FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to_______________
Commission File Number 0-1469
CHURCHILL DOWNS INCORPORATED
(Exact name of Registrant
as specified in its charter)
KENTUCKY 61-0156015
(State of Incorporation) (I.R.S. Employer
Identification No.)
700 CENTRAL AVENUE, LOUISVILLE, KENTUCKY 40208
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: 502/636-4400
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
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 the 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. [ ]
As of March 28, 1997, the estimated aggregate market value of the shares of the
Registrant's Common Stock held by non-affiliates of the Registrant was
approximately $90,000,000.
As of March 28, 1997, 3,654,264 shares of the Registrant's Common Stock were
outstanding.
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on June 19, 1997 are incorporated by reference herein in
response to Items 10, 11, 12 and 13 of Part III of Form 10-K.
This Report consists of twenty-three (23) consecutively numbered
pages.
The date of this Report is April 29, 1997.
1
CONTENTS
PAGE
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA. . . . . . . . . . . .3
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 11. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . . .21
EXHIBIT 23 CONSENT OF COOPERS & LYBRAND L.L.P. . . . . . . . . . . . . . . 23
2
PART II
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Churchill Downs Incorporated
We have audited the accompanying consolidated balance sheets of Churchill Downs
Incorporated and subsidiaries as of December 31, 1996, 1995 and 1994 and the
related consolidated statements of earnings, stockholders' equity and cash
flows, and the consolidated financial statement schedule, for each of the three
years then ended as listed in Item 14 of this Form 10-K. These consolidated
financial statements and financial statement schedule are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Churchill Downs
Incorporated and subsidiaries as of December 31, 1996, 1995 and 1994 and the
results of their operations and cash flows for each of the three years then
ended in conformity with generally accepted accounting principles. In addition,
in our opinion, the consolidated financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects, the information required to be included
therein for the years ended December 31, 1996, 1995 and 1994.
/S/ COOPERS & LYBRAND L.L.P.
- ----------------------------
Coopers & Lybrand L.L.P.
Louisville, Kentucky
March 7, 1997
3
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31, December 31, December 31,
ASSETS 1996 1995 1994
-------------- -------------- ------------
Current assets:
Cash and cash equivalents $ 8,209,414 $ 5,856,188 $ 2,521,033
Accounts receivable 5,218,236 2,098,901 2,277,218
Other current assets 679,221 549,820 741,560
------------- ------------- -------------
Total current assets 14,106,871 8,504,909 5,539,811
Other assets 3,739,906 4,632,044 5,058,524
Plant and equipment 100,025,412 97,451,463 89,537,701
Less accumulated depreciation (37,143,223) (33,101,934) (29,960,196)
------------- ------------- -------------
62,882,189 64,349,529 59,577,505
------------- ------------- -------------
$ 80,728,966 $ 77,486,482 $ 70,175,840
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $7,575,573 $6,517,508 $4,567,292
Accrued expenses 5,802,330 3,310,882 2,347,668
Dividends payable 2,375,271 1,892,302 1,891,759
Income taxes payable 2,510,508 1,049,508 -
Deferred revenue 6,511,902 6,098,541 6,142,111
Long-term debt, current portion 73,893 70,097 722,235
------------ ----------- -----------
Total current liabilities 24,849,477 18,938,838 15,671,065
Long-term debt, due after one year 2,925,298 6,351,079 7,961,079
Outstanding mutuel tickets (payable
after one year) 2,031,500 2,256,696 1,523,600
Deferred compensation 825,211 871,212 690,178
Deferred income taxes 2,316,600 2,415,500 2,248,000
Minority interest in equity of
consolidated subsidiary - - 78,771
Stockholders' equity:
Preferred stock, no par value; authorized,
250,000 shares; issued, none
Common stock, no par value; authorized,
10,000,000 shares, issued 3,654,264
shares 1996, 3,784,605 shares, 1995
and 3,783,318 shares, 1994 3,493,042 3,504,388 3,437,911
Retained earnings 44,352,838 43,486,460 39,175,627
Deferred compensation costs -- (272,691) (545,391)
Note receivable for common stock (65,000) (65,000) (65,000)
----------- ----------- -----------
47,780,880 46,653,157 42,003,147
----------- ----------- -----------
$80,728,966 $77,486,482 $70,175,840
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
4
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1996 1995 1994
------------- ------------ ------------
Net revenues $107,858,818 $ 92,434,216 $ 66,419,460
Operating expenses:
Purses 34,439,143 27,651,482 20,422,174
Other direct expenses 52,356,075 46,117,000 28,914,924
------------ ------------ ------------
86,795,218 73,768,482 49,337,098
------------ ------------ ------------
Gross profit 21,063,600 18,665,734 17,082,362
Selling, general and administrative 8,748,703 8,360,524 7,221,276
------------ ------------ ------------
Operating income 12,314,897 10,305,210 9,861,086
------------ ------------ ------------
Other income (expense):
Interest income 390,669 233,556 292,115
Interest expense (337,438) (572,779) (175,534)
Miscellaneous income 673,398 288,148 174,386
------------ ------------ ------------
726,629 (51,075) 290,967
------------ ------------ ------------
Earnings before income taxes 13,041,526 10,254,135 10,152,053
Provision for income taxes 4,970,000 4,051,000 3,985,700
------------ ------------ ------------
Net earnings $ 8,071,526 $ 6,203,135 $ 6,166,353
============ ============= ============
Net earnings per share (based on
weighted average shares outstanding
of 3,724,557, 3,784,140 and
3,778,350, respectively) $2.17 $1.64 $1.63
============ ============= ============
The accompanying notes are an integral part of the consolidated financial
statements.
5
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1996, 1995 and 1994
Note Deferred
Common Stock Retained Receivable for Compensation
Shares Amount Earnings Common Stock Costs Total
--------- ---------- ----------- --------------- ------------ -----
Balances December 31, 1993 3,773,930 $2,977,911 $34,901,033 $ (65,000) $(818,091) $36,995,853
Net earnings 6,166,353 6,166,353
Deferred compensation
amortization 272,700 272,700
Cash dividends, $.50 per share (1,891,759) (1,891,759)
Issuance of common stock at
$49.00 per share 9,388 460,000 460,000
--------- ---------- ----------- ---------- --------- -----------
Balances December 31, 1994 3,783,318 3,437,911 39,175,627 (65,000) (545,391) 42,003,147
Net earnings 6,203,135 6,203,135
Deferred Compensation
amortization 272,700 272,700
Issuance of common stock at
$51.65 per share 1,287 66,477 66,477
Cash dividends, $.50 per
share (1,892,302) (1,892,302)
--------- ------------ ---------- ---------- --------- -----------
Balances December 31, 1995 3,784,605 3,504,388 43,486,460 (65,000) (272,691) 46,653,157
Net earnings 8,071,526 8,071,526
Deferred compensation
amortization 272,691 272,691
Issuance of common stock
at $28.90 per share 3,909 112,970 112,970
Repurchase of common stock (134,250) (124,316) (4,829,877) (4,954,193)
Cash dividends, $.65
per share (2,375,271) (2,375,271)
---------- ---------- ----------- ----------- --------- -----------
Balances December 31, 1996 3,654,264 $3,493,042 $44,352,838 $ (65,000) - $47,780,880
========== ========== =========== =========== ========= ===========
The accompanying notes are an integral part of the consolidated financial
statements.
6
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1996 1995 1994
------------- ------------ ------------
Cash flows from operating activities:
Net earnings $8,071,526 $6,203,135 $6,166,353
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 4,814,114 4,506,427 3,327,731
Deferred income taxes ( 461,000) 167,500 129,000
Deferred compensation 226,690 142,534 640,712
Increase (decrease) in cash resulting
from changes in operating assets and
liabilities, net of effects from
acquisitions:
Accounts receivable (3,119,335) 178,317 1,438,984
Other currents assets 232,699 191,740 (44,526)
Income taxes payable 1,461,000 1,049,508 (1,492,740)
Deferred revenue 413,361 (43,570) (1,992,626)
Accounts payable, accrued expenses
and other 3,440,476 4,144,532 3,227,085
--------- ---------- -----------
Net cash provided by operating
activities 15,079,531 16,540,123 11,399,973
Cash flows from investing activities:
Additions to plant and equipment, net (2,570,795) (8,589,535) (23,310,204)
Acquisition of Anderson Park, Inc. net of
note payable of $1,100,000 - - (850,000)
Additions to intangible assets - (461,536) (1,248,905)
----------- ----------- -----------
Net cash used in investing activities (2,570,795) (9,051,071) (25,409,109)
----------- ----------- -----------
Cash flows from financing activities:
Increase (decrease) in long-term debt, net (3,421,985) (2,262,138) 7,299,418
Dividends paid (1,892,302) (1,891,759) (1,886,965)
Common stock issued 112,970 - -
Common stock repurchased (4,954,193) - -
------------ ------------ -----------
Net cash used in financing activities (10,155,510) (4,153,897) 5,412,453
Net increase (decrease) in cash and cash
equivalents 2,353,226 3,335,155 (8,596,683)
Cash and cash equivalents, beginning
of period 5,856,188 2,521,033 11,117,716
------------ ---------- -----------
Cash and cash equivalents, end of period $8,209,414 $5,856,188 $ 2,521,033
Supplemental disclosures of cash
flow information: Cash paid during the
period for:
Interest $277,149 $ 485,908 $ 102,626
Income taxes $3,970,000 $ 2,790,000 $ 5,393,000
Noncash investing and financing activities:
During 1994, $460,000 of notes payable was paid by the issuance of common
stock.
The accompanying notes are an integral part of the consolidated financial
statements.
7
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
Churchill Downs Incorporated (the "Company") conducts Spring and Fall live
race meetings for Thoroughbred horses and participates in intertrack and
interstate simulcast wagering as a host track and as a receiving track in
Kentucky. In Indiana, the Company, through its subsidiary, Hoosier Park
L.P. (Hoosier Park), conducts live Thoroughbred and Standardbred race
meetings and participates in simulcast wagering. Both its Kentucky and
Indiana operations are subject to regulation by the racing commissions of
the respective states.
The accompanying consolidated financial statements include the accounts of
the Company, its wholly owned subsidiaries, Churchill Downs Management
Company and Anderson Park Inc. and its majority owned subsidiary, Hoosier
Park, L.P. All significant intercompany balances and transactions have
been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FOLLOWS:
CASH EQUIVALENTS:
The Company considers investments with original maturities of three months
or less to be cash equivalents. The Company has, from time to time, cash
in the bank in excess of federally insured limits.
PLANT AND EQUIPMENT:
Plant and equipment are recorded at cost. Depreciation is provided by
accelerated and straight-line methods over the estimated useful lives of
the related assets.
DEFERRED REVENUE:
Deferred revenue includes advance sales of tickets.
8
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(cont'd)
OTHER ASSETS:
Amortization on a racing license is provided over forty years using the
straight-line method. Organizational costs and preopening costs are
amortized over 24 months. Amortization expense was $775,979, $688,916 and
$264,753 for the years ended December 31, 1996, 1995 and 1994.
STOCK-BASED COMPENSATION:
The Company accounts for stock based compensation in accordance with
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees". In accordance with Statement of Financial Accounting Standards
No. 123 (SFAS 123) "Accounting for Stock-based Compensation" proforma
disclosure of net income and earnings per share are presented in Note 7 as
if SFAS 123 had been applied.
RECLASSIFICATION:
Certain prior year accounts have been reclassified to conform to the
current year presentation.
EARNINGS PER SHARE:
Earnings per share has been computed by dividing net earnings by the
weighted average number of common shares and equivalents outstanding.
Common share equivalents included in the computation represent shares
issuable upon assumed exercise of stock options which would have a
dilutive effect on earnings. Such equivalents had no material effect on
the computation for the periods ended December 31, 1996, 1995 and 1994.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS 128). SFAS 128 is designed to improve the EPS information provided
in financial statements by simplifying the existing computational
guidelines. SFAS 128 is effective for financial statements issued for
periods ending after December 15, 1997. The Company does not expect
adoption of this standard will have a material impact on its financial
statements.
9
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. PLANT AND EQUIPMENT:
Plant and equipment are summarized as follows:
December 31, December 31, December 31,
1996 1995 1994
------------ ------------ ------------
Land $ 5,879,994 $ 5,930,242 $ 5,864,863
Grandstands and buildings 56,154,054 55,946,326 48,749,083
Equipment 2,936,129 2,685,026 2,110,793
Furniture and fixtures 3,603,276 3,435,761 3,586,659
Tracks and other improvements 31,377,753 29,332,188 28,364,732
Construction in process 74,206 121,920 861,571
------------ ----------- -----------
$100,025,412 $97,451,463 $89,537,701
============ =========== ===========
Depreciation expense was $4,038,135, $3,817,511 and $3,062,978 for the
years ended December 31, 1996, 1995 and 1994.
3. INCOME TAXES:
Components of the provision for income taxes follow:
Income taxes:
1996 1995 1994
----- ----- -----
Currently payable $5,431,000 $3,883,500 $3,856,700
Deferred income taxes (461,000) 167,500 129,000
---------- ---------- ----------
$4,970,000 $4,051,000 $3,985,700
========== ========== ==========
The Company's income tax expense is different from the amount computed by
applying the statutory federal income tax rate to income before taxes as
follows:
1996 1995 1994
---- ---- ----
Federal statutory tax on
Earnings before income tax $4,464,000 $3,486,000 $3,452,000
State income taxes, net of
federal income tax benefit 537,000 552,400 533,700
Other (31,000) (12,600) -
---------- ---------- ----------
$4,970,000 $4,051,000 $3,985,700
========== ========== ==========
10
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. INCOME TAXES: (cont'd)
At December 31, 1996, the Company has operating loss carryforwards of
approximately $5,200,000 for Indiana State income tax purposes expiring
from 2009 through 2011. Based on the weight of evidence, both negative and
positive, including the lack of historical earnings in the State of
Indiana, the Company has provided a valuation allowance because it is
unable to assert that it is more likely than not to realize some portion
or all of the deferred tax asset attributable to the Indiana state income
tax net operating loss carryforwards.
Significant components of the Company's deferred tax assets and
liabilities at December 31 follows:
1996 1995 1994
---------- ---------- ----------
Deferred tax liabilities:
Excess of book over tax basis of
property & equipment $2,284,000 $2,161,000 $2,037,000
Book basis of racing license
in excess of tax basis 657,000 680,000 700,000
---------- ---------- ----------
Gross deferred tax liability 2,941,000 2,841,000 2,737,000
---------- ---------- ----------
Deferred tax assets:
Accrual for supplemental
benefit plan (273,000) (252,900) (230,000)
Net operating loss carryforwards (176,000) (104,000) -
Allowance for uncollectible
receivables (66,000) (54,000) (86,000)
Excess of book over tax basis of
other assets (136,000) - -
Other accruals (511,500) (118,600) (173,000)
---------- ---------- ----------
Gross deferred tax assets (1,162,500) (529,500) (489,000)
Valuation allowance for deferred
tax assets 176,000 104,000 -
---------- ---------- ----------
Net deferred tax liability $1,954,500 $2,415,500 $2,248,000
========== ========== ==========
Income taxes are classified in the balance sheet as follows:
Net non-current deferred tax
liability $2,316,600 $2,415,500 $2,248,000
Net current deferred tax asset (362,100) - -
----------- ---------- ----------
$1,954,500 $2,415,500 $2,248,000
========== ========== ==========
11
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. EMPLOYEE BENEFIT PLANS:
The Company has a profit-sharing plan which covers all full-time employees
with one year or more of service. The Company will match contributions
made by the employee up to 2% of the employee's annual compensation and
contribute a discretionary amount determined annually by the Board of
Directors. The cost of the plan for the years ended December 31, 1996,
1995 and 1994 was $402,000, $280,000 and $276,000, respectively.
The estimated present value of future payments under a supplemental
benefit plan is charged to expense over the period of active employment of
the employees covered under the plan. Supplemental benefit plan expense
for the years ended December 31, 1996, 1995 and 1994 was $51,000, $57,000
and $49,000, respectively.
The Company is a member of a noncontributory defined benefit
multi-employer retirement plan for all members of the Pari-mutuel Clerk's
Union of Kentucky. Contributions are made in accordance with negotiated
labor contracts. Retirement plan expense for the year ended December 31,
1996, 1995 and 1994 was $183,246, $193,774 and $190,626, respectively. The
Company's policy is to fund this expense as accrued.
5. LONG-TERM DEBT:
The Company has an unsecured $20,000,000 bank line of credit with various
options for the interest rate, none of which are greater than the bank's
prime rate. The line of credit expires January 31, 1998. The prime rate as
of December 31, 1996 was 8.25%. No borrowings were outstanding at December
31, 1996. There was $6.0 million outstanding at December 31, 1995 and $7.5
million outstanding at December 31, 1994.
The Company also has two non-interest bearing notes payable in the
aggregate face amount of $900,000 relating to the purchase of an
intertrack wagering license from the former owners of the Sports Spectrum
property. Interest has been imputed at 8%. The balance of these notes net
of unamortized discount was $350,000, $420,000 and $481,000 at December
31, 1996, 1995 and 1994, respectively. The notes require aggregate annual
payments of $110,000. As described in the contingency footnote (Note 10)
any remediation costs for environmental cleanup can be offset against any
amounts due under these notes payable.
On May 31, 1996, the Company entered into a Partnership Interest Purchase
Agreement with Conseco HPLP, L.L.C. ("Conseco") for the sale of 10% of the
Company's partnership interest in Hoosier Park to Conseco. The transaction
also included a loan by Conseco of approximately $2,600,000. The loan
requires interest of prime plus 2% (10.25% at December 31, 1996) payable
monthly with principal due November, 2004. The note is collateralized by
10% of the assets of Hoosier Park.
12
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. LONG-TERM DEBT: (cont'd)
Maturities of all notes payable for the five years following December 31,
1996 follow:
PRINCIPLE AMOUNT
1997 - $ 74,000
1998 - 80,000
1999 - 86,000
2000 - 93,000
2001 - 17,000
Thereafter - 2,649,000
6. OPERATING LEASES:
The Company contracts for totalisator equipment and service. A contract
with a new vendor was entered into on November 1, 1993 and extends through
October, 1998. The contract provides for rentals based on a percentage of
pari-mutuel wagers registered by the totalisator equipment. Hoosier Park
entered into a separate contract with the same vendor for totalisator
equipment and service under an agreement which expires in 2001 and
provides for variable rentals based on the level of activity. Rental
expense for the years ended December 31 1996, 1995 and 1994 was
$1,257,000, $1,093,000 and $577,000, respectively.
Hoosier Park leases land in Anderson, Indiana under an operating lease
agreement with the City of Anderson. Under the agreement, Hoosier Park
pays an annual rent of $128,520 or one-half of one percent of the total
annual handle wagered at the racetrack facility and at the three Indiana
simulcast facilities on live races at the track, whichever is greater. The
original term of the lease expires April 22, 2003. Hoosier Park has
options to renew the lease for three additional ten-year periods subject
to the same terms and conditions. Rent expense during 1996, 1995 and 1994
was $218,821, $308,037 and $100,882, respectively, which included $90,301
and $179,517 of contingent rentals in 1996 and 1995, respectively.
In November 1995, Hoosier Park entered into an operating lease agreement
which expires November 25, 2005 to lease property for the Indianapolis
off-track betting facility. Under this agreement, Hoosier Park pays an
annual minimum rent of $200,000, plus additional rent contingent upon
annual gross revenues. Hoosier Park has an option to renew the lease for
an additional five-year period. Under the terms of the renewal lease,
Hoosier Park pays an annual minimum rent of $300,000, plus additional rent
contingent upon annual gross revenues. Rent expense under this agreement
during 1996 and 1995 was $619,646 and $113,568, respectively.
13
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. OPERATING LEASES: (cont'd)
Hoosier Park contracts for audio/video equipment and service under an
agreement which expires on the last day of racing in the year 2001. The
agreement provides for daily fees, which vary based on the level of
programming provided. Expense under this agreement during 1996, 1995 and
1994 was $800,841, $794,351 and $99,363, respectively.
A summary of future minimum operating lease payments follows:
Year Ending Minimum Lease
December 31 Payment ($)
----------- -------------
1997 $328,520
1998 328,520
1999 328,520
2000 328,520
2001 328,520
Later Years 954,693
----------
Total minimum lease payments $2,597,293
==========
7. STOCK-BASED COMPENSATION PLANS:
The Company sponsors the "Churchill Downs Incorporated 1993 Stock Option
Plan" (the "Plan"), a stock-based incentive compensation plan which is
described below. The Company applies APB Opinion 25 and related
interpretations in accounting for the Plan. In 1995, the FASB issued FASB
Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123")
which, if fully adopted by the Company, would change the methods the
Company applies in recognizing the cost of the Plan. Adoption of the cost
recognition provisions of SFAS 123 is optional and the Company has decided
not to elect these provisions of SFAS 123. However, pro forma disclosures
as if the Company adopted the cost recognition provisions of SFAS 123 in
1995 are required by SFAS 123 and are presented below.
Under the Plan, the Company is authorized to issue up to 200,000 shares of
common stock pursuant to "Awards" granted in the form of incentive stock
options (intended to qualify under Section 422 of the Internal Revenue
Code of 1986, as amended) and non-qualified stock options. Awards may be
granted to selected employees and directors of the Company or any
subsidiary.
14
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. STOCK-BASED COMPENSATION PLANS: (cont'd)
Employee Stock Options:
The Plan provides that the exercise price of any incentive stock option
may not be less than the fair market value of the common stock on the date
of grant. The exercise price of any nonqualified stock option is not so
limited by the Plan. The Company granted stock options in 1996, 1995 and
1994. The stock options granted in those years have contractual terms of
10 years and varying vesting dates, ranging from one to three years
following the date of grant. In accordance with APB 25, the Company has
not recognized any compensation cost for these stock options.
A summary of the status of the Company's stock options as of December 31,
1996, 1995 and 1994 and the changes during the year ended on those dates
is presented below:
1996 1995 1994
--------------------------- ---------------------------- ----------------------------
# of Shares Weighted # of Shares Weighted # of Shares Weighted
Underlying Average Underlying Average Underlying Average
Options Exercise Prices Options Exercise Prices Options Exercise Prices
----------- --------------- ------------ --------------- ----------- ---------------
Outstanding at beginning
of the year 124,000 $44.68 113,250 $45.93 92,700 $46.53
Granted 137,200 $37.93 10,750 $31.50 20,550 $43.22
Exercised - - - - - -
Canceled 92,700 $46.53 - - - -
Forfeited - - - - - -
Expired - - - - - -
Outstanding at end of year 168,500 $38.16 124,000 $44.68 113,250 $45.93
Exercisable at end of year - - 61,800 $46.53 30,900 $46.53
Weighted-average fair value
per share of options
granted during the year $11.09 $ 8.40
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1996 and 1995, respectively:
dividend yield of 2.1% in 1995 and ranging from 1.3% to 1.6% in 1996;
risk-free interest rates are different for each grant and range from 5.39%
to 6.74%; and the expected lives of options are different for each grant
and range from approximately 5.5 to 6.5 years, and a volatility of 18.75%
for all grants.
15
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. STOCK-BASED COMPENSATION PLANS: (cont'd)
The following table summarizes information about stock options outstanding
at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices At 12/31/96 Contributing Life Exercise Price at 12/31/96 Exercise Price
--------------- ----------- ----------------- -------------- ----------- --------------
$31.50 to $38.50 147,950 9.48 $37.46 - -
$42.50 to $44.00 20,550 7.6 $43.22 - -
TOTAL 168,500 9.25 $38.16 - -
Employee Stock Purchase Plan:
Under the Company's Employee Stock Purchase Plan (the "Employee Stock
Purchase Plan"), the Company is authorized to sell, pursuant to short-term
stock options, shares of its common stock to its full-time (or part-time
for at least 20 hours per week and at least five months per year)
employees at a discount from the common stock's fair market value through
payroll deductions. The Employee Stock Purchase Plan operates on the basis
of recurring, consecutive one-year periods. Each period commences on
August 1 and ends on the following July 31.
On the first day of each 12 month period, August 1, the Company will offer
to each eligible employee the opportunity to purchase common stock.
Employees may elect to participate for a period by electing to have a
designated percentage of their compensation withheld (after-tax) and
applied to purchase shares of common stock on the last day of the period,
July 31. The Employee Stock Purchase Plan allows withdrawals, terminations
and reductions on the amounts being deducted. The purchase price for the
common stock will be 85% of the lesser of the fair market value of the
common stock on (i) the first day of the period, or (ii) the last day of
the period. No employee may purchase common stock under the Employee Stock
Purchase Plan valued at more than $25,000 for each calendar year.
Under the Employee Stock Purchase Plan, the Company sold 3,909 shares of
common stock to 109 employees pursuant to options granted on August 1,
1995 and exercised on July 31, 1996. Because the plan year overlaps the
company's fiscal year, the number of shares sold pursuant to options
granted on August 1, 1996 can only be estimated because the 1996 plan year
is not yet complete. The Company's estimate of options granted in 1996
under the Plan is based on the number of shares sold to employees under
the Plan for the 1995 plan year, adjusted to reflect the change in the
number of employees participating in the Plan in 1996.
In accordance with APB 25, the Company has not recognized any compensation
cost for the Employee Stock Purchase Plan for 1996 or 1995 (or any other
prior year).
16
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. STOCK-BASED COMPENSATION PLANS: (cont'd)
A summary of the status of the Company's stock options under the Employee
Stock Purchase Plan as of December 31, 1996 and 1995 and the changes
during the year ended on those dates is presented below:
1996 1995
--------------------------- ----------------------------
# of Shares Weighted # of Shares Weighted
Underlying Average Underlying Average
Options Exercise Prices Options Exercise Prices
----------- --------------- ----------- ---------------
Outstanding at beginning
of the year 3,909 $28.90 - -
Granted 4,000 $34.43 3,909 $28.90
Exercised 3,909 $28.90 - -
Forfeited - - - -
Expired - - - -
Outstanding at end of the year 4,000 - 3,909 -
Exercisable at end of year - - - -
Weighted-average fair value per
share of options granted
during the year $12.78 $10.71
Had the compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS 123, the Company's net income and net
income per common share for 1996 and 1995 would approximate the pro forma
amounts below:
1996 1995
---------- ----------
Net income:
As reported $8,071,526 $6,203,135
Pro-forma 7,530,000 6,153,000
Net income per common share:
As reported $2.17 $1.64
Pro-forma 2.02 1.63
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to
1995, and the Company anticipates making awards in the future under its
stock-based compensation plans.
17
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. FAIR VALUES OF FINANCIAL INSTRUMENTS:
Financial Accounting Standards Board ("FASB") Statement No. 107,
"Disclosure about Fair Value of Financial Instruments," is a part of a
continuing process by the FASB to improve information on financial
instruments. The following methods and assumptions were used by the
Company in estimating its fair value disclosures for such financial
instruments as defined by the Statement:
Cash and Cash Equivalents - The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Long-Term Debt - The carrying amounts of the Company's borrowings under
its line of credit agreements and other long-term debt approximates fair
value, based upon current interest rates.
9. ACQUISITION:
On January 26, 1994 the Company purchased Anderson Park, Inc. ("API") for
approximately $1,950,000. API owned an Indiana Standardbred racing license
and was in the process of constructing a racing facility in Anderson,
Indiana. Subsequently, the facility was completed and contemporaneously
with the commencement of operations on September 1, 1994, the net assets
of API were contributed to a newly formed partnership, Hoosier Park, L.P.
in return for an 87% general partnership interest.
10. CONTINGENCIES:
On January 22, 1992, the company acquired certain assets of Louisville
Downs, Incorporated for $5,000,000. In conjunction with this purchase, the
Company withheld $1,000,000 from the amount due to the sellers to offset
certain costs related to the remediation of environmental contamination
associated with underground storage tanks at the site. Substantially all
of the $1,000,000 hold back had been utilized as of December 31, 1995. In
addition, the Company may offset any additional costs against additional
amounts payable to the sellers for the acquisition of the property.
It is not anticipated that the Company will have any liability as a result
of compliance with environmental laws with respect to the property.
Compliance with environmental laws has not otherwise affected development
and operation the property and the Company is not otherwise subject to any
material compliance costs in connection with federal or state
environmental laws.
18
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. SALE OF 10% OF HOOSIER PARK:
On December 20, 1995, the Company entered into a Partnership Interest
Purchase Agreement with Conseco HPLP, L.L.C. ("Conseco") for the sale of
10% of the Company's partnership interest in HPLP to Conseco. This sale
was closed on May 31, 1996. The purchase price for the 10% partnership
interest was $218,390 and the transaction also included a payment of
$2,603,514 for a 10% interest in the debt owed by HPLP to a subsidiary of
the Company. Conseco and Pegasus Group, Inc. ("Pegasus") are limited
partners of HPLP and Anderson Park, Inc. ("API"), a subsidiary of the
Company, continues to be the sole general partner of HPLP.
Through December 31, 1998, Conseco has an option to purchase from API an
additional 47% partnership interest in HPLP including payment for 47%
interest in the debt owed by HPLP to a subsidiary of the Company. The
purchase price of the additional partnership interest will be
approximately $6,222,000 and the payment for the debt will be
approximately $15,934,000. This purchase is subject to the approval of the
Indiana Horse Racing Commission. Upon exercise of the option, Conseco
would be the sole general partner of HPLP, and API and Pegasus will be
limited partners of HPLP with partnership interests of 30% and 13%,
respectively. The Company will continue to have a long-term management
agreement with HPLP pursuant to which the Company has operational control
of the day-to-day affairs of HPLP and its related simulcast facilities.
19
SUPPLEMENTARY FINANCIAL INFORMATION(Unaudited) COMMON STOCK INFORMATION
Per Share Of Common Stock
-------------------------
Net
Net Operating Net Earnings Earnings Market Price
Revenues Income (Loss) (Loss) Dividends High Low
------------ ----------- ------------ -------- --------- ----- ----
1996 $107,858,818 $12,314,897 $ 8,071,526 $2.17
Fourth Quarter 27,387,514 (1,096,925) (171,138) -0.02 $0.65 $36.50 $34.00
Third Quarter 13,981,302 (2,782,430) (1,580,988) -0.43 37.50 34.00
Second Quarter 54,939,249 19,637,584 11,896,865 3.17 44.00 36.00
First Quarter 11,550,753 (3,443,332) (2,073,213) -0.55 40.00 32.00
- --------------------------------------------------------------------------------------------------
1995 $ 92,434,216 $10,305,210 $ 6,203,135 $1.64
Fourth Quarter 21,264,267 (905,283) (500,096) -0.13 $0.50 $38.50 $31.00
Third Quarter 13,222,206 (3,572,224) (2,174,704) -0.57 43.25 35.50
Second Quarter 49,335,136 17,645,591 10,650,212 2.81 46.00 41.00
First Quarter 8,612,607 (2,862,874) (1,772,277) -0.47 47.00 42.50
- --------------------------------------------------------------------------------------------------
1994 $ 66,419,460 $ 9,861,086 $ 6,166,353 $1.63
Fourth Quarter 16,509,087 (515,409) (304,012) -0.08 $0.50 $43.00 $41.50
Third Quarter 7,515,621 (3,024,070) (1,794,462) -0.48 43.50 42.00
Second Quarter 39,968,720 17,128,385 10,469,618 2.77 45.00 42.00
First Quarter 2,426,032 (3,727,820) (2,204,791) -0.58 52.00 43.00
- --------------------------------------------------------------------------------------------------
THE COMPANY'S COMMON STOCK IS TRADED IN THE OVER-THE-COUNTER MARKET. AS OF MARCH
29, 1993, THE COMPANY'S COMMON STOCK WAS LISTED ON THE NATIONAL ASSOCIATION OF
SECURITIES DEALERS, INC.'S SMALLCAP MARKET UNDER THE SYMBOL CHDN. AS OF FEBRUARY
27, 1997, THERE WERE APPROXIMATELY 3,100 STOCKHOLDERS OF RECORD.
THE ABOVE TABLE SETS FORTH THE HIGH AND LOW BID QUOTATIONS (AS REPORTED BY
NASDAQ) AND DIVIDEND PAYMENT INFORMATION FOR THE COMPANY'S COMMON STOCK DURING
ITS LAST THREE YEARS. QUOTATIONS REFLECT INTER-DEALER PRICES, WITHOUT RETAIL
MARK-UP, MARK-DOWN OR COMMISSIONS, AND MAY NOT NECESSARILY REFLECT ACTUAL
TRANSACTIONS.
20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required herein is incorporated by reference from sections of
the Company's Proxy Statement titled "Section 16(a) Beneficial Ownership
Reporting Compliance," "Election of Directors," and "Executive Officers of the
Company," which Proxy Statement will be filed with the Securities and Exchange
Commission pursuant to instruction G(3) of the General Instructions to Form
10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from sections of
the Company's Proxy Statement titled "Election of Directors - Compensation and
Committees of the Board of Directors," "Compensation Committee Report on
Executive Compensation," "Compensation Committee Report on 1996 Cancellation and
Regrant of Options," "Compensation Committee Interlocks and Insider
Participation," "Performance Graph," and "Executive Compensation," which Proxy
Statement will be filed with the Securities and Exchange Commission pursuant to
instruction G(3) of the General Instructions to Form 10-K.
21
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has caused this amendment to be
signed on its behalf by the undersigned, thereunto duly authorized.
CHURCHILL DOWNS INCORPORATED
April 29, 1997 /s/Robert L. Decker
----------------------------------
Robert L. Decker
Senior Vice President, Finance and
Development, and Chief Financial Officer
/s/Vicki L. Baumgardner
----------------------------------
Vicki L. Baumgardner, Vice President,
Finance/Treasurer (Principal Accounting
Officer)
22
EXHIBIT 23
We consent to the incorporation by reference in the registration
statements of Churchill Downs Incorporated on Forms S-8 (File No. 33-85012 and
File No. 33-61111) of our report, dated March 7, 1997 on our audits of the
consolidated financial statements and financial statement schedule of Churchill
Downs Incorporated as of December 31, 1996, 1995 and 1994 and for each of the
three years then ended which report is included in this Annual Report on Form
10-K.
/S/COOPERS & LYBRAND L.L.P.
- -----------------------------
Coopers & Lybrand L.L.P.
Louisville, Kentucky
March 28, 1997
23
