those taxes deferred until future periods. Net deferred
and accrued income taxes represent significant assets and liabilities of the
Company. In accordance with the liability method of accounting for income taxes
as specified in SFAS No. 109, "Accounting for Income Taxes," we recognize the
amount of taxes payable or refundable for the current year and deferred tax
assets and liabilities for the future tax consequences of events that have
been
recognized in our financial statements or tax returns.
Adjustments
to deferred taxes are determined based upon changes in differences between
the
book basis and tax basis of our assets and liabilities, measured by future
tax
rates we estimate will be applicable when these differences are expected to
reverse. Changes in current tax laws, enacted tax rates or the estimated level
of taxable income or non-deductible expenses could change the valuation of
deferred tax assets and liabilities and affect the overall effective tax rate
and tax provision.
29
Historically,
we have utilized interest rate swap contracts to hedge exposure to interest
rate
fluctuations on our variable rate debt and have designated such swaps as cash
flow hedges of anticipated interest payments. Our interest rate swap contracts
matched the critical terms of the underlying debt, thus qualifying for hedge
accounting. Such critical terms include the notional amounts, benchmark interest
rate basis, interest reset dates and payment dates. The fair market value of
the
swaps was recorded on the balance sheet as an asset or liability with the offset
recorded in accumulated other comprehensive income net of income taxes. Any
changes in the fair market value of the swaps was adjusted to the asset or
liability account and recorded net of the income taxes in other comprehensive
income.
We
maintain an allowance for doubtful accounts receivable that we have deemed
to
have a high risk of collectibility. We analyze historical collection trends
and
customer creditworthiness when evaluating the adequacy of our allowance for
doubtful accounts receivable. Any changes in our assumptions or estimates could
impact our bad debt expense and results of operations.
For
our
business insurance renewals over the past several years, we assumed more risk
than in the prior years, primarily through higher retentions and higher maximum
losses for stop-loss insurance for certain coverages. In 2005, our business
insurance renewals included substantially the same coverages and retentions
as
in previous years. We estimate insurance liabilities for workers compensation
and general liability losses based on our historical loss experience, certain
actuarial assumptions of loss development factors and current industry trends.
Any changes in our assumptions, actuarial assumptions or loss experience could
impact our total insurance cost and overall 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.
Our
significant accounting policies are more fully described in Note 1 to the
Consolidated Financial Statements included in Item 8 of the Company's Annual
Report on Form 10-K for the year ended December 31, 2005.
Consolidated
Net Revenues
Our
net
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. However in 2004, we acquired Fair Grounds, which would
provide us with significant live racing days in the first quarter subject to
recommencing operations at Fair Grounds. Information regarding racing dates
at
our facilities for 2006 and 2005 is included in Item 1E, "Licenses and Live
Racing Dates" of this Annual Report on Form 10-K.
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, video poker, lease income and other sources.
Pari-mutuel
revenues are recognized upon occurrence of the live race that is presented
for
wagering and after that live race is made official by the respective states'
racing regulatory body. Additional non-wagering revenues such as admissions,
programs and concession revenues are recognized as delivery of the product
or
services has occurred.
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 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.
30
Return to IndexThe
Company retains as revenue a pre-determined percentage or commission on the
total amount wagered, and the balance is distributed to the winning patrons.
The
gross percentages retained on live racing and import simulcasting at our various
locations range from approximately 15% to 27%. In general, the fees earned
from
export simulcasting are contractually determined and average approximately
3.5%.
All commissions and fees earned from pari-mutuel wagering are shared with
horsemen through payment of purses based on local contracts and average
approximately 50%.
RESULTS
OF CONTINUING OPERATIONS
The
following table sets forth, for the periods indicated, certain operating data
for our properties:
| In thousands, except per share data and live race days) |
Year
ended December 31,
|
05
vs. 04 Change
|
04
vs. 03
Change
|
|||||||||||||||||
|
2005
|
2004
|
2003
|
$
|
%
|
$
|
%
|
||||||||||||||
|
Total
pari-mutuel handle
|
$
|
3,617,104
|
$
|
3,351,031
|
$
|
3,287,317
|
$
|
266,073
|
8
|
%
|
$
|
63,714
|
2
|
%
|
||||||
|
No.
of live race days
|
587
|
542
|
525
|
45
|
8
|
%
|
17
|
3
|
%
|
|||||||||||
|
Net
pari-mutuel revenues
|
$
|
297,509
|
$
|
274,374
|
$
|
271,313
|
$
|
23,135
|
8
|
%
|
$
|
3,061
|
1
|
%
|
||||||
|
Other
operating revenues
|
111,292
|
86,813
|
77,192
|
24,479
|
28
|
%
|
9,621
|
12
|
%
|
|||||||||||
|
Total
net revenues
|
$
|
408,801
|
$
|
361,187
|
$
|
348,505
|
$
|
47,614
|
13
|
%
|
$
|
12,682
|
4
|
%
|
||||||
|
Gross
profit
|
$
|
66,572
|
$
|
66,768
|
$
|
67,434
|
$
|
(196
|
)
|
-
|
$
|
(666
|
)
|
(1
|
)%
|
|||||
|
Gross
margin percentage
|
16
|
%
|
18
|
%
|
19
|
%
|
||||||||||||||
|
Operating
income
|
$
|
20,887
|
$
|
24,583
|
$
|
37,066
|
$
|
(3,696
|
)
|
(15
|
)%
|
$
|
(12,483
|
)
|
(34
|
)%
|
||||
|
Net
earnings from continuing operations
|
$
|
12,810
|
$
|
9,769
|
$
|
23,308
|
$
|
3,041
|
31
|
%
|
$
|
(13,539
|
)
|
(58
|
)%
|
|||||
|
Diluted
net earnings from continuing operations per common share
|
$
|
0.96
|
$
|
0.73
|
$
|
1.74
|
||||||||||||||
Year
Ended December 31, 2005 Compared to the Year Ended December 31,
2004
Our
total
net revenues increased $47.6 million, reflecting a full year impact of the
Louisiana Operations, which were acquired in October 2004. Additionally, the
Kentucky Operations segment benefited from the opening of the newly renovated
Churchill Downs racetrack facility, including increased attendance during the
week of the Kentucky Derby. The increased revenues were partially offset by
reduced revenues at Arlington Park as a result of fewer days that Arlington
Park
was appointed host track in Illinois during the twelve months ended December
31,
2005 compared to the same period in 2004. Further discussion of net revenue
variances by our reported segments is detailed below.
31
Significant
items affecting comparability of operating income, net earnings and diluted
earnings per share included:
| · |
We
recorded a $6.2 million asset impairment loss at Ellis Park during
the
third quarter of 2004 based on management's consideration of historical
and forecasted operating results of the
facility.
|
| · |
Corporate
expenses increased $7.6 million during the year ended December 31,
2005,
primarily as a result of increased costs associated with our initiative
to
attract and retain appropriate personnel to achieve our business
objectives, including increased costs of $2.2 million associated
with a
supplemental benefit plan for the chief executive officer as a result
of
an amendment to an employment contract during 2005. Additionally,
we
incurred increased professional fees related to obtaining compliance
with
the Sarbanes-Oxley Act of 2002 and increased costs associated with
our
customer relationship marketing
initiative.
|
| · |
During
the year ended December 31, 2005, we recognized a reduction of selling,
general and administrative expenses of $2.2 million related to an
estimate
of insurance proceeds that management determined are probable of
recovery
in connection with damages sustained from Hurricane Katrina by the
Louisiana Operations.
|
| · |
During
the year ended December 31, 2005, we recognized an unrealized gain
on
derivative instruments of $0.8 million compared to losses of $4.3
million
in the prior year, which were attributable to changes in the fair
market
value of embedded derivatives within a convertible promissory note
issued
during the fourth quarter of 2004.
|
| · |
Our
effective tax rate decreased from 57% in 2004 to 43% in 2005 resulting
primarily from the unrealized gain on derivative instruments and
the
non-deductible portion of the asset impairment loss recognized during
2004.
|
Year
Ended December 31, 2004 Compared to the Year Ended December 31,
2003
Our
total
net revenues increased $12.7 million primarily as a result of our acquisition
of
the Louisiana Operations. We acquired the Louisiana Operations in October 2004
providing 2 ½ months of revenues during the year ended December 31, 2004.
Additionally, the Kentucky Operations segment benefited from incremental Jockey
Club luxury suite sales for the Kentucky Derby and Kentucky Oaks days during
the
second quarter. Further discussion of net revenue variances by our reported
segments is detailed below.
Significant
items affecting comparability of operating income, net earnings and diluted
earnings per share included:
| · |
We
recorded a $6.2 million asset impairment loss at Ellis Park during
the
third quarter of 2004 based on management's consideration of the
historical and forecasted operating results of the
facility.
|
| · |
We
incurred $3.6 million of additional expenses related to alternative
gaming
legislative initiatives in Florida during
2004.
|
| · |
Interest
income decreased $0.9 million during 2004 compared to 2003 as a result
of
interest income related to a property tax refund in Illinois recognized
during the third quarter of 2003.
|
| · |
We
recorded an unrealized loss on derivative instruments of $4.3 million
related to changes in the fair market value of embedded derivatives
within
a convertible promissory note issued during the fourth quarter of
2004.
|
| · |
Our
effective tax rate rose from 39% in 2003 to 57% in 2004 resulting
from the
non-deductibility of the legislative initiative costs, a portion
of the
asset impairment loss and the unrealized loss on derivative
instruments.
|
32
Consolidated
Expenses
The
following table is a summary of our consolidated expenses:
| (In thousands) |
Year
ended December 31,
|
05
vs. 04 Change
|
04
vs. 03 Change
|
||||||||||||||||
|
2005
|
2004
|
2003
|
$
|
%
|
$
|
%
|
|||||||||||||
|
Purse
expenses
|
$
|
127,139
|
$
|
114,164
|
$
|
113,484
|
$
|
12,975
|
11
|
%
|
$
|
680
|
1
|
% | |||||
|
Depreciation/amortization
|
21,389
|
15,666
|
14,632
|
5,723
|
37
|
%
|
1,034
|
7
|
% | ||||||||||
| Other operating expenses |
193,701
|
164,589
|
152,955
|
29,112
|
18
|
%
|
11,634
|
8
|
% | ||||||||||
|
SG&A
expenses
|
45,685
|
35,983
|
30,368
|
9,702
|
27
|
%
|
5,615
|
18
|
% | ||||||||||
|
Impairment
losses
|
-
|
6,202
|
-
|
(6,202
|
)
|
(100
|
)%
|
6,202
|
100
|
% | |||||||||
|
Total
|
$
|
387,914
|
$
|
336,604
|
$
|
311,439
|
$
|
51,310
|
15
|
%
|
$
|
25,165
|
8
|
% | |||||
|
Percent
of revenue
|
95
|
%
|
93
|
%
|
89
|
%
|
|||||||||||||
Year
Ended December 31, 2005 Compared to the Year Ended December 31,
2004
Total
expenses increased 15% during 2005 primarily as a result of expenses related
to
the Louisiana Operations, which includes $15.2 million of increased purse
expenses. Corporate selling, general and administrative expenses also increased
by $7.6 million as more fully described below in the discussion of expense
variances by segment. Depreciation expense and other operating expenses from
the
Kentucky Operations increased primarily due to the newly renovated Churchill
Downs racetrack facility that was completed during the year ended December
31,
2005. These increased expenses were partially offset by reduced expenses as
a
result of the $6.2 million of impairment losses recognized at Ellis Park during
the year ended December 31, 2004. We recognized a reduction of selling, general
and administrative expenses of $2.2 million related to an estimate of insurance
proceeds that management determined are probable of recovery in connection
with
losses recognized from Hurricane Katrina by the Louisiana Operations. Purse
expenses from Arlington Park and Ellis Park decreased as more fully described
in
the discussion of expense variance by segment. Further discussion of expense
variances by our reported segments is detailed below.
Year
Ended December 31, 2004 Compared to the Year Ended December 31,
2003
Total
expenses increased 8% during 2004 primarily as a result of the $6.2 million
asset impairment loss at Ellis Park and the $3.6 million of additional expenses
related to legislative costs for alternative gaming (included in selling,
general and administrative expenses) as mentioned above. Additionally, expenses
increased $13.7 million as a result of our acquisition of the Louisiana
Operations during the fourth quarter of 2004. Further discussion of expense
variances by our reported segments is detailed below.
33
Other
Income (Expense) and Provision for Income Taxes
The
following table is a summary of our other income (expense) and provision for
income taxes:
| (In thousands) |
Year
ended December 31,
|
05
vs. 04 Change
|
04
vs. 03 Change
|
||||||||||||||||
|
|
2005
|
|
2004
|
|
2003
|
|
$
|
% |
$
|
% | |||||||||
|
Interest
income
|
$
|
622
|
$
|
413
|
$ |
1,297
|
$ |
209
|
51
|
%
|
$ |
(884
|
)
|
(68
|
)%
|
||||
|
Interest
expense
|
(1,576
|
)
|
(1,003
|
)
|
(916
|
)
|
(573
|
) |
(57
|
)%
|
(87
|
)
|
(9
|
)%
|
|||||
|
Unrealized
gain (loss) on derivative instruments
|
818
|
(4,254
|
)
|
-
|
5,072
|
119
|
%
|
(4,254
|
)
|
(100
|
)%
|
||||||||
|
Miscellaneous,
net
|
1,910
|
2,737
|
1,028
|
(827
|
) |
(30
|
)%
|
1,709
|
166
|
%
|
|||||||||
|
Other
income (expense)
|
$
|
1,774
|
$ |
(2,107
|
)
|
$ |
1,409
|
$ |
3,881
|
184
|
%
|
$ |
(3,516
|
)
|
(250
|
)%
|
|||
|
Provision
for income taxes
|
$
|
(9,851
|
)
|
$ |
(12,707
|
)
|
$ |
(15,167
|
)
|
$ |
2,856
|
22
|
%
|
$ |
2,460
|
16
|
%
|
||
|
Effective
tax rate
|
43
|
%
|
57
|
%
|
39
|
%
|
|||||||||||||
Year
Ended December 31, 2005 Compared to the Year Ended December 31,
2004
Significant
items affecting the comparability of other income and expense and provision
for
income taxes include:
| · |
Interest
expense increased during 2005 primarily due to additional borrowings
for
the acquisition of the Louisiana Operations combined with a rising
interest rate environment offset partially by a reduction of interest
expense during the fourth quarter of 2005 resulting from lower debt
balances due to the pay-off of debt in conjunction with the sale
of the
assets of Hollywood Park.
|
| · |
We
recognized an unrealized gain on derivative instruments of $0.8 million
in
2005 compared to losses of $4.3 million in the prior year, which
was
attributable to changes in the fair market value of embedded derivatives
within a convertible promissory note issued during the fourth quarter
of
2004.
|
| · |
Miscellaneous
income decreased during 2005 as a result of a $1.6 million gain realized
on the sale of 19% of our interest in Kentucky Downs during the fourth
quarter of 2004, which was partially offset by increased minority
interest
income related to the investment in Hoosier
Park.
|
| · |
Our
effective tax rate decreased from 57% in 2004 to 43% in 2005 resulting
from the non-taxable unrealized gain on derivative instruments and
the
non-deductible portion of the asset impairment loss recognized during
2004.
|
Year
Ended December 31, 2004 Compared to the Year Ended December 31,
2003
Significant
items affecting the comparability of other income and expense and provision
for
income taxes include:
| · |
Interest
income decreased $0.9 million during 2004 compared to 2003 as a result
of
interest income related to a property tax refund in Illinois recognized
during the third quarter of 2003.
|
| · |
We
recognized an unrealized loss on derivative instruments of $4.3 million
related to changes in the fair market value of embedded derivatives
within
a convertible promissory note issued during the fourth quarter of
2004.
|
| · |
Miscellaneous
income increased during 2004 as a result of a $1.6 million gain realized
on the sale of 19% of our interest in Kentucky Downs during the fourth
quarter of 2004.
|
| · |
Our
effective tax rate increased from 39% in 2003 to 57% in 2004 resulting
from the non-deductibility of the legislative initiative costs, a
portion
of the asset impairment loss and the unrealized loss on derivative
instruments.
|
34
Net
Revenues By Segment
The
following table presents net revenues, including intercompany revenues, by
our
reported segments:
| (In thousands) |
Year
ended December 31
|
05
vs. 04 Change
|
04
vs. 03 Change
|
||||||||||||||||
|
|
2005
|
|
2004
|
|
2003
|
|
$
|
%
|
$
|
%
|
|||||||||
|
Kentucky
Operations
|
$ |
119,642
|
$ |
112,710
|
$ |
110,845
|
$ |
6,932
|
6
|
%
|
$ |
1,865
|
2
|
%
|
|||||
|
Arlington
Park
|
84,188
|
87,951
|
87,012
|
(3,76
|
)
|
(4
|
)%
|
939
|
1
|
%
|
|||||||||
|
Calder
Race Course
|
92,736
|
92,111
|
91,753
|
625
|
1
|
%
|
358
|
-
|
|||||||||||
|
Hoosier
Park
|
40,869
|
41,649
|
43,011
|
(780
|
)
|
(2
|
)%
|
(1,362
|
)
|
(3
|
)%
|
||||||||
|
Louisiana
Operations
|
55,564
|
13,237
|
-
|
42,327
|
320
|
%
|
13,237
|
100
|
%
|
||||||||||
|
CDSN
|
67,272
|
60,121
|
60,721
|
7,151
|
12
|
%
|
(600
|
)
|
(1
|
)%
|
|||||||||
|
Total
racing operations
|
460,271
|
407,779
|
393,342
|
52,492
|
13
|
%
|
14,437
|
4
|
%
|
||||||||||
|
Other
investments
|
2,954
|
3,040
|
5,060
|
(86
|
)
|
(3
|
)%
|
(2,020
|
)
|
(40
|
)%
|
||||||||
|
Corporate
revenues
|
702
|
21
|
28
|
681
|
3,243
|
%
|
(7
|
)
|
(25
|
)%
|
|||||||||
|
Eliminations
|
(55,126
|
)
|
(49,653
|
)
|
(49,925
|
)
|
(5,473
|
)
|
(11
|
)%
|
272
|
1
|
%
|
||||||
| $ |
408,801
|
$ |
361,187
|
$ |
348,505
|
$ |
47,614
|
13
|
%
|
$ |
12,682
|
4
|
%
|
||||||
Year
Ended December 31, 2005 Compared to the Year Ended December 31,
2004
Significant
items affecting comparability of our revenues by segment include:
| · |
During
the fourth quarter of 2004, we completed our acquisition of the Louisiana
Operations, which contributed $42.3 million to the overall increase
in
revenues. Additionally, CDSN revenues and eliminations increased
primarily
as a result of the acquisition of the Louisiana
Operations.
|
| · |
Net
revenues from the Kentucky Operations increased as we realized benefits
from the opening of the newly renovated Churchill Downs racetrack
facility, including increased attendance during the week of the Kentucky
Derby, which was partially offset by lower revenues at Ellis Park
primarily due to 13 fewer days of live racing during the year ended
December 31, 2005 compared to 2004.
|
| · |
During
January and February, when there is no live racing in Illinois, the
IRB
designates a Thoroughbred racetrack as the host track in Illinois
The IRB
appointed Arlington Park as the host track in Illinois for 29 days
during
January 2005 compared to 52 days during portions of January and February
of 2004, which resulted in reduced revenues of $4.4 million during
the
year ended December 31, 2005 compared to
2004.
|
Year
Ended December 31, 2004 Compared to the Year Ended December 31,
2003
Significant
items affecting comparability of our revenues by segment include:
| · |
During
the fourth quarter of 2004, we completed our acquisition of the Louisiana
Operations which contributed $13.2 million to the overall increase
in
revenues.
|
| · |
Our
Kentucky Operations revenues increased primarily due to incremental
Jockey
Club luxury suite sales for Kentucky Derby and Oaks days as well
as a
decision to run a six-day per week live meet at Ellis Park compared
to a
five-day per week live meet during 2003. These increases were partially
offset by a decrease in pari-mutuel revenues attributable to inclement
weather and reduced attendance resulting from the impact of the Churchill
Downs racetrack facility renovation project, referred to as the "Master
Plan."
|
35
| · |
During
January and February when there is no live racing in Illinois, the
IRB
designates a Thoroughbred racetrack as the host track in Illinois.
The IRB
appointed Arlington Park as the host track in Illinois for 52 days
during
portions of January and February 2004 compared to 30 days during
January
2003. Additionally, Arlington Park pari-mutuel revenues improved
in 2004
as a result of the 2003 Illinois horsemen's strike, which negatively
affected wagering prior to the strike being resolved in April 2003.
Offsetting some of the revenue increases, pari-mutuel revenue decreased
due to eight fewer days of live racing during 2004 compared to
2003.
|
| · |
Hoosier
Park revenues decreased primarily as a result of a $0.8 million decrease
in riverboat admission subsidies stemming from the change in allocation
after a new track was built in Indiana. The subsidy is now allocated
evenly between Hoosier Park and the new track. Additionally, the
decrease
resulted from an overall decrease in pari-mutuel business
levels.
|
| · |
Other
investments decreased during 2004 primarily as a result of a reduced
number of service contracts held by Churchill Downs Simulcast Productions
upon purchasing the remaining 40% minority interest in Charlson Broadcast
Technologies LLC in December 2003.
|
Expenses
by Segment
The
following table presents total expenses, including intercompany expenses, by
our
reported segments:
| (In thousands) |
Year
ended December 31
|
05
vs. 04 Change
|
04
vs. 03 Change
|
|||||||||||
|
2005
|
2004
|
2003
|
$
|
%
|
$
|
%
|
||||||||
|
Kentucky
Operations
|
$108,328
|
$107,919
|
$99,141
|
$409
|
-
|
$8,778
|
9
|
%
|
||||||
|
Arlington
Park
|
84,222
|
81,887
|
82,254
|
2,335
|
3
|
%
|
(367
|
)
|
-
|
|||||
|
Calder
Race Course
|
88,033
|
88,509
|
82,133
|
(476
|
)
|
(1
|
)%
|
6,376
|
8
|
%
|
||||
|
Hoosier
Park
|
42,062
|
41,268
|
42,138
|
794
|
2
|
%
|
(870
|
)
|
(2
|
)%
|
||||
|
Louisiana
Operations
|
61,438
|
13,749
|
-
|
47,689
|
347
|
%
|
13,749
|
100
|
%
|
|||||
|
CDSN
|
50,863
|
46,230
|
46,464
|
4,633
|
10
|
%
|
(234
|
)
|
(1
|
)%
|
||||
|
Total
racing operations
|
434,946
|
379,562
|
352,130
|
55,384
|
15
|
%
|
27,432
|
8
|
%
|
|||||
|
Other
investments
|
2,712
|
2,864
|
5,645
|
(152
|
)
|
(5
|
)%
|
(2,781
|
)
|
(49
|
)%
|
|||
|
Corporate
expenses
|
18,045
|
10,439
|
8,596
|
7,606
|
73
|
%
|
1,843
|
21
|
%
|
|||||
|
Eliminations
|
(67,789
|
)
|
(56,261
|
)
|
(54,932
|
)
|
(11,528
|
)
|
(20
|
)%
|
(1,329
|
)
|
(2
|
)%
|
|
$387,914
|
$336,604
|
$311,439
|
$51,310
|
15
|
%
|
$25,165
|
8
|
%
|
||||||
Year
Ended December 31, 2005 Compared to the Year Ended December 31,
2004
Significant
items affecting comparability of our expenses by segment include:
| · |
During
the fourth quarter of 2004, we completed our acquisition of the Louisiana
Operations, which resulted in a $47.7 million increase in expenses.
CDSN
expenses and eliminations also increased primarily as a result of
the
acquisition of the Louisiana
Operations.
|
| · |
Corporate
expenses increased primarily as a result of increased costs associated
with our initiative to attract and retain appropriate personnel to
achieve
our business objectives, including increased costs of $2.2 million
associated with a supplemental benefit plan for the chief executive
officer as a result of an amendment to an employment contract during
2005.
Additionally, we incurred increased professional fees related to
obtaining
compliance with the Sarbanes-Oxley Act of 2002 and increased costs
associated with our customer relationship marketing
initiative.
|
| · |
Arlington
Park expense increased primarily as a result of increased costs associated
with our initiative to attract and retain appropriate personnel to
achieve
our business objectives, which includes expenses of $0.4 million
associated with the retirement of the racetrack president during
2005,
lower purse overpayment recoveries, higher insurance and utility
costs and
increased costs associated with the customer relationship management
initiative, which was partially offset by decreased purse expense
as a
result of fewer days that Arlington Park was appointed the host track
in
Illinois.
|
| · |
Expenses
from the Kentucky Operations increased primarily as a result of additional
depreciation expenses of $3.2 million, as well as increased operating
expense due to the completion of the Churchill Downs racetrack facility
renovation project during the second quarter of 2005, which was mostly
offset by impairment losses of $6.2 million recognized at Ellis Park
during the year ended December 31, 2004. Also, Ellis Park purse expenses
decreased primarily as a function of lower pari-mutuel revenues primarily
due to 13 fewer days of live
racing.
|
36
Year
Ended December 31, 2004 Compared to the Year Ended December 31,
2003
Significant
items affecting comparability of our expenses by segment include:
| · |
During
the fourth quarter of 2004, we completed our acquisition of the Louisiana
Operations, which contributed $13.7 million to the overall increase
in
expenses.
|
| · |
Kentucky
Operations expenses increased primarily as a result of the $6.2 million
asset impairment charges at Ellis Park during the third quarter of
2004
based on management's consideration of historical and forecasted
operating
results of the facility. The increase was also due to temporary facilities
expenses associated with our infield hospitality tent to accommodate
patrons during the Kentucky Oaks and Derby days as well as increased
expenses associated with our Personal Seats Licensing ("PSL") program.
|
| · |
Calder
Race Course expenses increased partially as a result of $3.6 million
incurred in Florida related to the slot
initiative.
|
| · |
Other
investment expenses decreased consistent with the decrease in revenues
as
noted above.
|
Discontinued
Operations
The
following table presents earnings (loss) from discontinued operations for the
years ended December 31, 2005, 2004 and 2003.
| (In thousands) |
Year
ended December 31
|
05
vs. 04 Change
|
04
vs. 03 Change
|
||||||||||||||||
|
2005
|
2004
|
2003
|
$
|
%
|
$
|
%
|
|||||||||||||
|
Net
revenues
|
$ |
70,080
|
$ |
101,328
|
$ |
95,551
|
$ |
(31,248
|
)
|
(31
|
)%
|
$ |
5,777
|
6
|
%
|
||||
|
Operating
expenses
|
62,891
|
88,645
|
85,835
|
(25,754
|
)
|
(29
|
)%
|
2,810
|
3
|
%
|
|||||||||
|
Gross
profit
|
7,189
|
12,683
|
9,716
|
(5,494
|
)
|
(43
|
)%
|
2,967
|
31
|
%
|
|||||||||
|
Selling,
general and administrative expenses
|
3,261
|
6,592
|
3,723
|
(3,331
|
)
|
(51
|
)%
|
2,869
|
77
|
%
|
|||||||||
|
Operating
income
|
3,928
|
6,091
|
5,993
|
(2,163
|
)
|
(36
|
)%
|
98
|
2
|
%
|
|||||||||
|
Other
income (expense):
|
|
||||||||||||||||||
|
Interest
income
|
20
|
22
|
19
|
(2
|
)
|
(9
|
)%
|
3
|
16
|
%
|
|||||||||
|
Interest
expense
|
(8,806
|
)
|
(5,687
|
)
|
(5,305
|
)
|
(3,119
|
)
|
(55
|
)%
|
(382
|
)
|
(7
|
)%
|
|||||
|
Miscellaneous,
net
|
3
|
3
|
-
|
-
|
-
|
3
|
100
|
%
|
|||||||||||
|
Other
income (expense)
|
(8,783
|
)
|
(5,662
|
)
|
(5,286
|
)
|
(3,121
|
)
|
(55
|
)%
|
(376
|
)
|
(7
|
)%
|
|||||
|
(Loss)
earnings before provision for income taxes
|
(4,855
|
)
|
429
|
707
|
(5,284
|
)
|
(1,232
|
)%
|
(278
|
)
|
(39
|
)%
|
|||||||
|
Benefit
(provision) for income taxes
|
1,057
|
(1,283
|
)
|
(636
|
)
|
2,340
|
182
|
%
|
(647
|
)
|
(102
|
)%
|
|||||||
|
(Loss)
earnings from operations
|
(3,798
|
)
|
(854
|
)
|
71
|
(2,944
|
)
|
(345
|
)%
|
(925
|
)
|
(1,303
|
)%
|
||||||
|
Gain
on sale of assets, net of income taxes
|
69,896
|
-
|
-
|
69,896
|
100
|
%
|
-
|
-
|
|||||||||||
|
Net
earnings (loss)
|
$ |
66,098
|
$ |
(854
|
)
|
$ |
71
|
$ |
66,952
|
7,840
|
%
|
$ |
(925
|
)
|
(1,303
|
)%
|
|||
37
Year
Ended December 31, 2005 Compared to the Year Ended December 31,
2004
Significant
items affecting comparability of earnings (loss) from discontinued operations
include:
| · |
Net
revenues, operating expenses and selling, general and administrative
expenses are lower as a result of the sale of the assets of Hollywood
Park
during the third quarter of 2005.
|
| · |
We
used proceeds from the sale of the assets of Hollywood Park to pay
off the
debt balances under the revolving loan facility and the variable
rate
senior notes. As such, all interest expenses related to these facilities
has been allocated to discontinued operations for the twelve months
ended
December 31, 2005 and 2004. Interest expense increased as a result
of
additional borrowings for the acquisition of the Louisiana Operations,
as
well as a higher interest rate
environment.
|
| · |
During
the year ended December 31, 2005, we recognized a gain of $69.9 million,
net of income taxes, on the sale of the assets of Hollywood
Park.
|
Consolidated
Balance Sheet
The
following table is a summary of our overall financial position as of December
31, 2005 and 2004:
| (In thousands) |
Year
ended December 31,
|
05
vs. 04 Change
|
|||||
|
2005
|
2004
|
$
|
%
|
||||
|
Total
assets
|
$514,542
|
$642,277
|
$(127,735)
|
(20)%
|
|||
|
Total
liabilities
|
$198,311
|
$403,849
|
$(205,538)
|
(51)%
|
|||
|
Total
shareholders' equity
|
$316,231
|
$238,428
|
$77,803
|
33%
|
|||
| · |
Total
assets decreased during 2005 primarily due to the sale of the assets
of
Hollywood Park, which was partially offset by increased plant and
equipment, primarily attributable to additions related to the Master
Plan
at Churchill Downs.
|
| · |
Total
liabilities decreased during 2005 primarily as a result of the pay-off
of
long-term debt in conjunction with the sale of the assets of Hollywood
Park.
|
Liquidity and Capital Resources
The following table is a summary of our liquidity and capital
resources:
| (In thousands) |
Year
ended December 31,
|
05 vs. 04 Change | 05 vs. 04 Change | |||||||||||
|
2005
|
2004
|
2003
|
$
|
% |
$
|
% | ||||||||
|
Operating
activities
|
$(1,325
|
)
|
$48,386
|
$47,040
|
$(49,711
|
)
|
(103
|
)%
|
$1,346
|
3
|
%
|
|||
|
Investing
activities
|
$205,023
|
$(135,781
|
)
|
$(41,749
|
)
|
$340,804
|
251
|
%
|
$(94,032
|
)
|
(225
|
)%
|
||
|
Financing
activities
|
$(208,655
|
)
|
$98,649
|
$(3,513
|
)
|
$(307,304
|
)
|
(312
|
)%
|
$102,162
|
2,908
|
%
|
||
| · |
Cash
flows from operating activities during 2005 decreased significantly
compared to 2004 primarily as a result of the sale of the assets
of
Hollywood Park.
|
| · |
Cash
flows provided by operating activities during the year ended December
31,
2004 increased primarily due to advance payments made relative to
the PSL
program and luxury suite sales, which was mostly offset by a decrease
in
earnings.
|
| · |
Cash
flows from investing activities increased during the year ended December
31, 2005 compared to the same period of 2004 primarily as a result
of
proceeds received on the sale of the assets of Hollywood
Park.
|
| · |
Cash
flows from investing activities decreased during the year ended December
31, 2004 primarily as a result of capital expenditures related to
the
Master Plan, as well as the acquisition of the Louisiana Operations
during
the fourth quarter of 2004.
|
| · |
Cash
flows from financing activities during 2005 decreased primarily as
a
result of the pay-off of long-term debt in conjunction with the sale
of
the assets of Hollywood Park.
|
| · |
During
2004, we increased our borrowings on our revolving line of credit
to fund
the acquisition of the Louisiana Operations, as well as to fund our
Master
Plan.
|
38
Credit
Facilities and Indebtedness
On
September 23, 2005, we entered into an Amended and Restated Credit Agreement
(the "Agreement"). The Guarantors under the Agreement are a majority of our
wholly-owned subsidiaries. The Agreement amends, supersedes and restates in
its
entirety a previous credit agreement dated as of April 3, 2003. The Agreement
provides for a maximum borrowing of $200.0 million (including a letter of credit
sub-facility not to exceed $25.0 million and a swing line commitment up to
a
maximum principal amount of $15.0 million). The facility terminates on September
23, 2010. Subject to certain conditions, we may at any time increase the
aggregate commitment up to an amount not to exceed $250.0 million.
Generally,
borrowings made pursuant to the Agreement will bear interest at a LIBOR-based
rate per annum plus an applicable percentage ranging from 0.75% to 1.50%
depending on certain of our financial ratios. In addition, under the Agreement,
we agreed to pay a commitment fee at rates that range from 0.15% to 0.375%
of
the available aggregate commitment, depending on our leverage
ratio.
The
Agreement contains customary financial and other covenant requirements,
including specific interest coverage and leverage ratios, as well as minimum
levels of net worth.
We
used a
portion of the net cash proceeds of $248.3 million from the sale of the assets
of Hollywood Park to pay off outstanding principal and interest of approximately
$229.0 million under our revolving loan facility and the Floating Rate Senior
Secured Notes due March 31, 2010 (the "Senior Notes"). The remaining cash
proceeds were used to pay income taxes generated by the gain on the sale of
assets during the fourth quarter. We also terminated our interest rate swap
contracts resulting in a net gain on termination of approximately $981.5
thousand. Management believes that cash flows from operations and borrowings
under our revolving credit facility will be sufficient to fund our cash
requirements for the year.
Our
principal commitments to make future payments consist of repayments of
borrowings under our revolving credit facility and obligations under operating
lease agreements. Our contractual obligations at December 31, 2005 are
summarized as follows ($ in thousands):
Contractual
Obligation
|
Less
Than
1
Year
|
1-3
Years
|
4-5
Years
|
After
5
Years
|
Total |
||||||||||||
|
Long-term
debt
|
$
|
-
|
$
|
-
|
$
|
15,602
|
$
|
18,191
|
$
|
33,793
|
||||||
|
Interest
expense
|
1,530
|
3,060
|
2,855
|
2,568
|
10,013
|
|||||||||||
|
Operating
leases
|
3,353
|
4,286
|
3,182
|
654
|
11,475
|
|||||||||||
|
Total
|
$
|
4,883
|
$
|
7,346
|
$
|
21,639
|
$
|
21,413
|
$
|
55,281
|
39
Recently
Issued Accounting Pronouncements
In
December 2004, the Financial Accounting Standards Board (the "FASB") issued
SFAS
No. 123(R), "Share-Based Payment" ("SFAS No. 123(R)") to replace SFAS No. 123,
"Accounting for Stock-Based Compensation,” and APB Opinion No. 25, "Accounting
for Stock Issued to Employees." SFAS No. 123(R) requires, among other things,
that all share-based payments to employees, including grants of stock options,
be measured based on their grant-date fair value and recognized as expense
in
the consolidated financial statements effective for interim or annual periods
beginning after December 15, 2005. Unless observable market prices exist, the
grant-date fair value is estimated using an appropriate option-pricing model
as
determined by management. Management must also make certain assumptions about
employee exercise habits, forfeiture rates and select an appropriate
amortization methodology for recognizing compensation expense. SFAS No. 123(R)
permits a modified prospective method of adoption. Upon adoption of SFAS No.
123(R), compensation expense will be recorded in the consolidated financial
statements for 1) all awards granted after January 1, 2006 and the 2) future
vesting of awards outstanding as of January 1, 2006. Companies may also elect
to
restate their previously issued consolidated financial statements to provide
consistency across all periods presented under a modified retrospective method.
During the fourth quarter of 2004, we terminated our stock option plans and
adopted a restricted stock plan. Except for grants made in accordance with
the
Employee Stock Purchase Plan, no stock options were granted during the years
ended December 31, 2005 and 2004, and we have no current intentions of granting
stock options during the year ended December 31, 2006. Upon adoption of SFAS
No.
123(R), we will be required to begin expensing all unvested stock options over
their remaining vesting periods. See Note 1 of our Consolidated Financial
Statements for additional details related to pro forma stock-based compensation
expense. Management has determined that the adoption of SFAS No. 123(R) will
not
have a material impact on our consolidated results of operations and earnings
per share.
At
December 31, 2005, we had $15.6 million of total debt outstanding under our
revolving credit facility, which bears interest at LIBOR based variable rates.
We are exposed to market risk on variable rate debt due to potential adverse
changes in the LIBOR rate. Assuming the outstanding balance on the debt
facilities remains constant, a one-percentage point increase or decrease in
the
LIBOR rate would increase or decrease annual pre-tax earnings, recorded fair
value and cash flows by $0.2 million.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors and Shareholders
of
Churchill Downs Incorporated:
We
have
completed integrated audits of Churchill Downs Incorporated’s
2005
and 2004 consolidated financial
statements and of its internal control over financial reporting as of December
31, 2005, and an audit of its 2003 consolidated financial statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Our opinions based
on
our audits, are presented below.
40
Consolidated
financial statements and financial statement schedule
In
our
opinion, the accompanying consolidated balance sheets and related consolidated
statements of net earnings and comprehensive earnings, of shareholders' equity
and of cash flows present fairly, in all material respects, the financial
position of Churchill Downs Incorporated and its subsidiaries (the Company)
at
December 31, 2005 and 2004, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2005 in
conformity with accounting principles generally accepted in the United States
of
America. In addition, in our opinion, the financial statement schedule listed
in
the index appearing under Item 15(a)(2) presents
fairly, in all material respects, the information set forth therein when read
in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule
based
on our
audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
Internal
control over financial reporting
Also,
in
our opinion, management’s assessment, included in Management’s Report on
Internal Control Over Financial Reporting appearing under Item
9A,
that
the Company maintained effective internal control over financial reporting
as of
December 31, 2005 based on criteria established in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2005,
based on criteria established in Internal
Control - Integrated Framework
issued
by the COSO. The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on management’s assessment and on the effectiveness
of the Company’s internal control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit
to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding
of
internal control over financial reporting, evaluating management’s assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures
of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use,
or
disposition of the company’s assets that could have a material effect on the
financial statements.
41
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
PricewaterhouseCoopers
LLP
Louisville,
Kentucky
March
13,
2006
42
CHURCHILL
DOWNS INCORPORATED
CONSOLIDATED
BALANCE SHEETS
December
31,
(in
thousands)
|
2005
|
2004
|
||||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
22,737
|
$
|
24,950
|
|||
|
Restricted
cash
|
4,946
|
7,267
|
|||||
|
Accounts
receivable, net of allowance for doubtful accounts of $786 in 2005
and
$881 in 2004
|
42,823
|
45,568
|
|||||
|
Deferred
income taxes
|
3,949
|
3,940
|
|||||
|
Other
current assets
|
8,879
|
3,809
|
|||||
|
Assets
held for sale
|
-
|
142,445
|
|||||
|
Total
current assets
|
83,334
|
227,979
|
|||||
|
Other
assets
|
13,020
|
16,883
|
|||||
|
Plant
and equipment, net
|
346,530
|
324,738
|
|||||
|
Goodwill
|
53,528
|
53,528
|
|||||
|
Other
intangible assets, net
|
18,130
|
19,149
|
|||||
|
Total
assets
|
$
|
514,542
|
$
|
642,277
|
|||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
27,957
|
$
|
22,827
|
|||
|
Purses
payable
|
14,564
|
16,629
|
|||||
|
Accrued
expenses
|
44,003
|
31,911
|
|||||
|
Dividends
payable
|
6,520
|
6,430
|
|||||
|
Deferred
revenue
|
26,219
|
25,880
|
|||||
|
Liabilities
associated with assets held for sale
|
-
|
9,221
|
|||||
|
Total
current liabilities
|
119,263
|
112,898
|
|||||
|
Long-term
debt
|
33,793
|
242,770
|
|||||
|
Other
liabilities
|
20,971
|
20,424
|
|||||
|
Deferred
revenue
|
18,614
|
19,071
|
|||||
|
Deferred
income taxes
|
5,670
|
8,686
|
|||||
|
Total
liabilities
|
198,311
|
403,849
|
|||||
|
Commitments
and contingencies
|
|||||||
|
Shareholders'
equity:
|
|||||||
|
Preferred
stock, no par value; 250 shares authorized; no shares
issued
|
-
|
-
|
|||||
|
Common
stock, no par value; 50,000 shares; issued: 13,132 shares and 12,904
shares in 2005 and 2004, respectively
|
121,270
|
114,930
|
|||||
|
Retained
earnings
|
198,001
|
125,613
|
|||||
|
Unearned
compensation
|
(3,040
|
)
|
(1,935
|
)
|
|||
|
Accumulated
other comprehensive loss
|
-
|
(180
|
)
|
||||
|
Total
shareholders' equity
|
316,231
|
238,428
|
|||||
|
Total
liabilities and shareholders' equity
|
$
|
514,542
|
$
|
642,277
|
|||
The
accompanying notes are an integral part of the consolidated financial
statements.
43
CHURCHILL
DOWNS INCORPORATED
CONSOLIDATED
STATEMENTS OF NET EARNINGS
AND
COMPREHENSIVE EARNINGS
Years
ended December 31,
(in
thousands, except per share data)
|
2005
|
2004
|
2003
|
||||||||
|
Net
revenues:
|
||||||||||
|
Net
pari-mutuel wagering
|
$
|
297,509
|
$
|
274,374
|
$
|
271,313
|
||||
|
Non-wagering
|
111,292
|
86,813
|
77,192
|
|||||||
|
408,801
|
361,187
|
348,505
|
||||||||
|
Operating
expenses:
|
||||||||||
|
Purses
|
127,139
|
114,164
|
113,484
|
|||||||
|
Other
direct expenses
|
215,090
|
180,255
|
167,587
|
|||||||
|
342,229
|
294,419
|
281,071
|
||||||||
|
Gross
profit
|
66,572
|
66,768
|
67,434
|
|||||||
|
Selling,
general and administrative expenses
|
45,685
|
35,983
|
30,368
|
|||||||
|
Asset
impairment loss
|
-
|
6,202
|
-
|
|||||||
|
Operating
income
|
20,887
|
24,583
|
37,066
|
|||||||
|
Other
income (expense):
|
||||||||||
|
Interest
income
|
622
|
413
|
1,297
|
|||||||
|
Interest
expense
|
(1,576
|
)
|
(1,003
|
)
|
(916
|
)
|
||||
|
Unrealized
gain (loss) on derivative instruments
|
818
|
(4,254
|
)
|
-
|
||||||
|
Miscellaneous,
net
|
1,910
|
2,737
|
1,028
|
|||||||
|
1,774
|
(2,107
|
)
|
1,409
|
|||||||
|
Earnings
from continuing operations before provision for income
taxes
|
22,661
|
22,476
|
38,475
|
|||||||
|
Provision
for income taxes
|
(9,851
|
)
|
(12,707
|
)
|
(15,167
|
)
|
||||
|
Net
earnings from continuing operations
|
12,810
|
9,769
|
23,308
|
|||||||
|
Discontinued
operations, net of income taxes:
|
||||||||||
|
(Loss)
earnings from operations
|
(3,798
|
)
|
(854
|
)
|
71
|
|||||
|
Gain
on sale of assets
|
69,896
|
-
|
-
|
|||||||
|
Net
earnings
|
78,908
|
8,915
|
23,379
|
|||||||
|
Other
comprehensive earnings (loss), net of tax:
|
||||||||||
|
Change
in fair value of cash flow hedges
|
180
|
181
|
(139
|
)
|
||||||
|
Comprehensive
earnings
|
$
|
79,088
|
$
|
9,096
|
$
|
23,240
|
||||
|
Net
earnings (loss) per common share data:
|
||||||||||
|
Basic
|
||||||||||
|
Net
earnings from continuing operations
|
$
|
0.98
|
$
|
0.74
|
$
|
1.77
|
||||
|
Discontinued
operations
|
4.94
|
(0.07
|
)
|
-
|
||||||
|
Net
earnings
|
$
|
5.92
|
$
|
0.67
|
$
|
1.77
|
||||
|
Diluted
|
||||||||||
|
Net
earnings from continuing operations
|
$
|
0.96
|
$
|
0.73
|
$
|
1.74
|
||||
|
Discontinued
operations
|
4.90
|
(0.06
|
)
|
0.01
|
||||||
|
Net
earnings
|
$
|
5.86
|
$
|
0.67
|
$
|
1.75
|
||||
|
Weighted
average shares outstanding:
|
||||||||||
|
Basic
|
12,920
|
13,196
|
13,189
|
|||||||
|
Diluted
|
13,500
|
13,458
|
13,392
|
|||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
44
CHURCHILL
DOWNS INCORPORATED
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS' EQUITY
Years
ended December 31, 2005, 2004 and 2003
(in
thousands, except per share data)
|
Common
Stock
|
Retained |
Note
Receivable Common
|
Unearned
Compen-
|
Accumulated
Other Comprehen-
|
||||||||||||||||
|
Shares
|
Amount
|
Earnings
|
Stock
|
sation
|
sive
Loss
|
|
Total
|
|||||||||||||
|
Balances,
December 31, 2002
|
13,157
|
$
|
126,043
|
$
|
106,374
|
$
|
(65
|
)
|
$
|
-
|
$
|
(222
|
)
|
$
|
232,130
|
|||||
|
Net
earnings
|
23,379
|
23,379
|
||||||||||||||||||
|
Issuance
of common stock for employee benefit plans
|
93
|
2,540
|
|
2,540
|
||||||||||||||||
|
Proceeds
from note receivable for common stock
|
65
|
65
|
||||||||||||||||||
|
Cash
dividends, $0.50 per share
|
(6,625
|
)
|
(6,625
|
)
|
||||||||||||||||
|
Change
in fair value of cash flow hedges
|
(139
|
)
|
(139
|
)
|
||||||||||||||||
|
Balances,
December 31, 2003
|
13,250
|
128,583
|
123,128
|
-
|
-
|
|
(361
|
)
|
251,350
|
|||||||||||
|
Net
earnings
|
8,915
|
8,915
|
||||||||||||||||||
|
Issuance
of common stock for employee benefit plans
|
149
|
3,787
|
3,787
|
|||||||||||||||||
|
Grant
of restricted stock
|
45
|
1,968
|
|
|
(1,968
|
)
|
-
|
|||||||||||||
|
Amortization
of restricted stock grants
|
33
|
|
33
|
|||||||||||||||||
|
Redemption
of common stock
|
(540
|
) |
(19,408
|
) |
(19,408
|
) | ||||||||||||||
|
Cash
dividends, $0.50 per share
|
(6,430
|
) |
(6,430
|
) | ||||||||||||||||
|
Change
in fair value of cash flow hedges
|
181
|
181
|
||||||||||||||||||
|
Balances,
December 31, 2004
|
12,904
|
114,930
|
125,613
|
-
|
(1,935
|
)
|
(180
|
) |
238,428
|
|||||||||||
|
Net
earnings
|
78,908
|
78,908
|
||||||||||||||||||
|
Issuance
of common stock for employee benefit plans
|
175
|
4,453
|
4,453
|
|||||||||||||||||
|
Grant
of restricted stock, net of forfeitures
|
53
|
1,887
|
(1,887
|
)
|
-
|
|||||||||||||||
|
Amortization
of restricted stock
|
782
|
|
782
|
|||||||||||||||||
|
Cash
dividend, $0.50 per share
|
(6,520
|
) |
(6,520
|
) | ||||||||||||||||
|
Change
in fair value of cash flow hedges
|
180
|
180
|
||||||||||||||||||
|
Balances,
December 31, 2005
|
13,132
|
|
$ |
121,270
|
|
$ |
198,001
|
|
$ |
-
|
|
$ |
(3,040
|
)
|
$
|
-
|
$
|
316,231
|
||
The
accompanying notes are an integral part of the consolidated financial
statements.
45
|
CHURCHILL
DOWNS INCORPORATED
CONSOLIDATED
STATEMENTS OF CASH FLOWS
Years
ended December 31,
(in
thousands)
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
earnings
|
$
|
78,908
|
$
|
8,915
|
$
|
23,379
|
||||
|
Adjustments
to reconcile net earnings to net cash (used in) provided by operating
activities:
|
||||||||||
|
Depreciation
and amortization
|
24,565
|
21,927
|
20,483
|
|||||||
|
Asset
impairment loss
|
-
|
6,202
|
-
|
|||||||
|
Gain
on sale of Hollywood Park
|
(112,737
|
)
|
-
|
-
|
||||||
|
Gain
on sale of Kentucky Downs interest
|
-
|
(1,613
|
)
|
-
|
||||||
|
Unrealized
(gain) loss on derivative instruments
|
(818
|
)
|
4,254
|
-
|
||||||
|
Other
|
1,950
|
120
|
-
|
|||||||
|
Increase
(decrease) in cash resulting from changes in operating assets and
liabilities, net of business acquisitions and
dispositions:
|
||||||||||
|
Restricted
cash
|
1,675
|
(5,331
|
)
|
1,634
|
||||||
|
Accounts
receivable
|
377
|
(1,684
|
)
|
(1,068
|
)
|
|||||
|
Other
current assets
|
(439
|
)
|
5,226
|
1,437
|
||||||
|
Accounts
payable
|
(138
|
)
|
(6,864
|
)
|
(198
|
)
|
||||
|
Purses
payable
|
(2,064
|
)
|
8,045
|
4,392
|
||||||
|
Accrued
expenses
|
5,039
|
2,835
|
(663
|
)
|
||||||
|
Deferred
revenue
|
5,155
|
13,351
|
3,174
|
|||||||
|
Other
assets and liabilities
|
(2,798
|
)
|
(6,997
|
)
|
(5,530
|
)
|
||||
|
Net
cash (used in) provided by operating activities
|
(1,325
|
)
|
48,386
|
47,040
|
||||||
|
Cash
flows from investing activities:
|
||||||||||
|
Acquisition
of businesses, net of cash acquired
|
-
|
(58,609
|
)
|
-
|
||||||
|
Acquisition
of additional interest in CBT
|
-
|
-
|
(894
|
)
|
||||||
|
Additions
to plant and equipment, net
|
(43,238
|
)
|
(77,172
|
)
|
(40,855
|
)
|
||||
|
Proceeds
from sale of Hollywood Park
|
248,261
|
-
|
-
|
|||||||
|
Net
cash provided by (used in) investing activities
|
205,023
|
(135,781
|
)
|
(41,749
|
)
|
|||||
|
Cash
flows from financing activities:
|
||||||||||
|
Borrowings
on bank line of credit
|
543,415
|
498,167
|
350,014
|
|||||||
|
Repayments
of bank line of credit
|
(652,813
|
)
|
(393,167
|
)
|
(325,085
|
)
|
||||
|
Repayments
of revolving loan facility for refinancing
|
-
|
-
|
(120,929
|
)
|
||||||
|
(Repayments
of) proceeds from senior notes, net of expenses
|
(100,000
|
)
|
-
|
98,229
|
||||||
|
Decrease
in other long-term debt, net
|
-
|
(1,618
|
)
|
(512
|
)
|
|||||
|
Change
in book overdraft
|
3,238
|
(1,895
|
)
|
(1,257
|
)
|
|||||
|
Proceeds
from note receivable for common stock
|
-
|
-
|
65
|
|||||||
|
Payment
of dividends
|
(6,430
|
)
|
(6,625
|
)
|
(6,578
|
)
|
||||
|
Common
stock issued
|
3,935
|
3,787
|
2,540
|
|||||||
|
Net
cash (used in) provided by financing activities
|
(208,655
|
)
|
98,649
|
(3,513
|
)
|
|||||
|
Net
(decrease) increase in cash and cash equivalents
|
(4,957
|
)
|
11,254
|
1,778
|
||||||
|
Cash
and cash equivalents, beginning of year
|
27,694
|
16,440
|
14,662
|
|||||||
|
Cash
and cash equivalents, end of year
|
22,737
|
27,694
|
16,440
|
|||||||
|
Cash
and cash equivalents included in assets held for sale
|
-
|
2,744
|
2,491
|
|||||||
|
Cash
and cash equivalents in continuing operations
|
$
|
22,737
|
$
|
24,950
|
$
|
13,949
|
||||
46
|
CHURCHILL
DOWNS INCORPORATED
CONSOLIDATED
STATEMENTS OF CASH FLOWS (continued)
Years
ended December 31,
(in
thousands)
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Supplemental
disclosures of cash flow information:
|
||||||||||
|
Cash
paid during the period for:
|
||||||||||
|
Interest
|
10,161
|
7,477
|
6,104
|
|||||||
|
Income
taxes
|
53,790
|
17,775
|
17,177
|
|||||||
|
Schedule
of Non-cash Activities:
|
||||||||||
|
Plant
and equipment additions included in accounts payable and accrued
expenses
|
3,259
|
2,064
|
7,208
|
|||||||
|
Issuance
of convertible promissory note for common stock
|
-
|
16,669
|
-
|
|||||||
|
Common
stock received in consideration of the sale of Kentucky Downs
interest
|
-
|
3,200
|
-
|
|||||||
|
Issuance
of common stock in connection with the Restricted Stock
Plan
|
1,936
|
1,968
|
-
|
|||||||
|
Assets
acquired and liabilities assumed from acquisition of
businesses:
|
||||||||||
|
Restricted
cash
|
-
|
323
|
-
|
|||||||
|
Other
current assets
|
-
|
8,060
|
-
|
|||||||
|
Plant
and equipment, net
|
-
|
45,066
|
-
|
|||||||
|
Intangible
assets
|
-
|
15,463
|
-
|
|||||||
|
Other
assets
|
-
|
140
|
-
|
|||||||
|
Accounts
payable
|
-
|
8,408
|
-
|
|||||||
|
Accrued
expenses
|
-
|
1,737
|
-
|
|||||||
|
Deferred
tax liability
|
-
|
298
|
-
|
|||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
47
Notes
to
Consolidated Financial Statements (Continued)
|
1.
|
Basis
Of Presentation And Summary Of Significant Accounting
Policies
|
Basis
of Presentation
The
Company conducts pari-mutuel wagering on live race meetings for Thoroughbred
horses and participates in intrastate and interstate simulcast wagering at
its
racetracks in Kentucky, Florida, Illinois and Louisiana. In addition, the
Company, through its Indiana subsidiary Hoosier Park L.P. ("Hoosier Park"),
conducts pari-mutuel wagering on live Thoroughbred, Quarter Horse and
Standardbred horse races and participates in interstate simulcast wagering.
The
Company's Kentucky, Florida, Illinois, Indiana and Louisiana operations are
subject to regulation by the racing commissions of the respective
states.
The
accompanying 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 (collectively referred
to
as "Hollywood Park"), 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, Ellis Park Race Course,
Inc. ("Ellis Park"), Churchill Downs Management Company ("CDMC"), Churchill
Downs Investment Company ("CDIC"), Churchill Downs Simulcast Productions
("CDSP"), Anderson Park Inc. ("Anderson") and its majority-owned subsidiary,
Hoosier Park. All significant intercompany balances and transactions have been
eliminated in consolidation.
Summary
of Significant Accounting Policies
Cash
Equivalents
The
Company considers investments with original maturities of three months or less
to be cash equivalents. The Company has, from time to time, cash in the bank
in
excess of federally insured limits. Checks issued but not presented to banks
frequently result in overdraft balances for accounting purposes and are
classified as a current liability in the Consolidated Balance
Sheets.
Restricted
Cash
Restricted
cash represents refundable deposits and amounts due to horsemen for purses,
stakes and awards.
Allowance
for Doubtful Accounts Receivable
The
Company maintains an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
allowance is maintained at a level considered appropriate based on historical
and other factors that affect collectibility. Uncollectible accounts receivable
are written off against the allowance for doubtful accounts receivable when
management determines that the probability of payment is remote and collection
efforts have ceased.
Plant
and Equipment
Plant
and
equipment are recorded at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the related assets
as
follows: 10 to 40 years for grandstands and buildings, 3 to 18 years for
equipment, 5 to 10 years for furniture and fixtures and 10 to 20 years for
tracks and other improvements.
Notes
to
Consolidated Financial Statements (Continued)
Intangible
Assets
The
Company determines the initial carrying value of its intangibles in accordance
with purchase accounting based on the anticipated future cash flows relating
to
the intangible. For definite-lived intangibles, the Company assigns useful
lives
based upon the estimated economic life of each intangible and amortizes them
accordingly. The intangible asset relating to the Illinois Horse Race Equity
fund is not being amortized, as revenues relating to the intangible are not
yet
being recognized. Amortization of the Indiana racing license is provided over
40
years using the straight-line method. Other definite-lived intangible assets
are
being amortized over their estimated useful lives ranging from 2 to 17 years
using the straight-line method.
Long-lived
Assets
In
the
event that facts and circumstances indicate that the carrying amount of tangible
or intangible long-lived assets or groups of assets may be impaired, an
evaluation of recoverability is performed. If an evaluation were required,
the
estimated future undiscounted cash flows associated with the assets would be
compared to the assets' carrying amount to determine if an impairment loss
should be recorded. If the assets’ carrying amount exceeds the estimated future
undiscounted cash flows associated with the assets, an impairment loss equal
to
the amount by which the assets’ carrying amount exceeds their fair value is
recognized.
In
addition, goodwill is otherwise tested for impairment on an annual basis, at
a
minimum, in the first quarter of each year. 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 the amount
of
goodwill recognized in a business combination is determined. The Company
completed the required annual impairment tests of goodwill and indefinite lived
intangible assets during the quarter ended March 31, 2005, and no adjustment
to
the carrying values of goodwill or indefinite lived intangible assets was
required.
Other
Assets
Loan
origination costs on the Company's revolving line of credit are being amortized
under the straight-line method over the terms of the loans, which approximates
the effective interest method.
Interest
Rate Swaps
From
time
to time, the Company utilizes interest rate swap contracts to hedge exposure
to
interest rate fluctuations on its variable rate debt and assesses whether such
swaps are cash flow hedges of anticipated interest payments. The Company's
interest rate swap contracts have historically matched the critical terms of
the
underlying debt, thus qualifying for hedge accounting. Such critical terms
include the notional amounts, benchmark interest rate basis, interest rate
dates
and payment dates. Upon qualification for hedge accounting, the fair value
of
the swaps is recorded on the balance sheet as an asset or liability with the
offset recorded in accumulated other comprehensive income net of income taxes.
Any changes in the market value of the swaps are adjusted to the asset or
liability account and recorded net of the related income taxes in other
comprehensive income.
49
Return to IndexNotes
to
Consolidated Financial Statements (Continued)
Revenue
Recognition
The
Company's pari-mutuel revenues include commissions on pari-mutuel wagering
at
its 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, the Company earns 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, concessions, video poker,
lease income and other sources and are recognized when the related service
is
performed. Non-wagering revenues also include Indiana riverboat admissions
subsidy and are recognized on a straight-line basis over the Company's fiscal
year.
Pari-mutuel
revenues are recognized upon occurrence of the live race that is presented
for
wagering and after that live race is made official by the respective state's
racing regulatory body. Additional non-wagering revenues such as admissions,
programs and concession revenues are recognized as delivery of the product
or
services has occurred.
Greater
than 70% of the Company's 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 the Company's live tracks and
also
wagers made on imported simulcast signals by patrons at the Company's racetracks
during live meets. Import simulcasting handle includes wagers on imported
signals at the Company's racetracks when the respective tracks are not
conducting live race meets and at the Company's off-track betting facilities
(“OTBs”) throughout the year. Export handle includes all patron wagers made on
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.
The
Company retains as revenue a pre-determined percentage or commission on the
total amount wagered, and the balance is distributed to the winning patrons.
The
gross percentages retained on live racing and import simulcasting at the
Company's various locations range from approximately 15% to 27%. In general,
the
fees earned from export simulcasting are contractually determined and average
approximately 3.5%. All commissions and fees earned from pari-mutuel wagering
are shared with horsemen through payment of purses based on local contracts
and
average approximately 50%.
Deferred
Revenue
Deferred
revenue includes advance sales related to the Kentucky Derby and Oaks races
in
Kentucky and other advanced billings on racing events. Revenues from these
advance billings are recognized when the related event occurs. Deferred revenue
also includes advance sales of Personal Seat Licenses ("PSL") and luxury suites.
PSLs represent the ownership of a specific seat for the Kentucky Derby, Kentucky
Oaks and Breeders' Cup races in Kentucky and have a contractual life of 30
years. Revenue from PSLs is recognized when the Kentucky Derby, Oaks and
Breeders' Cup races occur on a ratable basis over the term of the contract.
Luxury suites are sold for specific racing events as well as for a
pre-determined contractual term. Revenue related to the sale of luxury suites
is
recognized as they are utilized when the related event occurs.
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 purses to the winning
owners of races run at the Company's racetracks in the period in which wagering
occurs. The Company incurs a liability for all unpaid purses to be paid out.
The
Company may pay out purses in excess of statutorily required amounts resulting
in purse overpayments which are expensed as incurred. Recoveries of purse
overpayments are recognized in the period they are received.
50
Notes
to
Consolidated Financial Statements (Continued)
Income
Taxes
Net
deferred and accrued income taxes represent significant assets and liabilities
of the Company. In accordance with the liability method of accounting for income
taxes as specified in SFAS No. 109, “Accounting for Income Taxes,” the Company
recognizes the amount of taxes payable or refundable for the current year and
deferred tax assets and liabilities for the future tax consequences of events
that have been recognized in the financial statements or tax
returns.
Adjustments
to deferred taxes are determined based upon the changes in differences between
the book basis and tax basis of assets and liabilities, measured by future
tax
rates the Company estimates will be applicable when these differences are
expected to reverse. Changes in current tax laws, enacted tax rates or the
estimated level of taxable income or non-deductible expenses could change the
valuation of deferred tax assets and liabilities and affect the overall
effective tax rate and tax provision.
Legislative
Costs
The
Company expenses legislative costs at the time such costs are
incurred.
Un-Cashed
Winning Tickets
The
Company's policy for un-cashed winning pari-mutuel tickets follows the
requirements as set forth by each state's pari-mutuel wagering laws. The Company
will either remit un-cashed pari-mutuel ticket winnings to the state according
to the state's escheat laws or will maintain the liability during the required
holding period according to state law at which time the Company will recognize
it as income.
Minority
Interest
The
Company consolidates assets, liabilities and the earnings or losses from Hoosier
Park in the consolidated financial statements of the Company. A minority
interest liability is included in the "Other liabilities" caption of the
Consolidated Balance Sheets under the non-current section. The minority interest
expense (or income) is recorded in Miscellaneous, net under the "Other income
(expense)" section on the Consolidated Statements of Net Earnings.
Insurance
Recoveries
In
connection with losses incurred from natural disasters, insurance proceeds
are
collected on existing business interruption and property and casualty insurance
policies. When losses are sustained in one accounting period and the amounts
to
be recovered are collected in a subsequent accounting period, management uses
estimates and judgment to determine the amounts that are probable of recovery
as
specified in Financial Accounting Standards Board Interpretation No. 30,
"Accounting for Involuntary Conversions of Nonmonetary Asses to Monetary
Assets."
Worker's
Compensation and General Liability Self-Insurance
The
Company is substantially self-insured for losses related to workers'
compensation and general liability claims with stop-loss insurance for both
coverages. Losses are accrued based upon the Company's undiscounted estimates
of
the aggregate liability for claims incurred based on historical experience
and
certain actuarial assumptions. Recoveries from third party insurance companies
are also estimated and accrued.
Advertising
The
Company expenses the costs of general advertising, promotion and marketing
programs at the time the costs are incurred, or when the advertising is
run.
Notes
to
Consolidated Financial Statements (Continued)
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."
("APB 25") 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" ("SFAS No. 123"), the
Company's net earnings and net earnings per common share for 2005, 2004 and
2003
would approximate the pro forma amounts presented below:
|
(in
thousands, except per share data)
|
2005
|
2004
|
2003
|
|||||||
|
Net
earnings, as reported
|
$
|
78,908
|
$
|
8,915
|
$
|
23,379
|
||||
|
Add:
Stock-based compensation expense included in reported net earnings,
net of
tax benefit
|
782
|
33
|
-
|
|||||||
|
Deduct:
Pro forma stock-based compensation expense, net of tax
benefit
|
(1,480
|
)
|
(1,515
|
)
|
(2,130
|
)
|
||||
|
Pro
forma net earnings
|
$
|
78,210
|
$
|
7,433
|
$
|
21,249
|
||||
|
Net
earnings per common share:
|
||||||||||
|
As
reported
|
||||||||||
|
Basic
|
$
|
5.92
|
$
|
0.67
|
$
|
1.77
|
||||
|
Diluted
|
$
|
5.86
|
$
|
0.67
|
$
|
1.75
|
||||
|
Pro
forma
|
||||||||||
|
Basic
|
$
|
5.87
|
$
|
0.56
|
$
|
1.61
|
||||
|
Diluted
|
$
|
5.79
|
$
|
0.56
|
$
|
1.59
|
||||
The
effects of applying SFAS No. 123 in this pro forma disclosure are unlikely
to be
representative of the effects on pro forma net income 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.
No
options were granted during 2005 or 2004. The weighted average fair value of
each option granted during 2003 was estimated on the date of grant using the
Black-Scholes pricing model with the following weighted-average assumptions:
|
2003
|
|||
|
Weighted
average fair value at grant date
|
$18.72
|
||
|
Dividend
yield
|
1.29
|
%
|
|
|
Expected
volatility
|
53.54
|
% | |
|
Risk-free
interest rate
|
3.54
|
%
|
|
|
Expected
option life (years)
|
8.1
|
Computation
of Net Earnings per Common Share
Net
earnings per common share is presented for both basic earnings per share ("Basic
EPS") and diluted earnings per share ("Diluted EPS"). Earnings attributable
to
securities that are deemed to be participating securities are excluded from
the
calculation of Basic EPS. The Company has determined that the convertible
promissory note issued to a shareholder as described in Note 12 is a
participating security. Basic EPS is based upon the weighted average number
of
common shares outstanding during the period, excluding unvested restricted
stock
held by employees. Diluted EPS is based upon the weighted average number of
common and potential common shares outstanding during the period. Potential
common shares result from the assumed exercise of outstanding stock options
as
well as unvested restricted stock, the proceeds of which are then assumed to
have been used to repurchase outstanding common stock using the treasury stock
method. For periods that the Company reports a net loss, all potential common
shares are considered anti-dilutive and are excluded from calculations of
diluted net loss per common share. For periods when the Company reports net
earnings, potential common shares with purchase prices in excess of the
Company's average common stock fair value for the related period are considered
anti-dilutive and are excluded from calculations of diluted net earnings per
common share (see Note 17).
52
Notes
to
Consolidated Financial Statements (Continued)
Discontinued
Operations
The
results of operations and gain on the sale of assets or assets held for sale
are
reflected in the Consolidated Statements of Net Earnings as "discontinued
operations" for all periods presented. Interest expense on debt that is required
to be repaid as a result of the disposal transaction is allocated to
discontinued operations.
Use
of
Estimates and 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. The Company's most significant
estimates relate to the valuation of property and equipment, allowance for
doubtful accounts receivable, 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
claims.
Reclassifications
Certain
financial statement amounts have been reclassified in prior years to conform
to
current year presentation.
|
2.
|
Discontinued
Operations
|
Sale
of Assets of Hollywood Park
On
September 23, 2005, Churchill Downs California Company ("CDCC"), a wholly-owned
subsidiary of the Company, completed the disposition of the Hollywood Park
Racetrack horse racing facility and the Hollywood Park Casino facility located
in Inglewood, California ("Hollywood Park") to Hollywood Park Land Company,
LLC
(the "Purchaser") pursuant to the Asset Purchase Agreement (the "Purchase
Agreement") dated July 6, 2005. Pursuant to the Purchase Agreement, the
Purchaser acquired substantially all of the assets of CDCC used in its operation
of the Hollywood Park Racetrack, which includes land, buildings, improvements
and equipment, and the Building in which the Hollywood Park Casino is operated
and related fixtures for a purchase price of $260.0 million cash (the "Assets"),
and in addition, the Purchaser agreed to assume certain liabilities of CDCC
related to the Assets, subject to certain adjustments contained in the Purchase
Agreement as described below. The actual cash proceeds received by CDCC on
September 23, 2005, including the amounts applied to pay off indebtedness,
was
$254.6 million after the adjustments described below, which excludes transaction
costs of $5.4 million and cash sold of $856.8 thousand.
In
connection with the closing of the transactions contemplated by the Purchase
Agreement, as amended, between CDCC and Bay Meadows Land Company, LLC ("Bay
Meadows"), CDCC and the Purchaser, the assignee of Bay Meadows, entered into
a
letter agreement (the "Letter Agreement") modifying the Purchase Agreement
between CDCC and Bay Meadows. Pursuant to the Letter Agreement, the parties
agreed at closing of the Purchase Agreement to reduce the purchase price of
the
assets acquired by the Purchaser by $2.5 million to address environmental
remediation issues and to provide a working capital adjustment in favor of
the
Purchaser in the amount of $2.5 million. In addition, as of the closing, the
parties agreed that CDCC would retain certain immaterial liabilities and certain
simulcast receivables and payables.
Use
of
Proceeds
The
Company used a portion of the cash proceeds from the sale to pay off outstanding
principal and interest of approximately $229.0 million under its revolving
loan
facility and the Floating Rate Senior Secured Notes due March 31, 2010 (the
"Senior Notes"). The remaining cash proceeds were used to pay income taxes
generated by the gain on the sale of assets during the fourth quarter. In
connection with the pay-off of the Senior Notes, approximately $646.2 thousand
of deferred finance costs were written off against interest expense that is
included in discontinued operations. The Company also terminated its interest
rate swap contracts resulting in a net gain on termination of approximately
$981.5 thousand, which is also included in interest expense within discontinued
operations. Amounts included in accumulated other comprehensive income related
to the derivatives were also reclassified to current earnings from discontinued
operations.
53
Notes
to
Consolidated Financial Statements (Continued)
Agreement
of Indemnity - Multi-Employer Retirement Plans
In
connection with the sale, the Company transferred its obligations as a member
in
various noncontributory defined benefit multi-employer retirements plans, which
are administered primarily by unions, to the Purchaser. Under the terms of
an
indemnity agreement included in the Purchase Agreement, in the event the
Purchaser withdraws in a complete or partial withdrawal from any of the
multi-employer retirement plans due to a cessation of the Hollywood Park
Racetrack business on or before the last day of the fifth plan year beginning
immediately after the close of the sale, the Company agreed to indemnify and
hold the Purchaser harmless from and against any withdrawal liability incurred
by the Purchaser in connection with such complete or partial withdrawal,
provided that the aggregate amount of such withdrawal liability shall not exceed
the amount of the withdrawal liability that would have been incurred by the
Company if the Company had completely withdrawn from the applicable plans on
the
date of the closing of the sale. Because management has determined as of
December 31, 2005, it is probable that the Hollywood Park Racetrack business
will cease on or before the last day of the fifth plan year beginning
immediately after the closing of the sale, the Company has recognized a
liability of $5.6 million against the gain on the sale of assets equal to an
estimate of the total withdrawal liability as of the date of the closing of
the
sale as calculated using actuarial assumptions in accordance with applicable
plan provisions and the Employee Retirement Income Security act of 1974, as
amended by the Multi-Employers Pension Plan Amendment Act of 1980.
Financial
Information
In
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," the sale of the Assets has been accounted for as
discontinued operations. Accordingly, the results of operations of the Assets
for all periods presented and the gain on the sale have been classified as
discontinued operations, net of income taxes, in the Consolidated Statement
of
Net Earnings. Set forth below is a summary of the results of operations of
the
Assets sold for the years ended December 31, 2005, 2004 and 2003.
|
Year
ended December 31,
|
||||||||||
|
(in
thousands)
|
2005
|
2004
|
2003
|
|||||||
|
Net
revenues
|
$
|
70,080
|
$
|
101,328
|
$
|
95,551
|
||||
|
Operating
expenses
|
62,891
|
88,645
|
85,835
|
|||||||
|
Gross
profit
|
7,189
|
12,683
|
9,716
|
|||||||
|
Selling,
general and administrative expenses
|
3,261
|
6,592
|
3,723
|
|||||||
|
Operating
income
|
3,928
|
6,091
|
5,993
|
|||||||
|
Other
income (expense):
|
||||||||||
|
Interest
income
|
20
|
22
|
19
|
|||||||
|
Interest
expense
|
(8,806
|
)
|
(5,687
|
)
|
(5,305
|
)
|
||||
|
Miscellaneous,
net
|
3
|
3
|
-
|
|||||||
|
Other
income (expense)
|
(8,783
|
)
|
(5,662
|
)
|
(5,286
|
)
|
||||
|
(Loss)
earnings before provisions for income taxes
|
(4,855
|
)
|
429
|
707
|
||||||
|
Benefit
(provision) for income taxes
|
1,057
|
(1,283
|
)
|
(636
|
)
|
|||||
|
(Loss)
earnings from operations
|
(3,798
|
)
|
(854
|
)
|
71
|
|||||
|
Gain
on sale of assets, net of income taxes
|
69,896
|
-
|
-
|
|||||||
|
Net
earnings (loss)
|
$
|
66,098
|
$
|
(854
|
)
|
$
|
71
|
|||
54
Notes
to
Consolidated Financial Statements (Continued)
Set
forth
below is a summary of the assets held for sale as of December 31, 2004 (in
thousands):
|
December
31, 2004
|
|||||
|
Current
assets:
|
|||||
|
Cash
and cash equivalents
|
|
$ |
2,744
|
||
|
Accounts
receivable
|
5,294
|
|
|||
|
Other
current assets
|
410
|
||||
|
Other
assets
|
91
|
||||
|
Plant
and equipment, net
|
133,906
|
||||
|
Assets
held for sale
|
142,445
|
||||
|
Current
liabilities:
|
|||||
|
Accounts
payable
|
3,388
|
||||
|
Accrued
expenses
|
5,772
|
||||
|
Deferred
revenue
|
61
|
||||
|
Liabilities
associated with assets held for sale
|
9,221
|
||||
|
Net
assets held for sale
|
|
$ |
133,224
|
||
|
3.
|
Natural
Disasters
|
Hurricane
Katrina
On
August
29, 2005, Hurricane Katrina caused significant damage to the metropolitan New
Orleans, Louisiana area ("New Orleans"). The Company's Louisiana Operations,
including Fair Grounds, its 11 OTBs and Video Services, Inc., the exclusive
operator of more than 700 video poker machines, closed as a result of this
disaster. On October 26, 2005, five OTBs, including four that offer video poker,
reopened to the public. Two additional OTBs, both of which offer video poker,
reopened to the public on each of December 16, 2005 and February 2, 2006. Also,
on September 13, 2005, the Company reached an agreement with Harrah's Bossier
City Investment Company, L.L.C., d/b/a Harrah's Louisiana Downs, for a shortened
Fair Grounds race meet from November 19, 2005 through January 22, 2006, for
a
total of 37 race dates. Under the agreement, the 37 race dates were conducted
at
Harrah's Louisiana Downs in Bossier City, Louisiana. Due to the fact that
Hurricane Katrina had a significant impact on New Orleans, the Company is
currently evaluating if or when the remaining portion of its Louisiana
Operations will recommence.
A
significant portion of the assets of the Company's Louisiana Operations has
suffered damages from Hurricane Katrina. The Company carries property and
casualty insurance, as well as business interruption insurance. The Company
is
currently working with its insurance carriers to determine to what extent
insurance proceeds will offset any losses. As of December 31, 2005, the Company
has received $4.0 million in insurance proceeds in advance. Approximately $2.2
million of the proceeds was recorded as a reduction of selling, general and
administrative expenses against losses related to the interruption of business
caused by Hurricane Katrina that were actually incurred through December 31,
2005, that management determined are probable of recovery under an existing
business interruption insurance policy. The remaining $1.8 million of proceeds
has been recorded as a current liability in the Company's Consolidated Balance
Sheet as of December 31, 2005, until such time that management identifies
additional future business interruption or property and casualty losses that
are
deemed probable of recovery under existing insurance policies. The Company
has
not yet determined the ultimate impact that Hurricane Katrina will have on
its
results of operations. However, under existing policies, the Company is required
to pay a $500.0 thousand deductible related to any recoveries for
damages.
Hurricane
Wilma
On
October 24, 2005, Hurricane Wilma caused significant damage to Miami as well
as
other parts of South Florida. Calder Race Course sustained damage to its
clubhouse facility and parts of its stable area. Calder Race Course also lost
power during the storm and closed as a result. On October 29, 2005, Calder
Race
Course reopened for simulcast wagering. On October 30, 2005, Calder Race Course
reopened for a reduced number of live turf races. The Company resumed a full
card of normal live racing on November 3, 2005.
55
Return to IndexNotes
to
Consolidated Financial Statements (Continued)
A
significant portion of the assets of Calder Race Course has suffered damages
from Hurricane Wilma. The Company carries property and casualty insurance as
well as business interruption insurance. The Company is currently working with
its insurance carriers to determine to what extent insurance proceeds will
offset any losses. Approximately $0.2 million of insurance recoveries was
accrued against selling, general and administrative expenses related to costs
incurred to clean up the property after the hurricane as management determined
that it is probable such costs will be recovered based on the terms of an
existing insurance policy. The Company does not believe that Hurricane Wilma
will have a material, adverse impact on its results of operations. Under
existing policies, the Company is required to pay a deductible equal to 2%
of
the total insured value on an insurable unit basis related to any recoveries
for
damages.
Tornado
Damage
On
November 6, 2005, a tornado caused significant damage to portions of
southwestern Indiana and northwestern Kentucky, including Henderson, Kentucky,
the location of Ellis Park racetrack and its on-site simulcast facility. Ellis
Park sustained damage to its stable area as well as several other buildings
at
the racetrack. Ellis Park also lost power during the storm and closed as a
result. Simulcast operations at Ellis Park resumed on November 16, 2005 and
Ellis Park will conduct its scheduled racing meeting during 2006. The Company
carries property and casualty insurance as well as business interruption
insurance. Approximately $0.1 million of insurance recoveries was accrued
against selling, general and administrative expenses related to costs incurred
to clean up the property after the tornado as management determined that it
is
probable such costs will be recovered based on the terms of an existing
insurance policy. The Company does not believe that the tornado damage will
have
a material, adverse impact on its results of operations.
|
4.
|
Acquisitions
And Other Transactions
|
Acquisitions
Closed During the Fourth Quarter of 2004
On
October 14, 2004, the Company, through its wholly-owned subsidiary CDI
Louisiana, completed its previously announced acquisition of Fair Grounds Race
Course in New Orleans, Louisiana, including a Thoroughbred race track, 145
acres
of land, support facilities and OTB facilities associated with the racetrack,
from Fair Grounds Corporation, for $47 million in cash (subject to closing
adjustments), excluding costs of acquisition incurred at closing. The
acquisition, pursuant to an asset purchase agreement, as amended, among the
Company, CDI Louisiana and Fair Grounds Corporation (the "Fair Grounds Purchase
Agreement"), was approved by the United States Bankruptcy Court for the Eastern
District of Louisiana pursuant to the amended plan of reorganization of Fair
Grounds Corporation in its Chapter 11 bankruptcy case.
In
conjunction with the acquisition of Fair Grounds Race Course, the Company,
through CDI Louisiana, also completed the acquisition of certain assets of
Finish Line Management Corporation ("Finish Line") for approximately $6.7
million in cash, excluding acquisition costs incurred at closing, pursuant
to an
agreement among CDI Louisiana, the Company, Finish Line and Bryan G. Krantz
(the
"Finish Line Agreement"). The Finish Line assets acquired consist primarily
of
five OTB facilities in the New Orleans area. The Company also agreed to forgive
a receivable due from Finish Line to Fair Grounds Corporation and to waive
any
additional claims of Fair Grounds Corporation against Finish Line, which the
Company acquired in the acquisition of assets from Fair Grounds Corporation.
The
Company also entered into a 3-year consulting agreement with Bryan G. Krantz,
the President of Fair Grounds Corporation and Finish Line. Under the consulting
agreement, Mr. Krantz was paid $300 thousand at closing and will be paid
compensation of $400 thousand per year, along with health insurance. The Finish
Line transaction also included a lease of an OTB from Family Racing Venture,
LLC, an affiliate of Finish Line and Mr. Krantz.
Also,
in
conjunction with the Fair Grounds Race Course acquisition, the Company acquired
all of the stock of VSI, the owner and operator of more than 700 video poker
machines in nine locations, including the Fair Grounds Race Course, from
Louisiana Ventures, Inc., Steven M. Rittvo, Ralph Capitelli and T. Carey Wicker
III (collectively "Sellers") for approximately $4 million in cash, excluding
acquisition costs incurred at closing, pursuant to a Stock Purchase Agreement
(the "VSI Agreement") among the Sellers and CD Louisiana Video, a wholly-owned
subsidiary of the Company. The results of operations of CDI Louisiana and CD
Louisiana Video (collectively the "Louisiana Operations") are included in the
Company's consolidated financial statements from the date of acquisition during
the fourth quarter of 2004.
56
Return to IndexNotes
to
Consolidated Financial Statements (Continued)
The
acquisitions of Fair Grounds Race Course, Finish Line and VSI were accounted
for
under the purchase method. The following table summarizes the preliminary
estimated fair values of the assets acquired and liabilities assumed at the
date
of acquisition. Such estimates are subject to refinement as additional valuation
information is received.
|
(in
thousands)
|
Fair
Grounds Race Course and
Finish
Line
|
VSI
|
Total
|
|||||||
|
Cash
and cash equivalents
|
$
|
530
|
$
|
2,673
|
$
|
3,203
|
||||
|
Restricted
cash
|
323
|
-
|
323
|
|||||||
|
Other
current assets
|
8,060
|
-
|
8,060
|
|||||||
|
Other
assets
|
133
|
7
|
140
|
|||||||
|
Plant
and equipment
|
43,459
|
1,607
|
45,066
|
|||||||
|
Goodwill
|
-
|
3,127
|
3,127
|
|||||||
|
Other
intangible assets
|
12,336
|
-
|
12,336
|
|||||||
|
Total
assets acquired
|
64,841
|
7,414
|
72,255
|
|||||||
|
Accounts
payable
|
8,330
|
78
|
8,408
|
|||||||
|
Accrued
expenses
|
-
|
1,737
|
1,737
|
|||||||
|
Deferred
tax liability
|
-
|
298
|
298
|
|||||||
|
Total
liabilities acquired
|
8,330
|
2,113
|
10,443
|
|||||||
|
Net
assets acquired
|
56,511
|
5,301
|
61,812
|
|||||||
|
Less
cash acquired
|
(530
|
)
|
(2,673
|
)
|
(3,203
|
)
|
||||
|
Net
cash paid
|
$
|
55,981
|
$
|
2,628
|
$
|
58,609
|
Depreciation
of plant and equipment acquired is calculated using the straight-line method
over the estimated useful lives of the related assets as follows: 7 to 12 years
for land and leasehold improvements, 26 years for buildings, 2 to 11 years
for
equipment and 7 to 8 years for furniture and fixtures.
Pro
Forma
The
following table illustrates the effect on net earnings and earnings per share
as
if the Company had consummated the acquisition of Fair Grounds Race Course,
Finish Line and VSI as of January 1, 2003:
|
Years
Ended December 31,
|
|||||||
|
(in
thousands, except per share data)
|
2004
|
2003
|
|||||
|
Net
revenues from continuing operations
|
$
|
414,903
|
$
|
418,770
|
|||
|
Net
earnings from continuing operations
|
$
|
5,201
|
$
|
18,906
|
|||
|
Net
earnings
|
$
|
4,347
|
$ |
18,977
|
|||
|
Earnings
per common share
|
|||||||
|
Basic:
|
|||||||
|
Net
earnings from continuing operations
|
$
|
0.39
|
$
|
1.43
|
|||
|
Net
earnings
|
$
|
0.33
|
$
|
1.44
|
|||
|
Diluted:
|
|
||||||
|
Net
earnings from continuing operations
|
$
|
0.39
|
$
|
1.41
|
|||
|
Net
earnings
|
$
|
0.32
|
$
|
1.42
|
|||
|
Shares
used in computing earnings per common share:
|
|||||||
|
Basic
|
13,196
|
13,189
|
|||||
|
Diluted
|
13,458
|
13,392
|
|||||
57
Notes
to
Consolidated Financial Statements (Continued)
Kentucky
Downs Transaction
On
October 19, 2004, the Company sold a 19% interest in Kentucky Downs, including
debt owed to the Company, to Kelley Farms Racing, LLC in exchange for 86,886
shares of the Company's common stock valued at approximately $3.2 million.
The
consideration paid by Kelley Farms Racing, LLC was shares of the Company's
common stock, no par value, held by Brad M. Kelley. Mr. Kelley is the sole
owner
of Bison Capital, LLC and Bison Capital, LLC is the sole owner of Kelley Farms
Racing, LLC. The agreement also includes a contingency payout should Kentucky
Downs be approved for alternative gaming legislation. The Company recognized
a
gain on the sale of approximately $1.6 million during the fourth quarter of
2004
included in miscellaneous income. Upon consummation of the sale, the Company
retained a 5% interest in Kentucky Downs as well as a notes receivable of
approximately $412 thousand. As a result of this transaction and the redemption
of 452,603 shares of the Company's common stock from Mr. Kelley as discussed
in
Note 12 Mr. Kelley's percentage ownership in the Company was reduced to
4.9%.
|
5.
|
Accounts
Receivable
|
Accounts
receivable is comprised of the following:
|
(in
thousands)
|
|
2005
|
2004
|
|||||||
|
Simulcast
receivables
|
$
|
14,406
|
$
|
16,256
|
||||||
|
Trade
|
11,884
|
7,854
|
||||||||
|
PSL
and hospitality receivables
|
9,883
|
16,462
|
||||||||
|
Indiana
subsidy
|
5,222
|
5,197
|
||||||||
|
Other
|
2,214
|
680
|
||||||||
|
43,609
|
46,449
|
|||||||||
|
Allowance
for doubtful accounts
|
(786
|
)
|
(881
|
)
|
||||||
|
$
|
42,823
|
$
|
45,568
|
|||||||
|
6.
|
Plant
and Equipment
|
Plant
and
equipment is comprised of the following:
|
(in
thousands)
|
2005
|
2004
|
||||||
|
Land
|
$
|
77,054
|
$
|
75,702
|
||||
|
Grandstands
and buildings
|
276,554
|
180,291
|
||||||
|
Equipment
|
36,536
|
31,711
|
||||||
|
Furniture
and fixtures
|
39,201
|
25,780
|
||||||
|
Tracks
and other improvements
|
45,196
|
43,596
|
||||||
|
Construction
in process
|
2,916
|
78,428
|
||||||
|
477,457
|
435,508
|
|||||||
|
Accumulated
depreciation
|
(130,927
|
)
|
(110,770
|
)
|
||||
|
$
|
346,530
|
$
|
324,738
|
Depreciation
expense was approximately $20,329 thousand, $15,173 thousand and $14,258
thousand for the years ended December 31, 2005, 2004 and 2003, respectively.
Total interest expense capitalized as a component of the cost of property,
plant
and equipment was $1,431 thousand, $2,246 thousand and $479 thousand in 2005,
2004 and 2003, respectively.
58
Notes
to
Consolidated Financial Statements (Continued)
Asset
Impairment
The
Company recognized impairment charges of $6.2 million during the third quarter
of 2004 at its Ellis Park facility, which is included in the Company's Kentucky
Operations segment. The impairment charges were triggered as a result of Ellis
Park's poor live race meet performance during the third quarter of 2004.
Management's review, based on consideration of current fiscal year operating
results and the forecasted operating results of the facility, indicated that
the
estimated future cash flows were insufficient to recover the carrying value
of
long-lived assets. Accordingly, the Company adjusted the carrying value of
those
long-lived assets, including grandstands and buildings ($3,549 thousand),
furniture and fixtures ($85 thousand), equipment ($217 thousand), improvements
($512 thousand) and goodwill ($1,839 thousand), to management's estimated fair
value resulting in non-cash impairment charges of $6.2 million. The impairment
charges are included in the Company's Consolidated Statement of Net Earnings
for
the year ended December 31, 2004.
The
Company anticipates that the current carrying value of Ellis Park will be
supported by ongoing operations, however, should the Company's plans for
expected operating results at Ellis Park not be realized, an additional write
down of these assets could occur. Currently, the Company has not committed
to a
formal plan to divest the Ellis Park facility.
|
7.
|
Goodwill
|
Goodwill
of the Company at December 31, 2005 and 2004 is comprised of the following:
|
(in
thousands)
|
2005
|
2004
|
||||||
|
Kentucky
Operations
|
$
|
2,912
|
$
|
2,912
|
||||
|
Calder
Race Course
|
36,471
|
36,471
|
||||||
|
Churchill
Downs Simulcast Network ("CDSN")
|
11,018
|
11,018
|
||||||
|
CD
Louisiana Video
|
3,127
|
3,127
|
||||||
|
$
|
53,528
|
$
|
53,528
|
|
8.
|
Other
Intangible Assets
|
The
Company's other intangible assets are comprised of the following:
|
(in
thousands)
|
2005
|
2004
|
||||||
|
Illinois
Horse Race Equity Fund
|
$
|
3,307
|
$
|
3,307
|
||||
|
Indiana
racing license
|
2,085
|
2,085
|
||||||
|
Present
value of future Louisiana slot gaming
|
11,210
|
11,170
|
||||||
|
Other
|
5,260
|
5,259
|
||||||
|
21,862
|
21,821
|
|||||||
|
Accumulated
amortization
|
(3,732
|
)
|
(2,672
|
)
|
||||
|
$
|
18,130
|
$
|
19,149
|
Amortization
expense for other intangible assets was approximately $1,060 thousand, $611
thousand and $374 thousand for the years ended December 31, 2005, 2004 and
2003,
respectively, and is classified in operating expenses. Other intangible assets
which are being amortized are recorded at approximately $3.3 million and $4.4
million at December 31, 2005 and 2004, which is net of accumulated amortization
of $3.7 million and $2.7 million, respectively.
59
Notes
to
Consolidated Financial Statements (Continued)
Other
intangible assets with indefinite useful lives total $14,834 thousand. They
consist primarily of a future right to participate in the Illinois Horse Race
Equity Fund and the present value of future slot gaming in Louisiana. The
Company will determine the estimated useful life of the Illinois Horse Racing
Equity Fund upon the relocation of a license to operate a riverboat casino
gaming facility in Illinois and begin amortization of the intangible asset
as
necessary. In the event that the Company does not commence any slot gaming
activity in Louisiana, the related intangible asset would be written off and
recognized as an impairment loss in the Consolidated Statement of Net
Earnings.
Future
estimated aggregate amortization expense on other intangible assets for each
of
the next five fiscal years is as follows (in thousands):
|
Year
Ended
December
31,
|
Estimated
Amortization
Expense
|
||
|
2006
|
$659
|
||
|
2007
|
494
|
||
|
2008
|
459
|
||
|
2009
|
82
|
||
|
2010
|
82
|
|
9.
|
Income
Taxes
|
Components
of the provision for income taxes are as follows (in thousands):
|
2005
|
2004
|
2003
|
|||||||||
|
Current
payable:
|
|||||||||||
|
Federal
|
$
|
11,529
|
$
|
14,182
|
$
|
14,451
|
|||||
|
State
and local
|
1,347
|
1,363
|
1,997
|
||||||||
|
12,876
|
15,545
|
16,448
|
|||||||||
|
Deferred:
|
|||||||||||
|
Federal
|
(2,786
|
)
|
(2,517
|
)
|
(1,095
|
)
|
|||||
|
State
and local
|
(239
|
)
|
(321
|
)
|
(186
|
)
|
|||||
|
(3,025
|
)
|
(2,838
|
)
|
(1,281
|
)
|
||||||
|
$
|
9,851
|
$
|
12,707
|
$
|
15,167
|
||||||
The
Company's income tax expense is different from the amount computed by applying
the statutory federal income tax rate to income before taxes as follows (in
thousands):
|
2005
|
2004
|
2003
|
||||||
|
Federal
statutory tax on earnings before income tax
|
$
|
7,931
|
$
|
7,867
|
$
|
13,466
|
||
|
State
income taxes, net of federal income tax benefit
|
300
|
1,585
|
|
1,298
|
||||
|
Non-deductible
lobbying and contributions
|
1,616
|
1,639
|
|
417
|
||||
|
Unrealized
(gain) loss on derivative instruments
|
(139
|
) |
1,520
|
|
-
|
|||
|
Other
permanent differences
|
143
|
96
|
(14
|
)
|
||||
|
$
|
9,851
|
$
|
12,707
|
$
|
15,167
|
60
Notes
to
Consolidated Financial Statements (Continued)
Components
of the Company's deferred tax assets and liabilities are as follows (in
thousands):
|
2005
|
2004
|
|||||||
|
Deferred
tax liabilities:
|
||||||||
|
Property
and equipment in excess of tax basis
|
$
|
10,902
|
$
|
12,585
|
||||
|
Other
|
522
|
670
|
||||||
|
Deferred
tax liabilities
|
11,424
|
13,255
|
||||||
|
Deferred
tax assets:
|
||||||||
|
Deferred
compensation plans
|
3,630
|
2,510
|
||||||
|
Allowance
for uncollectible receivables
|
299
|
395
|
||||||
|
Deferred
liabilities
|
3,650
|
3,545
|
||||||
|
Net
operating losses
|
301
|
79
|
||||||
|
Other
|
2,124
|
2,059
|
||||||
|
Deferred
tax assets
|
10,004
|
8,588
|
||||||
|
Valuation
allowance
|
(301
|
)
|
(79
|
)
|
||||
|
Net
deferred tax liability
|
$
|
1,721
|
$
|
4,746
|
||||
|
Income
taxes are classified in the balance sheet as follows:
|
||||||||
|
Net
non-current deferred tax liability
|
$
|
5,670
|
$
|
8,686
|
||||
|
Net
current deferred tax asset
|
(3,949
|
)
|
(3,940
|
)
|
||||
|
$
|
1,721
|
$
|
4,746
|
At
December 31, 2005, the Company had net operating loss carryforwards for state
tax purposes of approximately $3,537 thousand, which expire in various amounts
from 2018 through 2020.
|
10.
|
Shareholders'
Equity
|
On
March
19, 1998, the Company's Board of Directors approved a shareholder rights plan,
which grants each shareholder the right to purchase a fraction of a share of
Series 1998 preferred stock at the rate of one right for each share of the
Company's common stock. This plan expires on March 19, 2008.
|
11.
|
Employee
Benefit Plans
|
The
Company has a profit-sharing plan that covers all employees with one year or
more of service and one thousand or more worked hours. The Company will match
contributions made by the employee up to 3% of the employee's annual
compensation. The Company will also match at 50%, contributions made by the
employee up to an additional 2%. The Company may also contribute a discretionary
amount determined annually by the Board of Directors as well as a year-end
discretionary match not to exceed 4%. The Company's cash contribution to the
plan for the years ended December 31, 2005, 2004 and 2003 was approximately
$1,110 thousand, $928 thousand and $849 thousand, respectively.
The
Company is a member of a noncontributory defined benefit multi-employer
retirement plan for all members of the Pari-mutuel Clerk's Union of Kentucky
and
several other collectively bargained retirement plans which are administered
by
unions. Cash contributions are made in accordance with negotiated labor
contracts. Retirement plan expense for the years ended December 31, 2005, 2004
and 2003 was approximately $485 thousand, $481 thousand and $471 thousand,
respectively. The Company's policy is to fund this expense as accrued. The
Company currently estimates that future contributions to these plans will not
increase significantly from prior years.
The
estimated present value of future payments under a supplemental benefit plan
for
the chief executive officer is charged to expense over the period of active
employment of the employee covered under the plan. Supplemental benefit plan
expense for the years ended December 31, 2005, 2004 and 2003 was approximately
$2,250 thousand, $100 thousand and $100 thousand, respectively.
61
Notes
to
Consolidated Financial Statements (Continued)
The
Company provides eligible executives and directors of the Company an opportunity
to defer to a future date the receipt of base and bonus compensation for
services as well as director's fees through a deferred compensation plan. The
Company's matching contribution on base compensation deferrals equals the
matching contribution of the Company's profit-sharing plan with certain limits.
The Company's cash contribution to the plan for the years ended December 31,
2005, 2004 and 2003 was approximately $65 thousand, $63 thousand and $72
thousand, respectively.
|
12.
|
Long-Term
Debt
|
The
following table presents our long-term debt outstanding at December 31, 2005
and
2004 (in thousands):
|
|
As
of December 31,
|
|||||||
|
2005
|
2004
|
|||||||
|
Long-term
debt, due after one year:
|
||||||||
|
$100
million variable rate senior notes
|
$
|
-
|
$
|
100,000
|
||||
|
$200
million revolving credit facility
|
|
15,000
|
125,000
|
|||||
|
Swing
line of credit
|
602
|
-
|
||||||
|
Convertible
note payable
|
12,973
|
12,552
|
||||||
|
Other
notes payable
|
5,218
|
5,218
|
||||||
|
Total
long-term debt
|
$
|
33,793
|
$
|
242,770
|
||||
On
September 23, 2005, the Company entered into an Amended and Restated Credit
Agreement (the "Agreement"). The Guarantors under the Agreement are a majority
of the Company's wholly-owned subsidiaries. The Agreement amends, supersedes
and
restates in its entirety a previous credit agreement dated as of April 3, 2003.
The Agreement provides for a maximum borrowing of $200.0 million (including
a
letter of credit sub-facility not to exceed $25.0 million and a swing line
commitment up to a maximum principal amount of $15.0 million). The facility
terminates on September 23, 2010. Subject to certain conditions, the Company
may
at any time increase the aggregate commitment up to an amount not to exceed
$250.0 million.
Generally,
borrowings made pursuant to the Agreement bear interest at a LIBOR-based rate
per annum plus an applicable percentage ranging from 0.75% to 1.50% depending
on
certain Company financial ratios. In addition, under the Agreement, the Company
agreed to pay a commitment fee at rates that range from 0.15% to 0.375% of
the
available aggregate commitment, depending on the Company's leverage ratio.
The
weighted average interest rate on outstanding borrowings at December 31, 2005
and 2004 was 5.27% and 5.15%, respectively. The weighted average interest rate
on outstanding borrowings at December 31, 2004 was 3.56% for the senior
notes.
The
Agreement contains customary financial and other covenant requirements,
including specific interest coverage and leverage ratios, as well as minimum
levels of net worth.
As
of
December 31, 2005 and 2004, Hoosier Park had approximately $5.2 million of
notes
payable due to Centaur Racing, LLC ("Centaur"). The loan requires interest
at
prime plus 2% (9.25% and 7.25% at December 31, 2005 and 2004, respectively)
payable monthly with principal due November 2014. The note is collateralized
by
10% of the assets of Hoosier Park.
62
Notes
to
Consolidated Financial Statements (Continued)
On
October 19, 2004, the Company acquired 452,603 shares of its common stock from
a
shareholder in exchange for a convertible promissory note in the principal
amount of $16.7 million, due October 18, 2014. The convertible note was amended
and restated on March 7, 2005 (as so amended and restated the "Note") to
eliminate the Company's ability to pay the Note at maturity with shares of
its
common stock. The Company will pay interest on the principal amount of the
Note
on an annual basis in an amount equal to what the shareholder would have
received as a dividend on the shares that were redeemed. The Note is immediately
convertible, at the option of the shareholder, into shares of the Company's
common stock at a conversion price of $36.83. The Note may not be prepaid
without the shareholder's consent. Upon maturity, the Company must pay the
principal balance and unpaid accrued interest in cash. Prior to the amendment,
the Note was deemed a short forward contract on common stock of the Company
that
included each of a short call option with a strike price of $36.83, a long
put
option with an equivalent strike price and a debt obligation consisting of
interest amounts equal to the future dividends with respect to the underlying
shares and a principal amount equal to the notional amount of $16.7 million.
A
discount of $4.2 million, representing the difference between the notional
amount and the fair market value of $12.5 million of the debt obligation on
the
date of issuance, was recorded and is being amortized against interest expense
over the term of the Note using the effective interest method.
The
aforementioned derivative financial instruments were recorded separately and
adjusted to fair market value on December 31, 2004 and March 7, 2005 in the
Company's Consolidated Balance Sheet as follows (in thousands):
|
|
December
31,
2004
|
March
7,
2005
|
Change
|
||||||||
|
Long
put option
|
$
|
3,413
|
$
|
3,408
|
$
|
(5
|
)
|
||||
|
Short
call option
|
(11,410
|
)
|
(11,233
|
)
|
177
|
||||||
|
Net
derivative financial instrument
|
$
|
(7,997
|
)
|
$
|
(7,825
|
)
|
$
|
172
|
Effective
on the date of the amendment, the Note is deemed a conventional convertible
debt
instrument. As such, the Note was adjusted to fair market value on March 7,
2005
against current earnings. The long put option and short call option are included
in other assets and other liabilities, respectively, and are both being
amortized into earnings on a straight-line basis over the remaining term of
the
Note. The Company recorded unrealized gains (losses) on derivative instruments
in the amounts of $818 thousand and $(4.3) million during the years ended
December 31, 2005 and 2004, respectively, which includes $646 thousand of
amortization during the year ended December 31, 2005.
Future
aggregate maturities of long-term debt are as follows (in
thousands):
|
Year
Ended
December
31,
|
||||
|
2006
|
$
|
-
|
||
|
2007
|
-
|
|
||
|
2008
|
-
|
|||
|
2009
|
-
|
|||
|
2010
|
|
15,602
|
||
|
Thereafter
|
18,191
|
|||
|
Total
|
$
|
33,793
|
|
13.
|
Operating
Leases
|
The
Company has a long-term operating lease agreement for land in Arlington Heights,
Illinois on which a portion of the backside facilities of Arlington Park is
located as well as two operating lease agreements for Arlington Park OTBs.
The
Arlington lease on land expires in 2010 with an option to purchase. One OTB
lease expires in 2006 with an option to extend the lease for an additional
five
years, and the other OTB lease expires in 2011 with an option to
purchase.
63
Notes
to
Consolidated Financial Statements (Continued)
The
Company also has a long-term operating lease for the land in Anderson, Indiana
on which its Hoosier Park facility is located as well as an operating lease
for
the Indianapolis off-track betting facility ("OTB"). The Anderson lease expires
in 2013, with remaining options to extend the lease for two additional ten-year
terms. The Indianapolis lease expires in 2009, with an option to extend the
lease for two additional five-year terms. The leases include provisions for
minimum lease payments as well as contingent lease payments based on handle
or
revenues.
The
Company also leases certain totalisator and audio/visual equipment that are
contingent on handle and race days, respectively. Total annual rent expense
for
contingent lease payments, including totalisator, audio/visual equipment, land
and facilities, was approximately $6,230 thousand, $5,792 thousand and $5,712
thousand for the years ended December 31, 2005, 2004 and 2003, respectively.
The
Company's total rent expense for all operating leases, including the contingent
lease payments, was approximately $9,936 thousand, $8,754 thousand and $7,902
thousand for the years ended December 31, 2005, 2004 and 2003,
respectively.
Future
minimum operating lease payments are as follows, not including totalisator
and
audio visual equipment (in thousands):
|
Year
Ended
December
31,
|
||||
|
2006
|
$
|
3,353
|
||
|
2007
|
2,343
|
|||
|
2008
|
1,943
|
|||
|
2009
|
1,801
|
|||
|
2010
|
1,381
|
|||
|
Thereafter
|
654
|
|||
|
Total
|
$
|
11,475
|
|
14.
|
Stock-Based
Compensation Plans
|
Employee
Stock Options
The
Company sponsors the "Churchill Downs Incorporated 2003 Stock Option Plan"
(the
"03 Plan"), the "Churchill Downs Incorporated 1997 Stock Option Plan" (the
"97
Plan"), and the "Churchill Downs Incorporated 1993 Stock Option Plan" (the
"93
Plan"), also collectively referred to as "the Stock Option Plans." These
stock-based incentive compensation plans are described below. The Company
applies APB 25 and related interpretations in accounting for the Stock Option
Plans. Pro forma disclosures as if the Company adopted the cost recognition
provisions of SFAS No. 123 are described in Note 1.
On
November 13, 2003, the Board of Directors terminated the 03 Plan, effective
upon
the shareholders' approval of the "Churchill Downs Incorporated 2004 Restricted
Stock Plan" (the "Restricted Stock Plan"). Awards issued under the 03 Plan
prior
to its termination will be unaffected by such termination.
The
Stock
Option Plans provide that the exercise price of any incentive stock option
may
not be less than the fair market value of the common stock on the date of grant.
The exercise price of any nonqualified stock option is not so limited by the
plans. The Company granted stock options in 2003. The stock options granted
in
those years have contractual terms of 10 years and generally vest three years
from the date of grant. In accordance with APB 25, the Company has not
recognized any compensation cost for these stock options.
64
Notes
to
Consolidated Financial Statements (Continued)
A
summary
of the status of the Company's stock options as of December 31, 2005, 2004
and
2003 and the changes during the year ended on those dates is presented below
(in
thousands, except per share data):
|
|
Number
of Shares Under
Option
|
Weighted
Average Exercise Price
|
||||||
|
Balance
December 31, 2002
|
997
|
$
|
27.01
|
|||||
|
Granted
|
11
|
$
|
34.57
|
|||||
|
Exercised
|
(79
|
)
|
$
|
24.66
|
||||
|
Cancelled/Forfeited
|
(45
|
)
|
$
|
32.79
|
||||
|
Balance
December 31, 2003
|
884
|
$ |
26.94
|
|||||
|
Granted
|
-
|
$ |
-
|
|||||
|
Exercised
|
(139
|
)
|
$ |
23.87
|
||||
|
Cancelled/Forfeited
|
(8
|
)
|
$ |
35.33
|
||||
|
Balance
December 31, 2004
|
737
|
$ |
27.45
|
|||||
|
Granted
|
-
|
$ |
-
|
|||||
|
Exercised
|
(168
|
)
|
$ |
22.27
|
||||
|
Cancelled/Forfeited
|
(44
|
)
|
$ |
37.14
|
||||
|
Balance
December 31, 2005
|
525
|
$
|
28.30
|
The
following table summarizes information about stock options outstanding and
exercisable at December 31, 2005 (in thousands, except per share
data):
|
Stock
Options Outstanding
|
Stock
Options Exercisable
|
|||||||||||||
| Range of Exercise Prices |
Number
Outstanding
|
Weighted
Average Remaining Contractual
Life
|
Weighted
Average
Exercise
Price
|
Number
Exercisable
|
Weighted
Average
Exercise
Price
|
|||||||||
|
$16.43
to $20.52
|
78
|
0.6
|
$ |
18.80
|
78
|
$ |
18.80
|
|||||||
|
$20.53
to $24.63
|
110
|
3.0
|
$ |
22.35
|
110
|
$ |
22.35
|
|||||||
|
$24.64
to $28.73
|
145
|
5.5
|
$ |
27.43
|
145
|
$ |
27.43
|
|||||||
|
$28.74
to $32.84
|
56
|
3.7
|
$ |
31.42
|
56
|
$ |
31.42
|
|||||||
|
$32.85
to $36.94
|
28
|
4.2
|
$ |
35.39
|
17
|
$ |
35.95
|
|||||||
|
$36.95
to $41.05
|
108
|
6.9
|
$ |
38.95
|
108
|
$ |
38.95
|
|||||||
| TOTAL |
525
|
4.3
|
$ |
28.30
|
514
|
$ |
28.17
|
|||||||
At
December 31, 2004, there were 562 thousand options exercisable with a weighted
average exercisable price of $24.07. At December 31, 2003, there were 533
thousand options exercisable with a weighted average exercisable price of
$22.91.
65
Notes
to
Consolidated Financial Statements (Continued)
Restricted
Stock Plan
On
November 13, 2003, the Board of Directors adopted the Restricted Stock Plan,
which was subsequently approved by the shareholders in June 2004. The Restricted
Stock Plan permits the award of common stock to directors and key employees,
including officers, of the Company and its subsidiaries who are from time to
time responsible for the management, growth and protection of the business
of
the Company and its subsidiaries. Up to 195 thousand shares of common stock
have
been reserved and set aside out of the Company's authorized but unissued common
stock for issuance under the Restricted Stock Plan. The Company awarded 54
thousand and 45 thousand shares of restricted stock in 2005 and 2004,
respectively. Such restricted stock vests five years from the date of grant
or
upon retirement at or after age 60. In accordance with the grant of restricted
stock, the Company recorded unearned compensation of approximately $1.9 million
and $2.0 million in 2005 and 2004, respectively, based on the fair market value
of common stock on the date of grant that will be amortized to compensation
expense over the vesting period of five years using the straight-line method.
Upon retirement at or after age 60 of a participant, the remaining unamortized
unearned compensation is recognized immediately in current earnings using the
nominal vesting approach. The Company recorded approximately $636 thousand
and
$33 thousand of compensation expense, included in earnings from continuing
operations, during the years ended December 31, 2005 and 2004, respectively.
SFAS No. 123(R), "Share-Based Payment" ("SFAS No. 123(R)"), as described in
Note
20, requires the use of the non-substantive vesting period approach. That is,
compensation expense must be recognized immediately for awards granted to
retirement eligible employees or over the period from the grant date to the
date
retirement eligibility is achieved, if that is expected to occur during the
nominal vesting period. Upon adoption of SFAS 123(R) during the first quarter
of
2006, the Company will begin using the non-substantive vesting approach for
all
new awards granted. If the Company had used the non-substantive vesting approach
for existing awards during the years ended December 31, 2005 and 2004,
compensation expense included in earnings from continuing operations would
have
been $1,011 thousand and $610 thousand, respectively.
Employee
Stock Purchase Plan
Under
the
Company's Employee Stock Purchase Plan (the "Employee Stock Purchase Plan"),
the
Company is authorized to sell, pursuant to short-term stock options, shares
of
its common stock to its full-time (or part-time for at least 20 hours per week
and at least five months per year) employees at a discount from the common
stock's fair market value. The Employee Stock Purchase Plan operates on the
basis of recurring, consecutive one-year periods. Each period commences on
August 1 and ends on the following July 31.
On
the
first day of each 12-month period, August 1, the Company offers to each eligible
employee the opportunity to purchase common stock. Employees who elect to
participate for each period have a designated percentage of their compensation
withheld (after-tax) and applied to the purchase of shares of common stock
on
the last day of the period, July 31. The Employee Stock Purchase Plan allows
withdrawals, terminations and reductions on the amounts being deducted. The
purchase price for the common stock is 85% of the lesser of the fair market
value of the common stock on (i) the first day of the period, or (ii) the last
day of the period. No employee may purchase common stock under the Employee
Stock Purchase Plan valued at more than $25 for each calendar year.
Under
the
Employee Stock Purchase Plan, the Company sold approximately 12 thousand shares
of common stock to 261 employees pursuant to options granted on August 1, 2004,
and exercised on July 31, 2005. Because the plan year overlaps the Company's
fiscal year, the number of shares to be sold pursuant to options granted on
August 1, 2005 can only be estimated because the 2005 plan year is not yet
complete. The Company's estimate of options granted in 2005 under the Plan
is
based on the number of shares sold to employees under the Plan for the 2004
plan
year, adjusted to reflect the change in the number of employees participating
in
the Plan in 2005.
66
Notes
to
Consolidated Financial Statements (Continued)
A
summary
of the status of the Company's stock options under the Employee Stock Purchase
Plan as of December 31, 2005, 2004 and 2003 and the changes during the year
ended on those dates is presented below (in thousands, except per share
data):
|
Number
of
Shares
Under
Option
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Fair
Value
at
Grant Date
|
|||||
|
Balance
December 31, 2002
|
13
|
$
|
32.19 | ||||
|
Adjustment
to prior year estimated grants
|
(1
|
) | |||||
|
Granted
|
15
|
$
|
37.31 |
$8.09
|
|||
|
Exercised
|
(12
|
) | 31.70 | ||||
|
Balance
December 31, 2003
|
15
|
$
|
37.31 | ||||
|
Adjustment
to prior year estimated grants
|
(2
|
)
|
|||||
|
Granted
|
15
|
$
|
37.10 |
$9.34
|
|||
|
Exercised
|
(13
|
)
|
$
|
31.70 | |||
|
Balance
December 31, 2004
|
15
|
$
|
37.10 | ||||
|
Adjustment
to prior year estimated grants
|
(3
|
)
|
|||||
|
Granted
|
10
|
$
|
46.65 |
$11.50
|
|||
|
Exercised
|
(12
|
)
|
|
31.60 | |||
|
Balance
December 31, 2005
|
10
|
$
|
46.65 | ||||
|
15.
|
Fair
Value Of Financial
Instruments
|
The
following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash
and
Cash Equivalents - The carrying amount reported in the balance sheet for cash
and cash equivalents approximates its fair value due to the short-term maturity
of these instruments.
Long-Term
Debt - The carrying amounts of the Company's borrowings under its line of credit
agreements and other long-term debt approximates fair value, based upon current
interest rates.
Interest
Rate Swaps - The fair value of interest rate swap contracts is based on rates
beings offered for similar arrangements which consider forward yield curves
and
discount rates.
Convertible
Notes Payable - The fair values of convertible notes payable and the related
embedded derivative instruments are estimated using pricing models similar
to
those used to value stock options.
|
16.
|
Commitments
and Contingencies
|
The
septic system at the Ellis Park facility must be replaced with a hook-up to
city
sewers. The project is currently being evaluated by assessing the benefits
of
different options for remediation. It is unknown at this time when the project
is expected to begin or what the ultimate cost to the Company will be.
It
is not
anticipated that the Company will have any material liability as a result of
compliance with environmental laws with respect to any of the Company's
properties. Except as discussed herein, compliance with environmental laws
has
not affected the ability to develop and operate the Company's properties and
the
Company is not otherwise subject to any material compliance costs in connection
with federal or state environmental laws.
Notes
to
Consolidated Financial Statements (Continued)
The
Company is also a party to various non-environmental legal proceedings and
administrative actions, all arising from the ordinary course of business.
Although it is impossible to predict the outcome of any legal proceeding, the
Company believes any liability that may finally be determined with respect
to
such legal proceedings should not have a material effect on the Company's
consolidated financial position, results of operations or cash
flows.
|
17.
|
Earnings
Per Common Share
Computations
|
The
following is a reconciliation of the numerator and denominator of the earnings
per common share computations (in thousands, except per share
data):
|
2005
|
2004
|
2003
|
||||||||
|
Numerator
for basic earnings (loss) from continuing operations per common
share:
|
||||||||||
|
Net
earnings from continuing operations
|
$
|
12,810
|
$
|
9,769
|
$
|
23,308
|
||||
|
Net
earnings from continuing operations allocated to participating
securities
|
(213
|
)
|
(23
|
)
|
-
|
|||||
|
Numerator
for basic earnings from continuing operations per common
share
|
$
|
12,597
|
$
|
9,746
|
$
|
23,308
|
||||
|
Numerator
for basic earnings (loss) per common share:
|
||||||||||
|
Net
earnings
|
$
|
78,908
|
$
|
8,915
|
$
|
23,379
|
||||
|
Net
earnings allocated to participating securities
|
(2,450
|
)
|
(17
|
)
|
-
|
|||||
|
Numerator
for basic earnings per common share
|
$
|
76,458
|
$
|
8,898
|
$
|
23,379
|
||||
|
Numerator
for diluted earnings from continuing operations per common
share:
|
||||||||||
|
Net
earnings from continuing operations
|
$
|
12,810
|
$
|
9,769
|
$
|
23,308
|
||||
|
Interest
expense on participating securities
|
137
|
113
|
-
|
|||||||
|
Numerator
for diluted earnings from continuing operations per common
share
|
$
|
12,947
|
$
|
9,882
|
$
|
23,308
|
||||
|
Numerator
for diluted earnings per common share:
|
||||||||||
|
Net
earnings
|
$
|
78,908
|
$
|
8,915
|
$
|
23,379
|
||||
|
Interest
expense on participating securities
|
137
|
113
|
-
|
|||||||
|
Numerator
for diluted earnings per common share
|
$
|
79,045
|
$
|
9,028
|
$
|
23,379
|
||||
|
Denominator
for earnings (loss) per common share:
|
||||||||||
|
Basic
|
12,920
|
13,196
|
13,189
|
|||||||
|
Plus
dilutive effect of stock options
|
127
|
171
|
203
|
|||||||
|
Plus
dilutive effect of convertible note
|
453
|
91
|
-
|
|||||||
|
Diluted
|
13,500
|
13,458
|
13,392
|
|||||||
|
Earnings
(loss) per common share:
|
||||||||||
|
Basic
|
||||||||||
|
Earnings
from continuing operations
|
$
|
0.98
|
$
|
0.74
|
$
|
1.77
|
||||
|
Discontinued
operations
|
4.94
|
(0.07
|
)
|
-
|
||||||
|
Net
earnings
|
$
|
5.92
|
$
|
0.67
|
$
|
1.77
|
||||
|
Diluted
|
||||||||||
|
Earnings
from continuing operations
|
$
|
0.96
|
$
|
0.73
|
$
|
1.74
|
||||
|
Discontinued
operations
|
4.90
|
(0.06
|
)
|
0.01
|
||||||
|
Net
earnings
|
$
|
5.86
|
$
|
0.67
|
$
|
1.75
|
||||
68
Return
to Index
Notes to Consolidated Financial Statements (Continued)
Notes to Consolidated Financial Statements (Continued)
Options
to purchase approximately 53 thousand shares and 169 thousand shares for the
years ended December 31, 2005 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.
|
18.
|
Segment
Information
|
The
Company has determined that it currently operates in the following seven
segments: (1) Kentucky Operations, including Churchill Downs racetrack, its
on-site simulcast facility and racetrack enclosure and Ellis Park racetrack
and
its on-site simulcast facility; (2) Calder Race Course; (3) Arlington Park
and
its eight off-track betting facilities ("OTBs"); (4) Hoosier Park racetrack,
its
on-site simulcast facility and its three OTBs; (5) Louisiana operations,
including Fair Grounds, its eleven OTBs and VSI; (6) CDSN, the simulcast product
provider of the Company; and (7) other investments, including Churchill Downs
Simulcast Productions ("CDSP") 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" for the year ended December 31,
2005. 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, 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 (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.
Historically,
the allocation of corporate overhead was excluded from EBITDA of the Company's
segments. During 2005, the Company began evaluating its segments using EBITDA
that included corporate overhead as a key performance measure. Therefore, the
segment EBITDA presented below includes corporate overhead for all periods
presented. Corporate EBITDA, however, includes overhead in the amounts of $2,156
thousand, $1,613 thousand and $1,626 thousand related to Hollywood Park for
the
years ended December 31, 2005, 2004 and 2003, respectively. Also, due to an
internal restructuring, the corporate sales department has been moved from
corporate to Kentucky Operations during 2005. As such, EBITDA in the amounts
of
$935 thousand, $1,030 thousand and $1,015 thousand was transferred to the
Kentucky Operations for the years ended December 31, 2005, 2004 and 2003,
respectively.
69
Return to IndexNotes
to
Consolidated Financial Statements (Continued)
The
table
below presents information about reported segments for the years ended December
31, 2005, 2004 and 2003 (in thousands):
|
December
31,
|
||||||||||
|
2005
|
2004
|
2003
|
||||||||
|
Net
revenues from external customers:
|
||||||||||
|
Kentucky
Operations
|
$
|
96,052
|
$
|
89,060
|
$
|
85,777
|
||||
|
Arlington
Park
|
75,422
|
79,764
|
78,489
|
|||||||
|
Calder
Race Course
|
81,131
|
79,505
|
78,535
|
|||||||
|
Hoosier
Park
|
40,710
|
41,491
|
42,808
|
|||||||
|
Louisiana
Operations
|
47,114
|
11,058
|
-
|
|||||||
|
CDSN
|
67,272
|
60,121
|
60,721
|
|||||||
|
Total
racing operations
|
407,701
|
360,999
|
346,330
|
|||||||
|
Other
investments
|
953
|
953
|
2,889
|
|||||||
|
Corporate
revenues
|
702
|
21
|
28
|
|||||||
|
Net
revenues from continuing operations
|
409,356
|
361,973
|
349,247
|
|||||||
|
Discontinued
operations
|
69,525
|
100,542
|
94,809
|
|||||||
|
$
|
478,881
|
$
|
462,515
|
$
|
444,056
|
|||||
|
Intercompany
net revenues
|
||||||||||
|
Kentucky
Operations
|
$
|
23,590
|
$
|
23,650
|
$
|
25,068
|
||||
|
Arlington
Park
|
8,766
|
8,187
|
8,523
|
|||||||
|
Calder
Race Course
|
11,605
|
12,606
|
13,218
|
|||||||
|
Hoosier
Park
|
159
|
158
|
203
|
|||||||
|
Louisiana
Operations
|
8,450
|
2,179
|
-
|
|||||||
|
Total
racing operations
|
52,570
|
46,780
|
47,012
|
|||||||
|
Other
investments
|
2,001
|
2,087
|
2,171
|
|||||||
|
Eliminations
|
(55,126
|
)
|
(49,653
|
)
|
(49,925
|
)
|
||||
|
(555
|
)
|
(786
|
)
|
(742
|
)
|
|||||
|
Discontinued
operations
|
555
|
786
|
742
|
|||||||
|
|
$ |
-
|
$
|
-
|
$
|
-
|
||||
|
Segment
EBITDA and net earnings :
|
||||||||||
|
Kentucky
Operations
|
$
|
21,381
|
$
|
11,905
|
$
|
18,130
|
||||
|
Arlington
Park
|
3,821
|
10,048
|
8,090
|
|||||||
|
Calder
Race Course
|
7,391
|
6,040
|
12,023
|
|||||||
|
Hoosier
Park
|
263
|
1,741
|
2,311
|
|||||||
|
Louisiana
Operations
|
(3,059
|
)
|
17
|
-
|
||||||
|
CDSN
|
16,409
|
13,892
|
14,257
|
|||||||
|
Total
racing operations (EBITDA)
|
46,206
|
43,643
|
54,811
|
|||||||
|
Other
investments
|
2,575
|
3,302
|
1,457
|
|||||||
|
Corporate
|
(3,777
|
)
|
(8,207
|
)
|
(3,542
|
)
|
||||
|
Total
|
45,004
|
38,738
|
52,726
|
|||||||
|
Eliminations
|
-
|
(6
|
)
|
-
|
||||||
|
Depreciation
and amortization
|
(21,389
|
)
|
(15,666
|
)
|
(14,632
|
)
|
||||
|
Interest
income (expense), net
|
(954
|
)
|
(590
|
)
|
381
|
|||||
|
Provision
for income taxes
|
(9,851
|
)
|
(12,707
|
)
|
(15,167
|
)
|
||||
|
Net
earnings from continuing operations
|
12,810
|
9,769
|
23,308
|
|||||||
|
Discontinued
operations, net of income taxes
|
66,098
|
(854
|
)
|
71
|
||||||
|
Net
earnings
|
$
|
78,908
|
$
|
8,915
|
$
|
23,379
|
70
Notes
to
Consolidated Financial Statements (Continued)
The
table
below presents total asset information about reported segments as of December
31, 2005 and 2004 (in thousands):
|
As
of December 31,
|
||||||||
|
2005
|
2004
|
|||||||
|
Total
assets:
|
||||||||
|
Kentucky
Operations
|
$
|
440,299
|
$
|
572,039
|
||||
|
Calder
Race Course
|
92,552
|
89,393
|
||||||
|
Arlington
Park
|
84,796
|
83,047
|
||||||
|
Hoosier
Park
|
33,318
|
33,073
|
||||||
|
Louisiana
Operations
|
74,157
|
75,290
|
||||||
|
CDSN
|
11,018
|
11,018
|
||||||
|
Other
investments
|
143,003
|
117,534
|
||||||
|
Assets
held for sale
|
-
|
142,445
|
||||||
|
879,143
|
1,123,839
|
|||||||
|
Eliminations
|
(364,601
|
)
|
(481,562
|
)
|
||||
|
$
|
514,542
|
$
|
642,277
|
|||||
|
Year
Ended December 31,
|
||||||||
|
2005
|
2004
|
|||||||
|
Capital
expenditures, net:
|
||||||||
|
Kentucky
Operations
|
$
|
28,749
|
$
|
66,653
|
||||
|
Hollywood
Park
|
2,161
|
4,080
|
||||||
|
Calder
Race Course
|
1,731
|
2,756
|
||||||
|
Arlington
Park
|
5,155
|
3,051
|
||||||
|
Hoosier
Park
|
419
|
554
|
||||||
|
Louisiana
Operations
|
4,901
|
40
|
||||||
|
Other
Investments
|
122
|
38
|
||||||
|
$
|
43,238
|
$
|
77,172
|
|||||
|
19.
|
Related
Party Transactions
|
Directors
of the Company may from time to time own or have interests in horses racing
at
the Company's tracks. All such races are conducted, as applicable, under the
regulations of each state's respective regulatory agency, and no director
receives any extra or special benefit with regard to having his or her horses
selected to run in races or in connection with the actual running of races.
There is no material financial statement impact based on the fact that some
directors may have interest in horses racing at our tracks.
In
its
ordinary course of business, the Company may enter into transactions with
certain of its officers and directors for the sale of personal seat licenses
and
suite accommodations at its racetracks, and tickets for its live racing events.
The Company believes that each such transaction has been on terms no less
favorable for the Company than could have been obtained in a transaction with
a
third party and no such person received any extra or special benefit in
connection with such transactions.
During
2000, Arlington Park entered into a ten-year lease with an option to purchase
agreement by which Arlington Park leases from Duchossois Industries, Inc.
("DII") approximately sixty-eight acres of real estate adjacent to Arlington
Park for use in backside operations. DII beneficially owns more than 5% of
the
Company's common stock. Total rent expense on the lease was approximately $378
thousand, $343 thousand and $315 thousand for the years ended December 31,
2005,
2004 and 2003, respectively.
One
or
more directors of the Company have an interest in business entities which
contract with the Company and its affiliates for the purpose of simulcasting
races and the acceptance of wagers on such races. Those business entities did
not receive any extra or special benefit as a result of the Company's
relationship with these directors. There is no material financial statement
impact for the Company from the simulcast contracts with these business
entities.
71
Notes
to
Consolidated Financial Statements (Continued)
Mr.
Charles W. Bidwill, Jr., who became a Director Emeritus of the Company during
2005, was Director Emeritus and a 14.42% owner of National Jockey Club, Inc.
National Jockey Club, Inc., Hawthorne Race Course, Inc. and Suburban Downs,
Inc., doing business together as Hawthorne National LLC, and the Company and
its
affiliates were parties to simulcasting contracts whereby Hawthorne National
LLC
was granted the right to simulcast the affiliates' respective races and the
Company's races, including the Kentucky Oaks and Kentucky Derby races. Hawthorne
National LLC and the Company were also parties to simulcasting contracts whereby
the Company was granted certain rights to simulcast Hawthorne National LLC
Thoroughbred races. In consideration for these rights, Hawthorne National LLC
and the Company paid contractually determined rates on gross handle simulcasted.
For purposes of these and other simulcast contracts, gross handle is defined
as
the total amount wagered by patrons on the races at the receiving facility
less
any money returned to the patrons by cancels and refunds. These simulcast
contracts are uniform throughout the industry and the rates charged were
substantially the same as rates charged to other parties who contracted to
simulcast the same races. The Company and its affiliates simulcasted their
races
to over 1,000 locations in the United States and selected international sites.
Hawthorne National LLC received no extra or special benefit as a result of
the
Company's relationship with Mr. Bidwill.
See
Notes
4 and 12 for discussion of transactions with a shareholder.
|
20.
|
Recently
Issued Accounting
Pronouncements
|
In
December 2004, the Financial Accounting Standards Board issued SFAS No. 123(R)
to replace SFAS No. 123 and APB 25. SFAS No. 123(R) requires, among other
things, that all share-based payments to employees, including grants of stock
options, be measured based on their grant-date fair value and recognized as
expense in the consolidated financial statements effective for interim or annual
periods beginning after December 15, 2005. Unless observable market prices
exist, the grant-date fair value is estimated using an appropriate
option-pricing model as determined by management. Management must also make
certain assumptions about employee exercise habits, forfeiture rates and select
an appropriate amortization methodology for recognizing compensation expense.
SFAS No. 123(R) permits a modified prospective method of adoption. Upon adoption
of SFAS No. 123(R), compensation expense will be recorded in the consolidated
financial statements for 1) all awards granted after January 1, 2006 and the
2)
future vesting of awards outstanding as of January 1, 2006. Companies may also
elect to restate their previously issued consolidated financial statements
to
provide consistency across all periods presented under a modified retrospective
method. During the fourth quarter of 2004, the Company terminated its stock
option plans and adopted a restricted stock plan. Except for grants made in
accordance with the Employee Stock Purchase Plan, no stock options were granted
during the years ended December 31, 2005 and 2004, and the Company has no
current intentions of granting stock options during the year ended December
31,
2006. Upon adoption of SFAS No. 123(R), the Company will be required to begin
expensing all unvested stock options over their remaining vesting periods.
See
Note 1 for additional details related to pro forma stock-based compensation
expense. Management has determined that the adoption of SFAS No. 123(R) will
not
have a material impact on the Company's consolidated results of operations
and
earnings per share.
72
Return to Index|
Supplementary
Financial Information - Results of Continuing Operations
(Unaudited)
(In
thousands, except per share data)
|
|
Common
Stock Information
(Per
Share of Common Stock)
|
|||||||||||||||||||
|
Net
Revenues
|
Net
Revenues |
Operating
Income (Loss)
|
|
Net
Earnings (Loss)
|
|
Basic
Earnings
(Loss)
|
|
Diluted
Earnings
(Loss)
|
|
Dividends
|
|||||||||
|
2005
|
|||||||||||||||||||
|
Fourth
Quarter
|
$
|
81,684
|
$
|
(7,482
|
)
|
$
|
(3,852
|
)
|
$
|
(0.30
|
)
|
$
|
(0.30
|
)
|
$
|
0.50
|
|||
|
Third
Quarter
|
112,028
|
6,058
|
3,842
|
0.29
|
0.28
|
||||||||||||||
|
Second
Quarter
|
163,207
|
40,337
|
22,678
|
1.70
|
1.69
|
||||||||||||||
|
First
Quarter
|
51,882
|
(18,026
|
)
|
(9,858
|
)
|
(0.77
|
)
|
(0.77
|
)
|
||||||||||
|
$
|
408,801
|
$
|
20,887
|
$
|
12,810
|
$
|
0.98
|
$
|
0.96
|
||||||||||
|
2004
|
|||||||||||||||||||
|
Fourth
Quarter
|
$
|
85,862
|
$
|
(880
|
)
|
$
|
(4,483
|
)
|
$
|
(0.35
|
)
|
$
|
(0.35
|
)
|
$
|
0.50
|
|||
|
Third
Quarter
|
102,536
|
1,685
|
(396
|
)
|
(0.03
|
)
|
(0.03
|
)
|
|||||||||||
|
Second
Quarter
|
140,159
|
37,902
|
22,877
|
1.72
|
1.70
|
||||||||||||||
|
First
Quarter
|
32,630
|
(14,124
|
)
|
(8,229
|
)
|
(0.62
|
)
|
(0.62
|
)
|
||||||||||
|
$
|
361,187
|
$
|
24,583
|
$
|
9,769
|
$
|
0.74
|
$
|
0.73
|
||||||||||
None.
|
ITEM
9A.
|
Included
in this Annual Report on Form 10-K are certifications of our Chief Executive
Officer and Executive Vice President - Chief Financial Officer, which are
required in accordance with Rule 13a-14 of the Securities and Exchange Act
of
1934 as amended (the “Exchange Act”). This section includes information
concerning the controls and controls evaluation referred to in the
certifications. Item 8 of this Annual Report on Form 10-K includes the report
of
PricewaterhouseCoopers LLP, our independent registered public accounting firm,
regarding its audit of our assessment and effectiveness of internal control
over
financial reporting.
(a) Evaluation
of Disclosure Controls and Procedures
The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the reports that the Company files
or submits to the Securities Exchange Commission is recorded, processed,
summarized, and reported within the time periods specified in the SEC's rules
and forms, and that such information is accumulated and communicated to the
Company's management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required financial
disclosure.
As
of the
end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company's Disclosure
Committee and management, including the Chief Executive Officer and the Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b).
Based upon this evaluation, the Chief Executive Officer and the Chief Financial
Officer concluded that our disclosure controls and procedures were effective
as
of December 31, 2005.
73
(b) Management's
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act. Our internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability
of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Our
internal control over financial reporting includes those policies and procedures
that:
|
(i)
|
Pertain
to the maintenance of records that, in reasonable detail, accurately
and
fairly reflect the transactions and dispositions of the assets of
the
Company;
|
|
(ii)
|
Provide
reasonable assurance that transactions are recorded as necessary
to permit
preparation of financial statements in accordance with generally
accepted
accounting principles, and that receipts and expenditures of the
Company
are being made only in accordance with authorizations of management
and
directors of the Company; and
|
|
(iii)
|
Provide
reasonable assurance regarding prevention or timely detection of
authorized acquisition, use or disposition of the Company's assets
that
could have a material effect on the financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Our
management assessed the effectiveness of the Company's internal control over
financial reporting as of December 31, 2005. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework.
Based
on
our assessment using those criteria, management has concluded that the Company
maintained effective internal control over financial reporting as of December
31, 2005.
Our
management's assessment of the effectiveness of the Company's internal control
over financial reporting as of December 31, 2005 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
as
stated in their report which appears under Item 8 within our consolidated
financial statements.
(c) Changes
in Internal Control Over Financial Reporting
Management
of the Company has evaluated, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, changes in the Company's internal
control over financial reporting (as defined in Rules 13a-15(f) of the Exchange
Act) during the fourth quarter of 2005. Except for the fact that the Company
remediated a material weakness related to management’s inability to evaluate
internal control over financial reporting at a third party Tote service
organization by obtaining a Type II SAS 70 service auditor’s report, there have
not been any changes in the Company's internal control over financial reporting
(as defined in Rules 13a-15(f) of the Exchange Act) that occurred during the
quarter ended December 31, 2005 that have materially affected, or are reasonably
likely to materially affect, the Company's internal control over financial
reporting.
|
ITEM
9B.
|
A.
On
March 9, 2006, the Board of Directors of the Company adopted amendments to
the
Company's Bylaws, effective immediately. The amendments provide for mandatory
indemnification for directors and officers of the Company and permissive
indemnification for other employees and agents of the Company, a description
of
the liabilities and expenses subject to indemnification, mandatory advancement
of expenses to a director or officer of the Company upon the person’s
undertaking to repay the amounts if it is ultimately determined that the
person
is not entitled to be indemnified, permissive advancement of expenses to
other
employees or agents of the Company, indemnification for service with a direct
or
indirect subsidiary of the Company, non-exclusivity of indemnification rights,
authorization to buy insurance and severability. A copy of the Bylaws of
the
Company, as amended, has been included as Exhibit 3(b) to this Report on
Form
10-K. A copy of the original provisions of the Company's Bylaws, as well
as the
amended provisions of the Company's Bylaws, is provided
below:
74
Provision
of Bylaws Prior to Amendment
INDEMNIFICATION
OF OFFICERS AND DIRECTORS
The
Corporation shall indemnify and may advance expenses to all Directors, officers,
employees, or agents of the Corporation, and their executors, administrators
or
heirs, who are, were or are threatened to be made a defendant or respondent
to
any threatened, pending or completed action, suit or proceedings (whether
civil,
criminal, administrative or investigative) by reason of the fact that he
is or
was a Director, officer, employee or agent of the Corporation, or while a
Director, officer, employee or agent of the Corporation, is or was serving
the
Corporation or any other legal entity in any capacity at the request of the
Corporation (hereafter a "Proceeding"), to the fullest extent that is expressly
permitted or required by the statutes of the Commonwealth of Kentucky and
all
other applicable law.
In
addition to the foregoing, the Corporation shall, by action of the Board
of
Directors, have the power to indemnify and to advance expenses to all Directors,
officers, employees or agents of the Corporation who are, were or are threatened
to be made a defendant or respondent to any Proceeding, in such amounts,
on such
terms and conditions, and based upon such standards of conduct as the Board
of
Directors may deem to be in the best interests of the
Corporation.
Provision
of Bylaws After Amendment
SECTION
1. INDEMNIFICATION. The
Corporation shall indemnify hold harmless each Director and officer of the
Corporation, and may indemnify and holder harmless any other employee or agent
of the Corporation, which is, was or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative
(hereafter a "Proceeding")
by
reason of the fact that he is or was a Director, officer, employee or agent
of
the Corporation, or while a Director, officer, employee or agent of the
Corporation, is or was serving the Corporation or any other legal entity in
any
capacity (including
without limitation, as a director, officer, partner, manager, trustee, employee
or agent of another foreigh or domestic corporation, partnership, joint venture,
trust, limited liability company, employee benefit plan or other enterprise)
at
the request of the Corporation
against
all liability and loss suffered and expenses incurred by such person
to the
fullest extent permitted
by law. The Corporation, however, shall not be required to indemnify a person
in
connection with a Proceeding (or part thereof) initiated by such person unless
the Proceeding (or part thereof) was authorized by the Board of Directors of
the
Corporation.
The
Corporation shall indemnify and hold harmless each director and officer of
a
direct or indirect subsidiary of the Corporation to the same extent it is
required to indemnify Directors and officers of the Corporation hereunder both
as to action in such person’s capacity as a director or officer of a direct or
indirect subsidiary of the Corporation and as to action in another capacity
while holding such office.
For
purposes of this Article, a person whose duties to the Corporation also involve
duties or services to an employee benefit plan or its participants shall be
deemed serving the employee benefit plan at the request of the Corporation.
The
liabilities and expenses subject to indemnification hereunder include any
obligation to pay a judgment, settlement, penalty, fine (including an excise
tax
assessed with respect to an employee benefit plan) or expenses incurred with
respect to a Proceeding, including attorneys’ fees and
disbursements.
SECTION
2. PREPAYMENT OF EXPENSES. The Corporation shall pay the expenses (including
attorneys’ fees) incurred by an officer or Director of the Corporation or an
officer or director of a direct or indirect subsidiary of the Corporation in
defending any Proceeding in advance of its final disposition, provided, however,
that the payment of such expenses shall be made only upon receipt of an
undertaking by the person to repay all amounts advanced if it shall ultimately
be determined that the person is not entitled to be indemnified. Payment of
such
expenses incurred by other employees and agents of the Corporation may be made
by the Board of Directors in its discretion upon such terms and conditions,
if
any, as it deems appropriate.
75
SECTION
3. CLAIMS.
(a)
If a
claim for indemnification or payment of expenses (including attorneys’ fees)
under this Article is not paid in full within sixty days after a written claim
therefor has been received by the Corporation the claimant may file suit to
recover the unpaid amount of such claim and, if successful in whole or in part,
shall be entitled to be paid the expense of prosecuting such claim. In any
such
action the Corporation shall have the burden of proving that the claimant was
not entitled to the requested indemnification or payment of expenses under
this
Article or otherwise.
(b)
If
the Corporation brings suit to recover an advance of expenses (whether pursuant
to the terms of an undertaking or otherwise), the Corporation shall have the
burden of proving that the recipient was not entitled to the advances under
this
Article or otherwise.
(c)
In
any suit brought by a person seeking to enforce a right to indemnification
hereunder (but not a suit brought by a person seeking to enforce a right to
an
advancement of expenses hereunder), it shall be a defense that the person
seeking to enforce a right to indemnification has not met any applicable
standard for indemnification under applicable law. With respect to any suit
brought by a person seeking to enforce a right to indemnification or right
to
advancement of expenses hereunder or any suit brought by the Corporation to
recover an advancement of expenses (whether pursuant to the terms of an
undertaking or otherwise), neither (i) the failure of the Corporation to have
made a determination prior to commencement of such suit that indemnification
of
such person is proper in the circumstances because such person has met the
applicable standards of conduct under applicable law, nor (ii) an actual
determination by the Corporation that such person has not met such applicable
standards of conduct, shall create a presumption that such person has not met
the applicable standards of conduct or, in a case brought by such person seeking
to enforce a right to indemnification, be a defense to such suit.
SECTION
4. NON-EXCLUSIVE RIGHTS; CONTINUATION. The indemnification and advancement
of
expenses provided in this Article shall not be deemed exclusive of, and shall
be
in addition to, any other rights to which any person may be entitled under
any
bylaw, agreement, general or specific action of the Board of Directors, vote
of
shareholders or disinterested Directors, or otherwise, both as to action in
such
person’s official capacity and as to action in another capacity while holding
such office, and shall continue as to a person who has ceased to be such
director, officer, employee, or agent and shall extend to and inure to the
benefit of the heirs, executors, and administrators of such person.
Without
limiting
the
foregoing, the Corporation may,
by
action of the Board of Directors, indemnify
and advance
expenses to each
person who is or was a Director, officer, employee or agent
of the
Corporation who is,
was
or is
threatened to be made a defendant or respondent to any Proceeding, in such
amounts, on such terms and conditions, and based upon such standards of conduct
as the Board of Directors may deem to be in the best interests of the
Corporation.
SECTION
5. INSURANCE. The Corporation may purchase and maintain insurance on behalf
of
any person who is or was a Director, officer, employee, or agent of the
Corporation, or is or was serving at the request of the Corporation in any
capacity with another entity against any liability asserted against such person
and incurred by such person in any such capacity, or arising out of such
person's status as such, whether or not the Corporation would have
the
power to indemnify
such person against such liability under the provisions of this Article or
otherwise.
SECTION
6. SEVERABILITY. If any provision or provisions of this Article shall be held
to
be invalid, illegal, or unenforceable for any reason whatsoever: (1) the
validity, legality, and enforceability of the remaining provisions of this
Article (including, without limitation, each portion of any paragraph or clause
containing any such provision held to be invalid, illegal, or unenforceable,
that is not itself held to be invalid, illegal, or unenforceable) shall not
in
any way be affected or impaired thereby; and (2) to the fullest extent possible,
the provisions of this Article (including, without limitation, each such portion
of any paragraph or clause containing any such provision held to be invalid,
illegal, or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal, or
unenforceable.
76
SECTION
7. AMENDMENT OR REPEAL. Any repeal or modification of the foregoing provisions
of this Article shall not adversely affect any right or protection hereunder
of
any person in respect of any act or omission occurring prior to the time
of such
repeal or modification.
B.
The Company entered into a Retirement and Release Agreement with Clifford
C.
Goodrich, our former President of Arlington Park, on December 8, 2005,
which
provides for a lump sum payment of $275,000 after his retirement as of
January
6, 2006. Pursuant to this agreement, Mr. Goodrich will receive a bonus
of
$50,882 under the Company's Incentive Compensation Plan, $36,600 in
consideration for his unvested stock options, $11,500 in lieu of his automobile
allowance, $19,750 for accrued but unused PTO days, $5,000 in lieu of
outplacement services, health insurance through the Company's provider
until
June 30, 2006 and family health coverage through COBRA from July 1, 2006
through
December 31, 2007, unless Mr. Goodrich receives similar benefits from another
employer prior to December 31, 2007. A copy of this agreement is attached
to
this Annual Report on Form 10-K as Exhibit 10(cc) and is incorporated herein
by
reference.
The
information required herein is incorporated by reference from sections of the
Company's Proxy Statement titled "Section 16(a) Beneficial Ownership Reporting
Compliance," "Election of Directors," "Executive Officers of the Company,"
“Corporate Governance” and "Audit Committee," which Proxy Statement will be
filed with the Securities and Exchange Commission pursuant to instruction G(3)
of the General Instructions to Form 10-K.
The
Company has adopted a Code of Ethics that applies to its CEO, CFO and employees
performing similar functions. This Code of Ethics is available on the Company’s
corporate website, www.churchilldownsincorporated.com,
under
the “Investors” heading. A copy of this Code of Ethics is also available and
will be sent to shareholders free of charge upon request to the Company’s
Secretary.
|
ITEM
11.
|
EXECUTIVE
COMPENSATION
|
The
information required herein is incorporated by reference from sections of the
Company's Proxy Statement titled "Election of Directors - Compensation of the
Board of Directors," "Compensation Committee Interlocks and Insider
Participation," “Corporate Governance,” "Certain Relationships and Related
Transactions" and "Executive Compensation," which Proxy Statement will be filed
with the Securities and Exchange Commission pursuant to instruction G(3) of
the
General Instructions to Form 10-K.
|
ITEM
12.
|
SECURITY
OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
|
The
information required herein is incorporated by reference from the sections
of
the Company's Proxy Statement titled "Security Ownership of Certain Beneficial
Owners and Management," "Election of Directors," "Executive Officers of the
Company" and "Equity Compensation Plan Information" which Proxy Statement will
be filed with the Securities and Exchange Commission pursuant to instruction
G(3) of the General Instructions to Form 10-K.
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS
AND RELATED
TRANSACTIONS
|
The
information required herein is incorporated by reference from the section of
the
Company's Proxy Statement titled "Certain Relationships and Related
Transactions," which Proxy Statement will be filed with the Securities and
Exchange Commission pursuant to instruction G(3) of the General Instructions
to
Form 10-K.
|
ITEM
14.
|
PRINCIPAL
ACCOUNTANT
FEES AND
SERVICES
|
The
information required herein is incorporated by reference from the section of
the
Company's Proxy Statement titled "Independent Public Accountants," which Proxy
Statement will be filed with the Securities and Exchange Commission pursuant
to
instruction G(3) of the General Instructions to Form 10-K.
77
|
Pages
|
|||
|
(a)
|
(1)
|
Consolidated
Financial Statements
|
|
|
The
following financial statements of Churchill Downs Incorporated for
the
years ended December 31, 2005, 2004 and 2003 are included in Part
II, Item
8:
|
|||
|
Report
of Independent Registered Public Accounting Firm
|
40
|
||
|
Consolidated
Balance Sheets
|
43
|
||
|
Consolidated
Statements of Net Earnings and Comprehensive Earnings
|
44
|
||
|
Consolidated
Statements of Shareholders' Equity
|
45
|
||
|
Consolidated
Statements of Cash Flows
|
46
|
||
|
Notes
to Consolidated Financial Statements
|
48
|
||
|
(2)
|
Schedule
VIII - Valuation and Qualifying Accounts
|
||
|
All
other schedules are omitted because they are not applicable, not
significant or not required, or because the required information
is
included in the financial statement notes thereto.
|
80
|
||
|
(3)
|
For
the list of required exhibits, see exhibit index.
|
||
|
(b)
|
Exhibits
|
||
|
See
exhibit index.
|
|||
|
(c)
|
All
financial statements and schedules except those items listed under
Items
15(a)(1) and (2) above are omitted because they are not applicable
or not
required, or because the requirement information in included in the
financial statements or notes thereto.
|
||
78
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
CHURCHILL
DOWNS INCORPORATED
|
|
|
/s/
Thomas H.
Meeker
|
|
|
Thomas
H. Meeker
President
and Chief Executive Officer
|
|
|
March
14, 2006
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
/s/
Carl F. Pollard
|
/s/
Thomas H. Meeker
|
/s/
Michael E. Miller
|
||
|
Carl
F. Pollard
|
Thomas
H. Meeker
|
Michael
E. Miller,
|
||
|
March
14, 2006
(Chairman
of the Board)
|
President
and Chief Executive Officer
March
14, 2006
(Director
and Principal Executive Officer)
|
Executive
Vice President and Chief Financial Officer
March
14, 2006
(Principal
Financial and Accounting Officer)
|
||
|
/s/
Leonard S. Coleman, Jr.
|
/s/
Richard L. Duchossois
|
|||
|
Leonard
S. Coleman, Jr.
|
Craig
J. Duchossois
|
Richard
L. Duchossois
|
||
|
March
14, 2006
|
March
14, 2006
|
March
14, 2006
|
||
|
(Director)
|
(Director)
|
(Director)
|
||
|
/s/
Robert L. Fealy
|
/s/
J. David Grissom
|
/s/
Seth W. Hancock
|
||
|
Robert
L. Fealy
|
J.
David Grissom
|
Seth
W. Hancock
|
||
|
March
14, 2006
|
March
14, 2006
|
March
14, 2006
|
||
|
(Director)
|
(Director)
|
(Director)
|
||
|
/s/
Daniel P. Harrington
|
/s/
G. Watts Humphrey, Jr.
|
/s/
Susan E. Packard
|
||
|
Daniel
P. Harrington
|
G.
Watts Humphrey, Jr.
|
Susan
E. Packard
|
||
|
March
14, 2006
|
March
14, 2006
|
March
14, 2006
|
||
|
(Director)
|
(Director)
|
(Director)
|
||
|
/s/
Darrell R. Wells
|
||||
|
Darrell
R. Wells
|
||||
|
March
14, 2006
|
||||
|
(Director)
|
79
Return to IndexCHURCHILL
DOWNS INCORPORATED
SCHEDULE
VIII - VALUATION AND QUALIFYING
ACCOUNTS
|
Description
|
Balance,
Beginning
of
Year
|
Charged
to
Expenses
|
Deductions
|
Balance,
End
of
Year
|
|||
|
Year
ended December 31, 2005
|
|||||||
|
Allowance
for doubtful accounts receivable
|
$881
|
$444
|
$(539)
|
$786
|
|||
|
Year
ended December 31, 2004
|
|||||||
|
Allowance
for doubtful accounts receivable
|
$967
|
$68
|
$(154)
|
$881
|
|||
|
Year
ended December 31, 2003
|
|||||||
|
Allowance
for doubtful accounts receivable
|
$844
|
$243
|
$(120)
|
$967
|
80
|
|
|||||
|
Numbers
|
Description
|
By
Reference To
|
|||
|
2
2
|
(a)
|
Stock
Purchase Agreement and Joint Escrow Instructions dated as of January
21,
1999 by and among Churchill Downs Incorporated and KE Acquisition
Corp.
|
Exhibit
2.1 to Report on Form 8-K dated April 23, 1999
|
||
|
(b)
|
First
Amendment to Stock Purchase Agreement dated as of April 19, 1999
by and
between Churchill Downs Incorporated, Churchill Downs Management
Company
and KE Acquisition Corp.
|
Exhibit
2.2 to Report on Form 8-K dated April 23, 1999
|
|||
|
(c)
|
Agreement
and Plan of Merger and Amendment to Stock Purchase Agreement dated
as of
April 22,1999 by and among Churchill Downs Incorporated, Churchill
Downs
Management Company, CR Acquisition Corp., TP Acquisition Corp., Calder
Race Course, Inc., Tropical Park, Inc. and KE Acquisition
Corp.
|
Exhibit
2.3 to Report on Form 8-K dated April 23, 1999
|
|||
|
(d)
|
Asset
Purchase Agreement dated May 5, 1999 between Hollywood Park, Inc.,
a
Delaware Corporation, and Churchill Downs Incorporated.
|
Exhibit
2.1 to Registration Statement on Form S-3 filed May 21, 1999 (No.
333-79031)
|
|||
|
(e)
|
Amendment
No. 1 to Asset Purchase Agreement dated as of August 31, 1999 by
and among
Churchill Downs Incorporated, Churchill Downs California Company
and
Hollywood Park, Inc.
|
Exhibit
2.2 to Report on Form 8-K dated September 10, 1999
|
|||
|
(f)
|
Stock
Purchase Agreement dated as of March 28, 1998 between Churchill Downs
Incorporated and TVI Corp.
|
Exhibit
2.1 to Report on Form 8-K dated April 21, 1998
|
|||
|
(g)
|
Partnership
Interest Purchase Agreement dated as of October 16, 2001 by and among
Anderson Park, Inc, Churchill Downs Management Company and Centaur
Racing,
LLC.
|
Exhibit
2(a) to Report on Form 10-Q for the fiscal quarter ended September
30,
2001
|
|||
|
(h)
|
First
Amendment to the Partnership Interest Purchase Agreement by and among
Anderson Park, Inc., Churchill Downs Management Company and Centaur
Racing, LLC dated May 6, 2004
|
Exhibit
10(b) to Report on Form 10-Q for the fiscal quarter ended June 30,
2004
|
|||
|
(i)
|
Amended
and Restated Agreement and Plan of Merger dated as of June 23, 2000,
as
amended as of July 14, 2000, by and among Churchill Downs Incorporated,
Duchossois Industries, Inc., A. Acquisition Corp., A. Management
Acquisition Corp., T. Club Acquisition Corp., Arlington International
Racecourse, Inc., Arlington Management Services, Inc., and Turf Club
of
Illinois, Inc.
|
Annex
A of the Proxy Statement for a Special Meeting of Shareholders of
Churchill Downs Incorporated held September 8, 2000
|
|||
|
(j)
|
Letter
Agreement dated August 31, 2004, between Churchill Downs Incorporated,
and
Louisiana Horsemen's Benevolent and Protective Association 1993,
Inc., and
acknowledgement by Fair Grounds Corporation.
|
Exhibit
2.2 to Report on Form 8-K/A dated August 31,
2004
|
|||
81
|
(k)
|
Asset
Purchase Agreement dated August 31, 2004 among Churchill Downs
Incorporated, on behalf of a wholly owned subsidiary to be formed,
Fair
Grounds Corporation, a Louisiana corporation and debtor-in-possession,
and
for the sole purpose of the provisions set forth in Section 11 of
the
Asset Purchase Agreement, Churchill Downs Incorporated, a Kentucky
corporation.
|
Exhibit
2.1 to Report on Form 8-K/A dated August 31, 2004
|
|||
|
(l)
|
First
Amendment to Asset Purchase Agreement dated as of September 17, 2004
among
Churchill Downs Incorporated, on behalf of a wholly-owned subsidiary
to be
formed, Fair Grounds Corporation, a Louisiana Corporation and
debtor-in-possession, and for the sole purpose of the provisions
set forth
in Section 5, Churchill Downs Incorporated, a Kentucky
corporation
|
Exhibit
2.1 to Report on Form 8-K dated September 17, 2004
|
|||
|
(m)
|
Global
Term Sheet among Churchill Downs Incorporated, Fair Grounds Corporation,
Ben S. Gravolet, Finish Line Management Corp. and Bryan G.
Krantz.
|
Exhibit
2.3 to Report on Form 8-K/A dated August 31, 2004
|
|||
|
(n)
|
Asset
Purchase Agreement Dated as of October 14, 2004 by and between Churchill
Downs Louisiana Horseracing Company, LLC, a Louisiana limited liability
company, Finish Line Management Corp., a Louisiana corporation, for
the
sole purpose of the provisions set forth in Section 12, Churchill
Downs
Incorporated, a Kentucky corporation, and for the sole purpose of
the
provision set forth in Section 2(f) and Section 6(h), Bryan G.
Krantz.
|
Exhibit
2.2 to Report on Form 8-K dated October 14, 2004
|
|||
|
(o)
|
Stock
Purchase Agreement by and among Churchill Downs Louisiana Video Poker
Company, LLC, Steven M. Rittvo, Ralph Capitelli, T. Carey Wicker
III and
Louisiana Ventures, Inc. dated as of the 14th
day of October, 2004.
|
Exhibit
2.3 to Report on Form 8-K dated October 14, 2004
|
|||
|
(p)
|
Asset
Purchase Agreement between Churchill Downs California Company and
Bay
Meadows Land Company, LLC dated as of July 6, 2005
|
Exhibit
10.1 to Report on Form 8-K/A dated July 6, 2005
|
|||
|
(q)
|
Letter
Agreement dated September 23, 2005 between Hollywood Park Land Company,
LLC and Churchill Downs California Company
|
Exhibit
10.2 to Report on Form 8-K dated September 23, 2005
|
|||
|
(r)
|
Letter
Agreements between Churchill Downs California Company and Bay Meadows
Land
Company, LLC dated each of August 1, 2005, August 8, 2005, August
12, 2005
and September 7, 2005 each amending the Asset Purchase Agreement
between
Churchill Downs California Company and Bay Meadows Land Company,
LLC dated
July 6, 2005
|
Exhibit
10.5 to Report on Form 8-K dated September 23, 2005
|
|||
| 3 |
(a)
|
Articles of Incorporation of Churchill Downs Incorporated as amended through July 27, 2005 | Exhibit 4.1 to Report on Form 8-K dated July 27, 2005 | ||
| (b) | Amended and Restated Bylaws of Churchill Downs Incorporate | Exhibit 3(b) to Report on Form 10-K for the year ended December 31, 2005 | |||
82
|
4
4
|
(a)
|
Amended
and Restated Credit Agreement among Churchill Downs Incorporated,
the
guarantor party thereto, the Lender party thereto and JP Morgan Chase
Bank, N.A., as agent and collateral agent, with PNC Bank, National
Association, as Syndication Agent and National City Bank of Kentucky
as
Documentation Agent, dated September 23, 2005
|
Exhibit
10.1 to Report on Form 8-K dated September 23, 2005
|
||
|
(b)
|
Rights
Agreement dated as of March 19, 1998 between Churchill Downs, Inc.
and
Bank of Louisville
|
Exhibit
4.1 to Report on Form 8-K dated March 19, 1998
|
|||
|
(c)
|
Amendment
No. 2 to Rights Agreement dated as of June 23, 2000, between Churchill
Downs Incorporated and Fifth Third Bank, as Rights Agent
|
Exhibit
4.1 to the Registrant's Registration Statement on Form 8-A/A dated
June
30, 2000
|
|||
|
(d)
|
Amendment
No. 3 to Rights Agreement dated as of September 8, 2000, between
Churchill
Downs Incorporated and Fifth Third Bank, as Rights Agent
|
Exhibit
4.1 to the Registrant's Registration Statement on Form 8-A/A dated
September 13, 2000
|
|||
|
10
0
|
(a)
|
Underwriting
agreement for 2,000,000 shares of Churchill Downs Incorporated common
stock between Churchill Downs Incorporated and CIBC World Markets
Corporation, Lehman Brothers, Inc., JC Bradford & Co., J.J.B.
Hilliard, W.L. Lyons, Inc. on behalf of several
underwriters
|
Exhibit
1.1 to Registration Statement on Form S-3/A filed July 15, 1999
(No.
333-79031)
|
||
|
(b)
|
Casino
Lease Agreement dated as of September 10, 1999 by and between Churchill
Downs California Company and Hollywood Park, Inc.
|
Exhibit
10.1 to Report on Form 8-K dated September 10, 1999
|
|||
|
(c)
|
Churchill
Downs Incorporated Amended and Restated Supplemental Benefit Plan
dated
December 1, 1998 *
|
Exhibit
10(a) to Report on Form 10-K for the year ended December 31,
1998
|
|||
|
(d)
|
Employment
Agreement dated as of March 13, 2003, with Thomas H. Meeker, President
*
|
Exhibit
10(m) to Report on Form 10-Q for fiscal quarter ended March 31,
2003
|
|||
|
(e)
|
Churchill
Downs Incorporated 2003 Stock Option Plan *
|
Exhibit
4(e) to the Registrant's Registration Statement on Form S-8 dated
June 20,
2003 (No. 333-106310)
|
|||
|
(f)
|
Churchill
Downs Incorporated Amended and Restated Incentive Compensation Plan
(1997)
*
|
Exhibit
10(g) to Report on Form 10-K for the fiscal year ended December 31,
2003
|
|||
|
(g)
|
Churchill
Downs Incorporated 1993 Stock Option
Plan
*
|
Exhibit
10(h) to Report on Form 10-K for the eleven months ended December
31,
1993
|
|||
|
(h)
|
Amendment
No. 1 to Churchill Downs Incorporated 1993 Stock Option Plan
*
|
Exhibit
10(g) to Report on Form 10-K for the year ended December 31,
1994
|
|||
|
(i)
|
Amendment
No. 2 to Churchill Downs Incorporated 1993 Stock Option Plan
*
|
Exhibit
10(m) to Report on Form 10-K for the year ended December 31,
1997
|
83
|
(j)
|
Fourth
Amended and Restated Churchill Downs Incorporated 1997 Stock Option
Plan
*
|
Exhibit
10(a) to Report on Form 10-Q for the fiscal quarter ended June 30,
2002
|
|||
|
(k)
|
Amended
and Restated Lease Agreement dated January 31, 1996
|
Exhibit
10(i) to Report on Form 10-K for the year ended December 31,
1995
|
|||
|
(l)
|
Churchill
Downs Incorporated, Amended and Restated Deferred Compensation Plan
for
Employees and Directors *
|
Exhibit
10(a) to Report on Form 10-Q for the fiscal quarter ended March 31,
2001
|
|||
|
(m)
|
Form
of Stockholder's Agreement dated September 8, 2000 among Churchill
Downs
Incorporated and Duchossois Industries, Inc.
|
Annex
C of the Proxy Statement for a Special Meeting of Shareholders of
Churchill Downs Incorporated held September 8, 2000
|
|||
|
(n)
|
Agreement
and Plan of Merger dated as of April 17, 1998 by and among TVI Corp.,
Racing Corporation of America, Churchill Downs Incorporated and RCA
Acquisition Company
|
Exhibit
2.2 to Report on Form 8-K dated April 21, 1998
|
|||
|
(o)
|
Partnership
Interest Purchase Agreement dated December 20, 1995 among Anderson
Park,
Inc., Conseco HPLP, LLC, Pegasus Group, Inc. and Hoosier Park,
L.P.
|
Exhibit
10(k) to Report on Form 10-K for the year ended December 31,
1995
|
|||
|
(p)
|
Lease
Agreement between the City of Louisville, Kentucky and Churchill
Downs
Incorporated dated January 1, 2003
|
Exhibit
2.1 to Report on Form 8-K dated January 6, 2003
|
|||
|
(q)
|
Retirement Agreement between Churchill Downs Incorporated and Robert
L.
Decker *
|
Exhibit
10(y) to Report on Form 10-K for the year ended December 31,
2002
|
|||
|
(r)
|
Churchill Downs Incorporated Executive Severance Policy dated November
13,
2003 *
|
Exhibit
10(s) to Report on Form 10-K for the year ended December 31,
2003
|
|||
|
(s)
|
Purchase Agreement dated as of October 19, 2004 by and between Kelley
Farms Racing, LLC and Churchill Downs
Incorporated.
|
Exhibit
10.2 to Report on Form 8-K filed October 20, 2004
|
|||
|
(t)
|
Form
of Restricted Stock Agreement*
|
Exhibit
10.1 to Report on Form 8-K filed November 30, 2004
|
|||
|
(u)
|
Agreement
Regarding Participation Agreement between Churchill Downs Management
Company and Centaur Racing, LLC dated May 6, 2004
|
Exhibit
10(a) to Report on Form 10-Q for the fiscal quarter ended June 30,
2004
|
|||
|
(v)
|
Letter
agreements between Churchill Downs Incorporated and Fair Grounds
Corporation dated June 25, 2004 and June 29, 2004
|
Report
on Form 10-Q for the fiscal quarter ended June 30, 2004
|
|||
|
(w)
|
Stock
Redemption Agreement dated as of October 19, 2004 between Churchill
Downs
Incorporated and Brad M. Kelley.
|
Exhibit
10.2 to Report on Form 8-K dated October 25, 2004
|
|||
|
(x)
|
Churchill
Downs Incorporated Amended and Restated Convertible Promissory Note
dated
March 7, 2005
|
Exhibit
10.1 to Report on Form 8-K dated March 7, 2005
|
|||
|
(y)
|
Churchill
Downs Incorporated 2004 Restricted Stock Plan*
|
Exhibit
4.5 to Report S-8 filed June 22, 2004
|
|||
|
(z)
|
2005
Churchill Downs Incorporated Deferred Compensation Plan, as
amended*
|
Exhibit
10.1 to Report on Form 8-K dated June 15, 2005
|
|||
|
(aa)
|
Employment
Agreement, effective as of July 5, 2005, by and between Churchill
Downs
Incorporated and William C. Carstanjen*
|
Exhibit
10.2 to Report on Form 8-K dated June 15, 2005
|
|||
|
(bb)
|
Reinvestment
Agreement dated as of September 23, 2005 among Bay Meadows Land Company,
LLC, Stockbridge HP Holdings Company, LLC, Stockbridge Real Estate
Fund
II-A, LP, Stockbridge Real Estate Fund II-B, LP, Stockbridge Real
Estate
Fund II-T, LP, Stockbridge Hollywood Park Co-Investors, LP and Churchill
Downs Investment Company
|
Exhibit
10.3 to Report on Form 8-K dated September 23, 2005
|
|||
|
(cc)
|
Retirement
and Release Agreement with Clifford C. Goodrich*
|
Exhibit
10(cc) to Report on Form 10-K for the year ended December 31,
2005
|
|||
|
(dd)
|
Summary
of the Company’s Performance Goals and Bonus Awards for the Named
Executive Officers*
|
Report
on Form 10-Q/A for the fiscal quarter ended March 31, 2005 filed
March 9,
2006
|
|||
|
(ee)
|
Summary
of the Company’s Bonus Awards for the Named Executive
Officers*
|
Report
on Form 8-K dated March 8, 2006
|
|||
|
14
4
|
The
Company's Code of Ethics as of December 31, 2003
|
Exhibit
14 to Report on Form 10-K for the year ended December 31,
2003
|
|||
|
21
1
|
Subsidiaries
of the registrant
|
Exhibit
21 to Report on Form 10-K for the year ended December 31,
2004
|
|||
|
23
3
|
Consent
of PricewaterhouseCoopers LLP, Independent Registered Public Accounting
Firm
|
Exhibit
23 to Report on Form 10-K for the year ended December 31,
2005
|
|||
|
31
1
|
(a)
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
Exhibit
31(a) to Report on Form 10-K for the year ended December 31,
2005
|
||
|
(b)
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
Exhibit
31(b) to Report on Form 10-K for the year ended December 31,
2005
|
|||
|
32
2
|
Certification
of CEO and CFO Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
to
Section 906 of the Sarbanes-Oxley Act of 2002 (furnished pursuant
to Rule
13a - 14(b))
|
Exhibit
32 to Report on Form 10-K for the year ended December 31,
2005
|
|||
|
*Management
contract or compensatory plan or
arrangement.
|
|||||
85
AMENDED
AND RESTATED BYLAWS OF
CHURCHILL
DOWNS INCORPORATED
ARTICLE
I
OFFICE
AND SEAL
SECTION
1. OFFICES. The principal office of the Corporation in the State of Kentucky
shall be located at 700 Central Avenue, Louisville, Kentucky. The Corporation
may have such other offices, either within or without the State of Kentucky,
as
the business of the Corporation may require from time to time.
SECTION
2. THE CORPORATE SEAL. The Seal of the Corporation shall be circular in form,
mounted upon a metal die suitable for impressing same upon paper, and along
the
upper periphery of the seal shall appear the word "Churchill Downs" and along
the lower periphery thereof the word "Kentucky". The center of the seal shall
contain the word "Incorporated".
ARTICLE
II
STOCKHOLDERS
MEETINGS AND RECORD DATES
SECTION
1. ANNUAL MEETING. The date of the annual meeting of the stockholders for the
purpose of electing directors and for the transaction of such other business
as
may come before the meeting shall be established by the Board of Directors,
but
shall not be later than 180 days following the end of the Corporation's fiscal
year. If the election of Directors shall not be held on the day designated
for
any annual meeting, or at any adjournment thereof, the Board of Directors shall
cause the election to be held at a special meeting of the stockholders to be
held as soon thereafter as may be convenient.
SECTION
2. SPECIAL MEETINGS. Special meetings of the stockholders may be called by
holders of not less than 66% of all shares entitled to vote at the meeting,
or
by a majority of the members of the Board of Directors.
SECTION
3. PLACE OF MEETING. The Board of Directors may designate any place within
or
without the State of Kentucky as the place of meeting for any annual meeting
of
stockholders, or any place either within or without the State of Kentucky as
the
place of meeting for any special meeting called by the Board of
Directors.
If
no
designation is made, or if a special meeting be called by other than the Board
of Directors, the place of meeting shall be the principal office of the
Corporation in the State of Kentucky.
SECTION
4. NOTICE OF MEETINGS. Written notice stating the place, day and hour of the
meeting and, in case of a special meeting, the purpose or purposes for which
the
meeting is called, shall be delivered not less than ten (10) nor more than
sixty
(60) days before the date of the meeting, either personally or by mail, by
or at
the direction of the President, or the Secretary, or the officer or persons
calling the meeting, to each stockholder of record entitled to vote at such
meeting. If mailed, such notice shall be deemed to be delivered when deposited
in the United States mail in a sealed envelope addressed to the stockholder
at
his address as it appears on the records of the Corporation, with first class
postage thereon prepaid.
SECTION
5. RECORD DATE. The Corporation's record date shall be fixed by the Board of
Directors for the determination of stockholders entitled to notice of or to
vote
at a meeting of stockholders, or stockholders entitled to receive any
distribution. When a determination of stockholders entitled to vote at any
meeting of stockholders has been made as provided herein, such determination
shall apply to any adjournment thereof.
SECTION
6. VOTING LISTS AND SHARE LEDGER. The Secretary shall prepare a complete list
of
the stockholders entitled to vote at any meeting, or any adjournment thereof,
arranged in alphabetical order, with the address of and the number of shares
held by each stockholder, which list shall be produced and kept open at the
meeting and shall be subject to the inspection of any stockholder during the
meeting. The original share ledger or stock transfer book, or a duplicate
thereof kept in this State, shall be prima facie
evidence
as to the stockholders entitled to examine such list or share ledger or stock
transfer book, or the stockholders entitled to vote at any meeting of
stockholders or to receive any dividend.
SECTION
7. QUORUM. A majority of the outstanding shares entitled to vote, represented
in
person or by proxy, shall constitute a quorum at any meeting of stockholders.
The stockholders present at a duly organized meeting can continue to do business
at any adjourned meeting, notwithstanding the withdrawal of enough stockholders
to leave less than a quorum.
SECTION
8. PROXIES. At all meetings of stockholders, a stockholder may vote by proxy.
An
appointment of a proxy shall be executed in writing by the stockholder or by
his
duly authorized attorney-in-fact and be filed with the Secretary of the
Corporation before or at the time of the meeting.
SECTION
9. NATURE OF BUSINESS. At any meeting of stockholders, only such business shall
be conducted as shall have been brought before the meeting by or at the
direction of the Board of Directors or by any stockholder who complies with
the
procedures set forth in this Section 9.
No
business may be transacted at any meeting of stockholders, other than business
that is either (a) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors, (b) otherwise
properly brought before such meeting of stockholders by or at the direction
of
the Board of Directors, or (c) in the case of any annual meeting of stockholders
or a special meeting called for the purpose of electing directors, otherwise
properly brought before such meeting by any stockholder (i) who is a stockholder
of record on the date of the giving of the notice provided for in this Section
9
and on the record date for the determination of stockholders entitled to vote
at
such meeting of stockholders and (ii) who complies with the notice procedures
set forth in this Section 9.
In
addition to any other applicable requirements, for business to be properly
brought before any annual meeting of stockholders by a stockholder, or for
a
nomination of a person to serve as a Director, to be made by a stockholder,
such
stockholder must have given timely notice thereof in proper written form to
the
Secretary.
To
be
timely, a stockholder’s notice to the Secretary must be delivered or mailed to
and be received at the principal executive offices of the Corporation (a) in
the
case of the annual meeting of stockholders, not less than ninety (90) nor more
than one hundred and twenty (120) days prior to the anniversary date of the
immediately preceding annual meeting of stockholders; provided,
however,
that in
the event that the annual meeting of stockholders is called for a date that
is
not within thirty (30) days before or after such anniversary date, notice by
the
stockholder, in order to be timely, must be so received not later than the
close
of business on the tenth (10th) day following the day on which notice of the
date of the annual meeting of stockholders was mailed or public disclosure
of
the date of such meeting was made, whichever first occurs; and (b) in the case
of a special meeting of stockholders called for the purpose of electing
directors, not later than the close of business on the tenth (10th) day
following the day on which notice of the date of the special meeting of
stockholders was mailed or public disclosure of the date of such meeting was
made, whichever first occurs.
To
be in
proper written form, a stockholder’s notice to the Secretary must set forth as
to each matter (including nominations) such stockholder proposes to bring before
the meeting of stockholders (a) a brief description of the business desired
to
be brought before the meeting and the reasons for conducting the business at
the
meeting, (b) the name and record address of such stockholder, (c) the class
or
series and number of shares of capital stock of the Corporation which are owned
beneficially or of record by such stockholder as of the record date for the
meeting (if such date shall then have been made publicly available and shall
have occurred) and as of the date of such notice, (d) a description of all
arrangements or understandings between such stockholder and any other person
or
persons (including their names) in connection with the proposal of such business
by such stockholder and any material interest of such stockholder in such
business, (e) as to each person whom the stockholder proposes to nominate for
election as a director (i) the name, age, business address and residence address
of the person and (ii) the class or series and number of shares of capital
stock
of the Corporation which are owned beneficially or of record by the person
as of
the record date for the meeting (if such date shall then have been made publicly
available and shall have occurred) and as of the date of such notice, (f) any
other information which would be required to be disclosed in a proxy statement
or other filings required to be made in connection with the solicitations of
proxies for the proposal (including, if applicable, with respect to the election
of directors) pursuant to Section 14 of the Securities Exchange Act of 1934,
as
amended, and the rules and regulations promulgated thereunder if such
stockholder were engaged in such solicitation, and (g) a representation that
such stockholder intends to appear in person or by proxy at the meeting to
bring
such business before the meeting. Any notice concerning the nomination of a
person for election as a director must be accompanied by a written consent
of
the proposed nominee to being named as a nominee and to serve as a director
if
elected.
No
business shall be conducted and no person shall be eligible for election as
a
Director at any annual meeting of stockholders or a special meeting of
stockholders called for the purpose of electing directors except business or
nominations brought before such meeting in accordance with the procedures set
forth in this Section 9; provided,
however,
that,
once business has been properly brought before the meeting in accordance with
such procedures, nothing in this Section 9 shall be deemed to preclude
discussion by any stockholder of any such business. If the chairman of the
meeting of stockholders determines that business was not properly brought before
such meeting, or a nomination was not properly made, as the case may be, in
accordance with the foregoing procedures, the chairman shall declare to the
meeting that (a) the business was not properly brought before the meeting and
such business shall not be transacted, or, if applicable, (b) the nomination
was
defective and such defective nomination shall be disregarded.
ARTICLE
III
DIRECTORS
SECTION
1. GENERAL POWERS. The business and affairs of the Corporation shall be managed
by a Board of Directors.
SECTION
2. NUMBER AND TENURE. The Board of Directors shall consist of thirteen (13)
members but the number may be increased or decreased by amendment of this Bylaw,
and provided further that the number shall be decreased to twelve (12) members
effective at the 2005 Annual Meeting of Shareholders. The Directors shall be
divided into three classes, consisting of four (4) Class I Directors, four
(4)
Class II Directors and five (5) Class III Directors until the 2005 Annual
Meeting of Shareholders, and four (4) Class I Directors, four (4) Class II
Directors and four (4) Class III Directors thereafter. Each director shall
hold
office for a term of three (3) years or until his successor shall have been
elected and qualifies for the office, whichever period is longer. A person
shall
not be qualified for election as a Director unless he shall be less than seventy
(70) years of age on the date of election, unless the election of such person
is
required by contract. Each Director shall become a Director Emeritus upon
expiration of his current term following the date the Director is no longer
qualified for election as a Director due to age. A Director Emeritus shall
not
be permitted to vote on matters brought before the Board of Directors or any
committee thereof and shall not be counted for the purpose of determining
whether a quorum of the Board of Directors or the committee is present and
shall
not have any of the responsibilities of a director, nor any of a director’s
rights, powers or privileges. Reference in these Bylaws to “Directors” shall not
mean or include Emeritus Directors.
SECTION
3. REGULAR MEETINGS. A regular meeting of the Board of Directors shall be held
without other notice than this bylaw, immediately after, and at the same place
as, the annual meeting of stockholders. The Board of Directors may provide,
by
resolution, the time and place, either within or without the State of Kentucky,
for the holding of additional regular meetings without other notice than such
resolution.
SECTION
4. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called
by
or at the request of the President, the Chairman of the Board or the majority
of
the Board of Directors. The person or persons authorized to call special
meetings of the Board of Directors may fix any place, either within or without
the State of Kentucky, as the place for holding any special meeting of the
Board
of Directors.
SECTION
5. NOTICE. Notice of any special meeting of the Board of Directors shall be
given by notice delivered personally, by mail, by telegraph or by telephone.
If
mailed, such notice shall be given at least five (5) days prior thereto and
such
mailed notice shall be deemed to have been delivered upon the earlier of receipt
or five (5) days after it is deposited in the United States mail in a sealed
envelope so addressed, with first class postage thereon prepaid. If notice
is
given by telegram, it shall be delivered at least twenty-four (24) hours prior
to the special meeting and such telegram notice shall be deemed to have been
delivered when the telegram is delivered to the telegraph company. Personal
notice and notice by telephone shall be given at least twenty-four (24) hours
prior to the special meeting and shall be deemed delivered upon receipt. Any
Director may waive notice of any meeting. The attendance of a Director at any
meeting shall constitute a waiver of notice of such meeting, except when a
Director attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the Board of Directors need be specified in the
notice or waiver of notice of such meeting.
SECTION
6. QUORUM. A majority of the Board of Directors shall constitute a quorum for
the transaction of business at any meeting of the Board of Directors, provided
that if less than a majority of the Directors are present at said meeting,
a
majority of the Directors present may adjourn the meeting from time to time
without further notice.
SECTION
7. MANNER OF ACTING. The act of the majority of the Directors present at a
meeting at which a quorum is present shall be the act of the Board of
Directors.
SECTION
8. VACANCIES. Any vacancy occurring in the Board of Directors may be filled
by
the affirmative vote of a majority of the remaining Directors though less than
a
quorum of the Board of Directors, and the director elected to fill such vacancy
shall hold office for the remainder of the full term of the class of directors
in which the vacancy occurred and until the director’s successor is elected and
qualified.
SECTION
9. INFORMAL ACTION. Any action required or permitted to be taken of the Board
of
Directors or of a committee of the Board, may be taken without a meeting if
a
consent, in writing, setting forth action so taken shall be signed by all of
the
Directors, or all of the members of the committee, as the case may be. Members
of the Board of Directors or any committee designated by the Board may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment whereby all persons participating
in the meeting can hear or speak to each other at the same time. Participation
in a meeting pursuant to this section shall constitute presence in person at
the
meeting.
SECTION
10. NOMINATION OF DIRECTORS. Only persons who are nominated in accordance with
the procedures set forth in Section 9 of Article II of these Bylaws shall be
eligible for election as Directors of the Corporation, except as may be
otherwise provided in the Restated Articles of Incorporation with respect to
the
right of holders of preferred stock of the Corporation to nominate and elect
a
specified number of Directors in certain circumstances.
ARTICLE
IV
COMMITTEES
OF THE BOARD
SECTION
1. COMMITTEES. The Board of Directors shall have authority to establish such
committees as it may consider necessary or convenient for the conduct of its
business. All committees so established shall keep minutes of every meeting
thereof and such minutes shall be submitted at the next regular meeting of
the
Board of Directors at which a quorum is present, and any action taken by the
Board with respect thereto shall be entered in the minutes of the Board. Each
committee so established shall elect a Chairman of the committee. On all
committees where the Chairman of the Board is not appointed as a voting member,
the Chairman of the Board shall be an ex officio, nonvoting member of that
committee.
SECTION
2. THE EXECUTIVE COMMITTEE. The Board of Directors shall appoint and establish
an Executive Committee composed of up to six (6) Directors who shall be
appointed by the Board annually. The Executive Committee shall have and may
exercise when the Board of Directors is not in session, all of the authority
of
the Board of Directors that may lawfully be delegated; provided, however, the
Executive Committee shall not have the power to enter into any employment
agreement with an officer of the Corporation, without the specific approval
and
ratification of the Board of Directors. A majority in membership of the
Executive Committee shall constitute a quorum.
SECTION
3. THE AUDIT COMMITTEE. The Board of Directors shall appoint and establish
an
Audit Committee composed of up to five (5) Directors, none of whom shall be
officers, who shall be appointed by the Board annually. The Audit Committee
shall make an examination every twelve months into the affairs of the
Corporation and report the results of such examination in writing to the Board
of Directors at the next regular meeting thereafter. Such report shall state
whether the Corporation is in sound condition and whether adequate internal
audit controls and procedures are being maintained and shall include
recommendations to the Board of Directors regarding such changes in the manner
of doing business or conducting the affairs of the Corporation as shall be
deemed advisable.
SECTION
4. THE COMPENSATION COMMITTEE. The Board of Directors shall appoint and
establish a Compensation Committee to be composed of five (5) Directors who
shall be appointed by the Board annually. Each member of the Compensation
Committee shall be a director who is not, during the one year prior to service
or during such service, granted or awarded equity securities pursuant to any
executive compensation plan of the Company. It shall be the duty of the
Compensation Committee to administer the Company’s Supplemental Benefit Plan[s],
the Company’s Incentive Compensation Plan[s], the Company’s Stock Option
Plan[s], any executive compensation plan and any shareholder approved employee
stock purchase or thrift plan, including without limitation, matters relating
to
the amendment, administration, interpretation, employee eligibility for and
participation in, and termination of, the foregoing plans. It shall further
be
the duty of the Compensation Committee to review annually the salary paid to
the
President and Chief Executive Officer of the Company and to exercise any other
authorities relating to compensation that the Board may lawfully delegate to
it;
provided, however, the Compensation Committee shall not have the power to enter
into any employment agreement with an officer of the Company without the
specific approval and ratification of the Board of Directors.
SECTION
5. THE RACING COMMITTEE. The Board of Directors may appoint and establish a
Racing Committee to be composed of up to four (4) Directors who may be appointed
by the Board annually. The Racing Committee shall be responsible for and shall
have the authority to obligate the Corporation with respect to matters
concerning the Corporation's contracts and relations with horsemen, jockeys
and
others providing services relating to the conduct of horse racing, including
the
authority to approve and cause the Corporation to enter into contracts with
organizations representing horsemen and/or commit to provide benefits or
services by the Corporation to horsemen and others.
SECTION
6. NOTICE OF COMMITTEE MEETINGS. Notice of all meetings by the committees
established in this Article shall be given in accordance with the special
meeting notice section, Article III, Section 5, of these Bylaws.
ARTICLE
V
OFFICERS
SECTION
1. CLASSES. The officers of the Corporation shall be a Chairman of the Board,
a
President, one or more Vice Presidents, a Secretary, a Treasurer and such other
officers and agents as may be provided by the Board and elected in accordance
with the provisions of this Article. Any of the offices may be combined in
one
person in accordance with the provisions of law. The Chairman of the Board
of
Directors shall be a member of the Board but none of the other officers is
required to be a member of the Board.
SECTION
2. ELECTION AND TERM OF OFFICE. The officers of the Corporation shall be elected
annually by the Board of Directors at the first meeting of the Board held after
each annual meeting of stockholders. If the election of officers shall not
be
held at such meeting, such election shall be held as soon thereafter as
convenient. Vacancies may be filled or new offices created and filled at any
meeting of the Board of Directors. Each officer shall hold office until his
successor shall have been duly elected and shall have qualified or until his
death or until he shall resign or shall have been removed from office in the
manner hereinafter provided.
SECTION
3. REMOVAL. Any officer elected by the Board of Directors may be removed by
the
President whenever in his judgment the best interest of the Corporation would
be
served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed and shall be subject always to
supervision and control of the Board of Directors. Election or appointment
of an
officer or agent shall not of itself create contractual rights.
SECTION
4. CHAIRMAN OF THE BOARD. The Chairman of the Board of Directors shall call
to
order and preside at all stockholders' meetings and at all meetings of the
Board
of Directors. He shall perform such other duties as he may be authorized to
perform by the Board of Directors.
SECTION
5. PRESIDENT. The President shall be the chief executive officer of the
Corporation and as such shall in general supervise and control all of the
business operations and affairs of the Corporation. In the absence of the
Chairman of the Board of Directors, or in the event of the death or incapacity
of the Chairman, the President shall perform the duties of the Chairman until
a
successor Chairman is elected or until the incapacity of the Chairman
terminates. The President shall have full power to employ and cause to be
employed and to discharge and cause to be discharged all employees of the
Corporation, subject always to supervision and control of the Board of
Directors. When authorized so to do by the Board of Directors, he shall execute
contracts and other documents for and in behalf of the Corporation. Unless
otherwise ordered by the Board of Directors, the President shall have full
power
and authority on behalf of the Corporation to attend, act and vote at any
meeting of stockholders of any corporation in which this Corporation may hold
stock. He shall perform such other duties as may be specified in the Bylaws
and
such other duties as he may be authorized to perform by the Board of
Directors.
SECTION
6. EXECUTIVE VICE PRESIDENT. In the case of the death of the President or in
the
event of his inability to act, the Executive Vice President designated by the
Board shall perform the duties of the President and, when so acting, shall
have
all the powers of and be subject to all restrictions upon the President. The
Executive Vice President shall perform such other duties as from time to time
may be assigned by the President or by the Board of Directors.
SECTION
7. TREASURER. The Treasurer, subject to the control of the Board of Directors,
and together with the President, shall have general supervision of the finances
of the Corporation. He shall have care and custody of and be responsible for
all
moneys due and payable to the Corporation from any source whatsoever and deposit
such moneys in the name of the Corporation in such banks, trust companies or
other depositories as shall be selected in accordance with the provisions of
these Bylaws. The Treasurer shall have the care of, and be responsible for
all
securities, evidences of value and corporate instruments of the Corporation,
and
shall supervise the officers and other persons authorized to bank, handle and
disburse its funds, informing himself as to whether all deposits are or have
been duly made and all expenditures duly authorized and evidenced by proper
receipts and vouchers. He shall cause full and accurate books to be kept,
showing the transactions of the Corporation, its accounts, assets, liabilities
and financial condition, which shall at all times be open to the inspection
of
any Director, and he shall make due reports to the Board of Directors and the
stockholders, and such statements and reports as are required of him by law.
Subject to the Board of Directors, he shall have such other powers and duties
as
are incident to his office and not inconsistent with the Bylaws, or as may
be
assigned to him at any time by the Board.
SECTION
8. SECRETARY. The Secretary shall attend all meetings of the Board of Directors,
make a record of the business transacted and record same in one or more books
kept for that purpose. The Secretary shall see that the Stock Transfer Agent
of
the Corporation keeps proper records of all transfers, cancellations and
reissues of stock of the Corporation and shall keep a list of the stockholders
of the Corporation in alphabetical order, showing the Post Office address and
number of shares owned by each. The Secretary shall also keep and have custody
of the seal of the Corporation and when so directed and authorized by the Board
of Directors shall affix such seal to instruments requiring same. The Secretary
shall be responsible for authenticating records of the Corporation and shall
perform such other duties as may be specified in the Bylaws or as he may be
authorized to perform by the Board of Directors.
SECTION
9. VICE PRESIDENTS. There may be additional Vice Presidents elected by the
Board
of Directors who shall have such responsibilities, powers and duties as from
time to time may be assigned by the President or by the Board of
Directors.
ARTICLE
VI
CONTRACTS,
LOANS, CHECKS AND DEPOSITS
SECTION
1. CONTRACTS AND AGREEMENTS. The Board of Directors may authorize any officer
or
officers, agent or agents, to enter into any contract or agreement or execute
and deliver any instruments in the name of and on behalf of the Corporation,
and
such authority may be general or confined to specific instances.
SECTION
2. LOANS. No loans shall be contracted on behalf of the Corporation, and no
evidences of indebtedness shall be issued in its name unless authorized by
a
resolution of the Board of Directors. Such authority may be general or confined
to specific instances.
SECTION
3. CHECKS, DRAFTS, ORDERS, ETC. All checks, drafts or other orders for the
payment of money, notes or other evidences of indebtedness issued in the name
of
the Corporation shall be signed by such officer or officers, agent or agents,
of
the Corporation and in such manner as shall from time to time be determined
by
resolution of the Board of Directors.
SECTION
4. DEPOSITS. All funds of the Corporation not otherwise employed shall be
deposited from time to time to the credit of the Corporation in such banks,
trust companies, or other depositories as the Board of Directors may
select.
ARTICLE
VII
SHARES
AND THEIR TRANSFER
SECTION
1. CERTIFICATES
FOR SHARES.
The
shares of the Corporation may be represented by certificates or may be
uncertificated. Certificates representing shares of the Corporation shall be
in
such form as may be determined by the Board of Directors. Such certificates
shall be in the name of the Corporation and signed by the President or Vice
President and by the Secretary or an Assistant Secretary and may be sealed
with
the seal of the Corporation or a facsimile thereof. In case any officer who
has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such officer before such certificate is issued, it may
nevertheless be issued by the Corporation with the same effect as if the person
were such officer at the date of issue. Where any such certificate is manually
countersigned by a transfer agent or registrar (other than the Corporation
itself or an employee of the Corporation), any of the other signatures on the
certificate may be a facsimile. All certificates surrendered to the Corporation
for transfer shall be canceled, and no new certificate shall be issued until
the
former certificate for all like number of shares shall have been surrendered
and
canceled, except that in the case of a lost, destroyed or mutilated certificate,
a new one may be issued therefor upon such terms and indemnity to the
Corporation as the Board of Directors may prescribe.
SECTION
2. RECORDS.
The
Corporation shall keep at its registered office or principal place of business,
or at the office of its transfer agent or registrar, a record of its
shareholders, as required by applicable law. Except as otherwise expressly
required by law, the person in whose name shares stand on the books of the
Corporation shall be deemed the owner thereof for all purposes as regards the
Corporation.
SECTION
3. TRANSFER
OF SHARES.
Transfer of shares of the Corporation shall be made only on the books of the
Corporation by the registered shareholder thereof, or by the registered
shareholder's attorney thereunto duly authorized by written power of attorney
duly executed and filed with the Secretary of the Corporation or with a transfer
agent appointed as provided in Section 4 of this Article, and on the surrender
of any certificate or certificates for such shares properly
endorsed.
SECTION
4. REGULATIONS.
The
Board of Directors may make such rules and regulations as it may deem expedient,
not inconsistent with these Bylaws, concerning the issue, transfer and
registration of shares of the Corporation. The Board of Directors may appoint
or
authorize any officer or officers to appoint one or more transfer agents and
one
or more registrars and may require all certificates for shares to bear the
signature or signatures of any of them.
ARTICLE
VIII
FISCAL
YEAR
The
fiscal year of the Corporation shall begin on the 1st day of January and end
on
the 31st day of December.
ARTICLE
IX
WAIVER
OF NOTICE
Whenever
any notice is required to be given under the provisions of these Bylaws, or
under the provisions of the Articles of Incorporation, or under the provisions
of the corporation laws of the State of Kentucky, waiver thereof in writing,
signed by the person, or persons, entitled to such notice, whether before or
after the time stated therein, shall be deemed equivalent to the giving of
such
notice.
ARTICLE X
INDEMNIFICATION
OF OFFICERS AND DIRECTORS
SECTION
1. INDEMNIFICATION. The Corporation shall indemnify and hold harmless each
Director and officer of the Corporation, and may indemnify and hold harmless
any
other employee or agent of the Corporation, who is, was or is threatened to
be
made a party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative and whether formal
or
informal (hereafter a “Proceeding”) by reason of the fact that he is or was a
Director, officer, employee or agent of the Corporation, or while a Director,
officer, employee or agent of the Corporation, is or was serving the Corporation
or any other legal entity in any capacity (including, without limitation, as
a
director, officer, partner, manager, trustee, employee or agent of another
foreign or domestic corporation, partnership, joint venture, trust, limited
liability company, employee benefit plan or other enterprise) at the request
of
the Corporation, against all liability and loss suffered and expenses incurred
by such person to the fullest extent permitted by law. The Corporation, however,
shall not be required to indemnify a person in connection with a Proceeding
(or
part thereof) initiated by such person unless the Proceeding (or part thereof)
was authorized by the Board of Directors of the Corporation.
The
Corporation shall indemnify and hold harmless each director and officer of
a
direct or indirect subsidiary of the Corporation to the same extent it is
required to indemnify Directors and officers of the Corporation hereunder both
as to action in such person’s capacity as a director or officer of a direct or
indirect subsidiary of the Corporation and as to action in another capacity
while holding such office.
For
purposes of this Article, a person whose duties to the Corporation also involve
duties or services to an employee benefit plan or its participants shall be
deemed serving the employee benefit plan at the request of the Corporation.
The
liabilities and expenses subject to indemnification hereunder include any
obligation to pay a judgment, settlement, penalty, fine (including an excise
tax
assessed with respect to an employee benefit plan) or expenses incurred with
respect to a Proceeding, including attorneys’ fees and
disbursements.
SECTION
2. PREPAYMENT OF EXPENSES. The Corporation shall pay the expenses (including
attorneys’ fees) incurred by an officer or Director of the Corporation or an
officer or director of a direct or indirect subsidiary of the Corporation in
defending any Proceeding in advance of its final disposition, provided, however,
that the payment of such expenses shall be made only upon receipt of an
undertaking by the person to repay all amounts advanced if it shall ultimately
be determined that the person is not entitled to be indemnified. Payment of
such
expenses incurred by other employees and agents of the Corporation may be made
by the Board of Directors in its discretion upon such terms and conditions,
if
any, as it deems appropriate.
SECTION
3. CLAIMS. (a) If a claim for indemnification or payment of expenses (including
attorneys’ fees) under this Article is not paid in full within sixty days after
a written claim therefor has been received by the Corporation the claimant
may
file suit to recover the unpaid amount of such claim and, if successful in
whole
or in part, shall be entitled to be paid the expense of prosecuting such claim.
In any such action the Corporation shall have the burden of proving that the
claimant was not entitled to the requested indemnification or payment of
expenses under this Article or otherwise.
(b)
If
the Corporation brings suit to recover an advance of expenses (whether pursuant
to the terms of an undertaking or otherwise), the Corporation shall have the
burden of proving that the recipient was not entitled to the advance under
this
Article or otherwise.
(c)
In
any suit brought by a person seeking to enforce a right to indemnification
hereunder (but not a suit brought by a person seeking to enforce a right to
an
advancement of expenses hereunder), it shall be a defense that the person
seeking to enforce a right to indemnification has not met any applicable
standard for indemnification under applicable law. With respect to any suit
brought by a person seeking to enforce a right to indemnification or right
to
advancement of expenses hereunder or any suit brought by the Corporation to
recover an advancement of expenses (whether pursuant to the terms of an
undertaking or otherwise), neither (i) the failure of the Corporation to have
made a determination prior to commencement of such suit that indemnification
of
such person is proper in the circumstances because such person has met the
applicable standards of conduct under applicable law, nor (ii) an actual
determination by the Corporation that such person has not met such applicable
standards of conduct, shall create a presumption that such person has not met
the applicable standards of conduct or, in a case brought by such person seeking
to enforce a right to indemnification, be a defense to such suit.
SECTION
4. NON-EXCLUSIVE RIGHTS; CONTINUATION. The indemnification and advancement
of
expenses provided in this Article shall not be deemed exclusive of, and shall
be
in addition to, any other rights to which any person may be entitled under
any
bylaw, agreement, general or specific action of the Board of Directors, vote
of
shareholders or disinterested Directors, or otherwise, both as to action in
such
person’s official capacity and as to action in another capacity while holding
such office, and shall continue as to a person who has ceased to be a Director,
officer, employee, or agent of the Corporation and shall extend to and inure
to
the benefit of the estate or personal representative of such
person.
Without
limiting the foregoing, the Corporation may, by action of the Board of
Directors, indemnify and advance expenses to each person who is or was a
Director, officer, employee or agent of the Corporation who is, was or is
threatened to be made a defendant or respondent to any Proceeding, in such
amounts, on such terms and conditions, and based upon such standards of conduct
as the Board of Directors may deem to be in the best interests of the
Corporation.
SECTION
5. INSURANCE. The Corporation may purchase and maintain insurance on behalf
of
any person who is or was a Director, officer, employee, or agent of the
Corporation, or is or was serving at the request of the Corporation in any
capacity with another legal entity against any liability asserted against such
person and incurred by such person in any such capacity, or arising out of
such
person's status as such, whether or not the Corporation would have the power
to
indemnify such person against such liability under the provisions of this
Article or otherwise.
SECTION
6. SEVERABILITY. If any provision or provisions of this Article shall be held
to
be invalid, illegal, or unenforceable for any reason whatsoever: (1) the
validity, legality, and enforceability of the remaining provisions of this
Article (including, without limitation, each portion of any paragraph or clause
containing any such provision held to be invalid, illegal, or unenforceable,
that is not itself held to be invalid, illegal, or unenforceable) shall not
in
any way be affected or impaired thereby; and (2) to the fullest extent possible,
the provisions of this Article (including, without limitation, each such portion
of any paragraph or clause containing any such provision held to be invalid,
illegal, or unenforceable) shall be construed so as to give effect to the intent
manifested by the provision held invalid, illegal, or
unenforceable.
SECTION
7. AMENDMENT OR REPEAL. Any repeal or modification of the foregoing provisions
of this Article shall not adversely affect any right or protection hereunder
of
any person in respect of any act or omission occurring prior to the time of
such
repeal or modification.
ARTICLE
XI
FIDELITY
BONDS
The
Board
of Directors shall have authority to require the execution of fidelity bonds
by
all or any of the officers, agents and employees of the Corporation in such
amount as the Board may determine. The cost of any such bond shall be paid
by
the Corporation as an operating expense.
ARTICLE
XII
AMENDMENT
OF BYLAWS
The
Board
of Directors may alter, amend or rescind these Bylaws, subject to the right
of
the stockholders to repeal or modify such actions.
RETIREMENT
AND RELEASE AGREEMENT
1. Agreement
and Release.
(a) In
consideration of the agreement of Churchill
Downs Incorporated
(the
“Company”)
to
provide to Clifford
C. Goodrich
(“Goodrich”)
the
consideration, payments and rights set forth in, and subject to the terms and
conditions of, this Retirement and Release Agreement (the “Agreement”),
which
Agreement shall supercede and modify any inconsistent provisions of the Offer
Letter dated November 20, 2002, between the Company and Goodrich (the
“Offer
Letter”),
Goodrich hereby unconditionally releases and discharges the Company from any
claims, known or unknown, directly or indirectly related to or in any way
connected with his employment with or status as an officer of the Company or
his
retirement from his employment with the Company, including, without limitation,
the Offer Letter as of the Retirement Date (as hereinafter defined), and any
and
all claims and causes of action of any kind or nature whatsoever, known or
unknown, and whether specifically mentioned or not, which may exist or might
be
claimed to exist at or prior to the date of the retirement from Goodrich’s
employment (the “Claims”),
as
well as any future injuries, losses or damages not now known or anticipated
but
which may later develop or become discovered (including the effects or
consequences thereof), and which are attributable or connected to the Claims;
provided, that the foregoing shall not be deemed to release any obligations,
liability or responsibility arising from or related to the breach of this
Agreement.
(b) The
parties further agree and acknowledge that the claims or actions released herein
include, but are not limited to, those based on allegations of wrongful
discharge and/or breach of contract (except for the obligations created by
or
arising out of this Agreement), retaliation, any common law claims and those
alleging discrimination on the basis of race, color, sex, religion, national
origin, age, disability, or any other basis under Title VII of the Civil Rights
Act of 1964, as amended, the Age Discrimination in Employment Act of 1967
(“ADEA”), as amended, or any other federal, state, or local law, rule or
regulation. Goodrich also agrees that his rights under the aforementioned
statutes or any other federal, state or local law, rule or regulation are
effectively waived by this Agreement. The parties understand and acknowledge
that no rights or claims accrued to Goodrich under the Company’s benefit plans
through the Retirement Date, or rights or claims arising under the ADEA after
the execution of this Agreement, are waived hereby. Goodrich specifically
relinquishes any and all rights to employment or re-employment with the Company.
(c) Except
for the obligations created by or arising out of this Agreement, the Company,
on
its own behalf and on behalf of its subsidiaries, affiliates, officers,
directors, employees, successors and assigns, and each of them (collectively,
the “CDI Group”),
hereby releases and discharges Goodrich, as well as his trustees, agents,
attorneys, insurers, representatives, successors and assigns, from and with
respect to any and all claims, demands, rights, liens, agreements, contracts,
covenants, actions, suits, causes of action, obligations, debts, costs,
expenses, attorneys’ fees, damages, judgments, orders and liabilities of
whatever kind or nature in law, equity or otherwise, whether now know or
unknown, suspected or unsuspected, which it may have or hold against Goodrich,
now or in the future, arising out of or in any way connected with Goodrich’s
service as an officer, director, employee and/or agent of any member of the
CDI
Group, his separation from his position as an officer, director, employee and/or
agent of any member of the CDI Group, or any other transactions, occurrences,
acts or omissions or any loss, damage or injury whatever, known or unknown,
resulting from any act or omission by or on the part of Goodrich committed
or
omitted prior to the Retirement Date, provided that all such services, actions
or omissions by Goodrich were in good faith, and taken or omitted in a manner
which he believed to be in the best interest of the Company and its
shareholders, and not in violation of any federal or state criminal laws, any
provision of the Sarbanes-Oxley Act of 2005, or Section 16 of the Securities
Exchange Act of 1934.
1
2. Retirement
Pay.
Goodrich will be permitted to retire from his employment with the Company,
whose
employment with the Company will terminate effective at the close of business
on
January 6, 2006 (the “Retirement
Date”),
subject to the provisions of paragraph 21 herein, and Goodrich will
receive Retirement Pay (the “Retirement
Pay”)
in the
amount of $275,000.00 payable to Goodrich in one lump sum on the later of either
January 13, 2006, or on the next business day following the expiration of the
seven (7) day revocation period set forth below in paragraph 21 (the “Payment
Date”). Effective with the execution of this Agreement and continuing through
January 6, 2006, Goodrich
is relieved of all duties and responsibilities on behalf of the Company, and
Goodrich is not authorized to act by or on behalf of the Company in any manner
whatsoever, it being understood that his employment is being continued through
January 6,2006, for the sole purpose of allowing him to receive certain benefits
set forth in this paragraph 2, effective with the execution of this Retirement
and Release Agreement. The Retirement Pay shall be deemed the pay due to
Goodrich under Section 11 of the Offer Letter. The Company will withhold
applicable federal, state and local income and/or occupational taxes as well
as
FICA taxes and other legally required deductions from the Retirement Pay, and
the parties agree that the payment described herein shall be made by sending
such payment to Goodrich’s home address at 614 Prairie Avenue, Barrington,
Illinois, 60010. In addition, not as part of the Retirement Pay but as pay
and/or reimbursements to which Goodrich is entitled, Goodrich shall receive
(a)
his regular paychecks through the last regular pay period in 2005, plus
additional paychecks (i) covering the period through January 6, 2006, and (ii)
including payment for accrued but unused PTO days (20), and (b) on the Payment
Date, reimbursement for all unreimbursed normal and customary expenses incurred
by Goodrich on and prior to the Retirement Date in furtherance of the Company’s
business and in accordance with past custom and practice.
3. Incentive
Compensation Plan Payment.
The
parties acknowledge and agree that notwithstanding this Agreement and the
termination of Goodrich’s employment as of the Retirement Date, Goodrich is and
shall remain eligible to participate in the Company’s Incentive Compensation
Plan (the “IC
Plan”)
for
the entire calendar year of 2005, and the Company agrees that the IC Plan shall
not be modified in any manner so as to reduce or otherwise prejudice the
participation of Goodrich therein through the Retirement Date. On or before
March 15, 2006, and not as part of the Retirement Pay, Goodrich will receive
payment of $50,882.00 with respect to the operation and results of the Company
for 2005 under the IC Plan (the “IC
Plan Payment”),
in
accordance with the performance goals established for Goodrich for 2005 under
the IC Plan The Company will withhold applicable federal, state and local income
and/or occupational taxes as well as Medicare taxes and other legally required
deductions from the IC Plan Payment.
2
4. Stock
Options.
Subject
to the provisions of paragraph 21 herein, Goodrich will receive $36,600.00
in
consideration for his unvested stock options. The Company will withhold
applicable taxes and other legally required deductions from the Stock Option
Payment.
5. Restricted
Stock.
Restrictions on the Restricted Stock awarded to Mr. Goodrich will lapse on
the
later of the date of his retirement or six (6) months after the date of the
signed Restricted Stock Award Agreements.
6. Director
Compensation
Directors fees for 2005 services rendered to Printing Specialties will be
forwarded to Goodrich upon receipt of such at Arlington Park.
7. Automobile
Allowance.
Subject
to the provisions of paragraph 21 herein, Goodrich will receive $11,500.00
in
lieu of his Company Automobile Allowance. The Company will withhold applicable
federal, state and local income and/or occupational taxes as well as Medicare
taxes and other legally required deductions from the Automobile
Allowance.
8. Health
Insurance COBRA Payments.
Subject
to the provisions of paragraph 21 herein and subject to the approval of the
health care provider of the Company, the Company will maintain Goodrich under
its health insurance plan as Goodrich currently is enrolled, and pay the full
amount of all insurance premiums for Goodrich through June 30, 2006. Thereafter,
the Company will pay the full amount of all insurance premiums for Goodrich
to
continue family health coverage commensurate with the coverage currently
maintained for Goodrich from July 1, 2006 through December 31, 2007, under
COBRA
at the Company’s cost; provided, however, the Company shall cease making such
payments and shall have no further obligation to make such payments in the
event
and at the time Goodrich becomes eligible for similar family health coverage,
with similar benefits and co-payments as under the Company’s health insurance
plan, with another employer on or prior to December 31, 2007. In the event
that
the Company’s health care provider will not permit Goodrich to be maintained
under the Company health insurance plan through June 30, 2006, then the Company
will pay the full amount of all health insurance premiums for Goodrich to
maintain family coverage under COBRA for a period of eighteen (18) months
beginning on February 1, 2006, subject to the other terms and conditions set
forth above.
3
9. Return
of Company Property.
Goodrich agrees that no later than the last day of his employment with the
Company, he shall return to the Company all Company property in his possession
or control, if any, including, but not limited to, all keys, documents, books
and other records and materials of the Company.
10. Outplacement
Services.
Subject
to the provisions of paragraph 21 herein,
in
lieu of
outplacement services, Goodrich will receive $5,000.00. The Company will
withhold applicable federal, state and local income and/or occupational taxes
as
well as Medicare taxes and other legally required deductions from the
Outplacement Services Payment.
11. Non-Competition.
Goodrich agrees that, for so long as the Company is not in default under this
Agreement, Goodrich will not, for a period of one (1) year from the Retirement
Date, directly or indirectly, without the prior written consent of the CEO
of
the Company, and with or without pay, provide consultative services to, accept
employment with, serve as a director or equivalent position of, or otherwise
render any professional or other services to, or participate as a partner,
venturer, shareholder, member or manager, or otherwise be connected with, Magna
Entertainment Corporation, its subsidiaries and affiliates. The Company shall
be
entitled to injunctive relief to enjoin Goodrich from any violation of this
Section 10 in addition to all other rights it may have at law or in
equity.
12. Deferred
Compensation Plan.
The
Company acknowledges and agrees that Goodrich shall be entitled to participate
in the Company’s Deferred Compensation Plan, as amended and restated (the
“DC
Plan”),
through the Retirement Date, and that the Company will make all normal Company
Contributions under such DC Plan based upon Goodrich’s participation therein for
2005 and 2006 as contemplated by the DC Plan.
13. 401(k)
Plan.
The
Company acknowledges and agrees that Goodrich shall be entitled to participate
in the Company’s Section 401(k) Profit Sharing Plan, as amended and restated
(the “401(k)
Plan”),
through the Retirement Date, and that the Company will make all normal Company
contributions under the 401(k) Plan based upon Goodrich’s participation therein
for 2005 and 2006 as
contemplated by the 401(k) Plan
14. Press
Release; Confidential Agreement.
The
parties agree that the terms of this Agreement and all discussions of this
Agreement shall be maintained confidential, except (i) for disclosure to their
respective attorneys, accountants and advisors, (ii) to the extent disclosure
is
required by applicable governmental law, rule and regulation or rules of the
NASDAQ Stock Market, and (iii) for the mutually acceptable Press Release to
be
released to the media at such time as mutually agreed between the Company and
Goodrich on the date this Agreement has been mutually executed by the parties,
and which Press Release may be included by the Company in any applicable Form
8-K and similar securities filings. The parties agree that they, their attorneys
and/or representatives shall not in any way divulge or cause to be divulged
any
terms, information or details of this Agreement or the discussion that preceded
it, except as provided above.
4
15. Company
Affiliates.
The
parties understand that, as used in this Agreement, "Company" includes Churchill
Downs Incorporated and its affiliates, and all of their past and present
officers, directors, employees, trustees, agents, attorneys, parents, partners,
members, affiliates, principals, insurers, the Company's subsidiaries,
predecessors, successors, and assigns, and all other entities, persons, firms
or
corporations liable or who might be claimed to be liable, none of whom admit
any
liability to Goodrich, but all of whom expressly deny any such liability.
Notwithstanding the foregoing and the releases otherwise set out in this
Agreement, the parties understand and acknowledge that no rights or claims
accrued to Goodrich under the Company’s benefit plans through the Retirement
Date are waived or released by Goodrich.
16.
Severability;
Governing Law; Headings.
Goodrich further understands, and it is his intent, that in the event this
Agreement is ever held to be invalid or unenforceable (in whole or in part)
as
to any particular type of claim or charge or as to any particular circumstances,
it shall remain fully valid and enforceable as to all other claims, charges
and
circumstances. The parties further agree that this Agreement is to be construed
under the laws of the Commonwealth of Kentucky, and that the section headings
used in this Agreement are for convenience only and shall not affect in any
way
the meaning or interpretation of this Agreement.
17. Confidential
Information.
Goodrich further acknowledges that in the course of his employment with the
Company, he acquired knowledge of a confidential nature regarding the Company,
and he agrees that if this knowledge is divulged, privately or in public,
irreparable harm may be caused to the Company. This confidential information
may
include, but is not limited to, information regarding the Company's business
practices, trade secrets, plans, customer lists, contracts, financial and market
data, marketing reports, business opportunities and other information of a
confidential nature. In consideration of the Retirement Pay received by
Goodrich, he agrees and covenants that he shall not divulge, publicly or
privately, any specified or other such confidential information regarding any
aspect of the Company's business acquired during or as a result of his
employment with the Company until such information is known to the general
public or disclosed in public filings. Furthermore, to the extent that
disclosure of any such information is controlled by statute, regulation or
other
law, Goodrich agrees that he is bound by such laws and that this Agreement
does
not operate as a waiver of any such non-disclosure requirement. In the event
of
any breach of this Agreement and covenant, the Company shall be entitled to
injunctive relief, in addition to all other rights it may have at law or in
equity.
5
18. Non-Disparagement.
(a) Goodrich
agrees that, for so long as the Company is not in default under the terms of
this Agreement, he shall not directly or indirectly make or ratify any public
statement, oral or written, to any person that disparages the Company, its
subsidiaries or affiliates, or its directors, officers and
employees.
(b) The
Company agrees that, for so long as Goodrich is not in default under the terms
of this Agreement, it shall not, and shall cause its subsidiaries, affiliates,
and officers not to, directly or indirectly, make or ratify any public
statement, oral or written, to any person that disparages, either professionally
or personally, Goodrich.
19. Indemnification.
The
Company will, to the maximum extent permitted by applicable law, indemnify
Goodrich and hold him harmless from and against any and all claims, liabilities,
judgments, fines, penalties, costs and expenses (including, without limitation,
reasonable attorney’s fees, costs of investigation and experts, settlements and
other amounts actually incurred by Goodrich in connection with the defense
of
any action, suit or proceeding, and in connection with any appeal thereon)
incurred by Goodrich in any and all future, threatened, pending or completed
actions, suits or proceedings, whether civil, criminal, administrative or
investigative (including, without limitation, actions, suits or proceedings
brought by or in the name of the Company), arising, directly or indirectly,
by
reason of Goodrich’s status, actions or inaction as an officer, director,
employee or agent of the Company or any of its subsidiaries or affiliates,
so
long as he acted in good faith, in a manner he believed to be in the best
interest of the Company and its shareholders, and not in violation of any
federal or state criminal laws, any provision of the Sarbanes-Oxley Act of
2005,
or Section 16 of the Securities Exchange Act of 1934. The Company shall promptly
advance to Goodrich upon request any and all expenses incurred by Goodrich
in
defending any and all such actions, suits or proceedings to the maximum extent
permitted by applicable law.
20. Acknowledgement
of Understanding.
Goodrich acknowledges that he has read this Agreement, fully understands each
and every provision, and signs it voluntarily and knowingly. Goodrich also
acknowledges that in consideration of accepting the payment described above,
he
may be giving up possible future administrative and/or legal or other claims.
Goodrich also acknowledges that he has been advised by the Company to consult
an
attorney prior to executing this Agreement. Furthermore, the parties hereby
acknowledge and agree that Goodrich has twenty-one (21) days from his receipt
of
this Agreement in which to consider it and that this Agreement may be revoked
by
Goodrich within seven (7) calendar days after he executes it. Any such
revocation shall be in writing and shall be delivered to the Company within
this
seven (7) calendar day period. Any revocation received by the Company thereafter
shall be null and void and of no force and effect. The parties also acknowledge
and agree that this Agreement shall not be effective or enforceable until the
seven (7) day revocation period expires.
6
21. Goodrich
agrees that between January 6 and January 13, 2006, he will execute an
additional release covering the period from the effective date of the Agreement
through January 6, 2006. Goodrich agrees that all Company covenants which relate
to obligations of the Company beyond January 6, 2006, will be contingent upon
the execution of the additional release. Goodrich further agrees that should
he
fail or refuse to execute an additional release, his employment will be deemed
to have terminated effective December 21, 2005, and Goodrich will forfeit the
remaining consideration provided for in paragraphs 4, 7, 8 and 10, but said
forfeiture will not affect the sufficiency of the consideration provided for
herein or the enforceability of this Agreement.
[Signatures
appear on next page]
7
WITNESS
the
signatures of the parties hereto:
GOODRICH:
_/s/
Clifford C. Goodrich_______________
Clifford
C. Goodrich
Date:_______________________________
COMPANY:
CHURCHILL
DOWNS INCORPORATED
By:_/s/
Andrew G. Skehan_______________
Andrew
G. Skehan
Executive
Vice-President and
Chief
Operating Officer
Date:________________________________
8
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
hereby
consent to the incorporation by reference in the Registration Statements on
Form
S-8
(Nos.
33-127057, 333-62013, 33-61111, 333-41376, 333-43486, 333-100574,
333-106310, 333-116733 and 333-116734) of Churchill Downs Incorporated of our
report dated March 13, 2006 relating to the consolidated financial statements,
financial statement schedule, management’s assessment of the effectiveness of
internal control over financial reporting and the effectiveness of internal
control over financial reporting, which appears in this Annual Report on Form
10-K.
Louisville,
Kentucky
March
14,
2006
CERTIFICATION
OF CHIEF EXECUTIVE OFFICER
I,
Thomas
H. Meeker, certify that:
1. I
have
reviewed this Annual Report on Form 10-K of Churchill Downs
Incorporated;
| 1. |
I
have reviewed this Annual Report on Form 10-K of Churchill Downs
Incorporated;
|
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
| 3. |
Based
on my knowledge, the financial statements, and other financial information
included in this report,
fairly
present in all material respects the financial condition, results
of
operations and cash flows of the registrant as of, and for, the periods
presented in this report;
|
|
4.
|
The
registrant’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and
have:
|
|
a.
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being
prepared;
|
|
b.
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision,
to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
c.
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
d.
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
5.
|
The
registrant’s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
|
b.
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
| Date: March 14, 2006 | /s/ Thomas H. Meeker__________ |
| Thomas H. Meeker | |
| President and Chief Executive Officer |
CERTIFICATION
OF CHIEF FINANCIAL OFFICER
I,
Michael E. Miller, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of Churchill Downs Incorporated; |
|
2.
|
Based
on my knowledge, this report does not contain any untrue statement
of a
material fact or omit to state a material fact necessary to make
the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
|
|
3.
|
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects
the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
|
|
4.
|
The
registrant’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
|
|
a.
|
Designed
such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to
ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is
being
prepared;
|
|
b.
|
Designed
such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision,
to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles;
|
|
c.
|
Evaluated
the effectiveness of the registrant’s disclosure controls and procedures
and presented in this report our conclusions about the effectiveness
of
the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation;
and
|
|
d.
|
Disclosed
in this report any change in the registrant’s internal control over
financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely
to
materially affect, the registrant’s internal control over financial
reporting; and
|
|
5.
|
The
registrant’s other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s
board of directors (or persons performing the equivalent
functions):
|
|
a.
|
All
significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information;
and
|
|
b.
|
Any
fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant’s internal control
over financial reporting.
|
| Date: March 14, 2006 | /s/ Michael E. Miller_______ | ||
| Michael E. Miller | |||
| Executive Vice President and Chief Financial Officer | |||
Certification
of CEO and CFO Pursuant to
18
U.S.C. Section 1350,
As
Adopted Pursuant to
Section
906 of the Sarbanes-Oxley Act of 2002
In
connection with the Annual Report on Form 10-K of Churchill Downs Incorporated
(the "Company") for the fiscal year ended December 31, 2005 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), Thomas
H.
Meeker, as President and Chief Executive Officer of the Company, and Michael
E.
Miller, as Executive Vice President and Chief Financial Officer of the Company,
each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to §
906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge,
that:
(1) The
Report fully complies with the requirements of section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.
/s/
Thomas H. Meeker___________
Thomas
H.
Meeker
President
and Chief Executive Officer
March
14,
2006
/s/
Michael E. Miller_____________
Michael
E. Miller
Executive
Vice President and Chief Financial Officer
March
14,
2006
This
certification is being furnished to the Securities and Exchange Commission
as an
exhibit to the Report and shall not be deemed filed by the Company for purposes
of § 18 of the Securities Exchange Act of 1934, as amended.
A
signed
original of this written statement required by Section 906, or other document
authenticating, acknowledging, or otherwise adopting the signature that appears
in typed form within the electronic version of this written statement required
by Section 906, has been provided to Churchill Downs Incorporated and will
be
retained by Churchill Downs Incorporated and furnished to the Securities and
Exchange Commission or its staff upon request.