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)
|
Kentucky
|
61-0156015
|
|
(State
or other jurisdiction of incorporation or organization)
|
(IRS
Employer Identification No.)
|
|
700
Central Avenue, Louisville, Kentucky 40208
|
(502)
636-4400
|
|
(Address
of principal executive offices) (zip code)
|
(Registrant's
telephone number, including area code)
|
|
Securities
registered pursuant to Section 12(b) of the Act:
|
|
|
None
|
None
|
|
(Title
of each class registered)
|
(Name
of each exchange on which registered)
|
|
Securities
registered pursuant to Section 12(g) of the Act:
|
|
|
Common
Stock, No Par Value
|
|
|
(Title
of class)
|
|
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.
|
B.
|
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.
|
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
|
||||||||||