UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Year Ended December 31, 1998
[ ] 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
CHURCHILL DOWNS INCORPORATED
Exact name of registrant as specified in its charter
KENTUCKY 61-0156015
State or other jurisdiction of IRS Employer Identification No.
Incorporation or Organization
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 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 whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months 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 of this
Form 10-K. (_________)
As of March 25, 1999, 7,525,041 shares of the Registrant's Common Stock were
outstanding, and the aggregate market value of the shares held by nonaffiliates
of the Registrant was $131,000,000.
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on June 17, 1999 are incorporated by reference herein in
response to Items 10, 11, 12 and 13 of Part III of Form 10-K. The exhibit index
is located on pages 58 to 59 of Form 10-K.
Page 1 of 28
I N D E X
PAGES
ITEM 8. Financial Statements and Supplementary Data 3
SIGNATURES 26
EXHIBIT 21 Subsidiaries of the registrant 27
EXHIBIT 23 Consent of PricewaterhouseCoopers LLP 28
-2-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Churchill Downs Incorporated
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a) (1), present fairly, in all material respects, the
consolidated financial position of Churchill Downs Incorporated and its
subsidiaries as of December 31, 1998, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
In addition, in our opinion, the consolidated financial statement schedule
listed in the index appearing under Item 14 (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 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 generally accepted auditing standards which
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, 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 the opinion expressed above.
PricewaterhouseCoopers LLP
/s/PricewaterhouseCoopers LLP
Louisville, Kentucky
February 24, 1999
-3-
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1998 1997 1996
---- ---- ----
Current assets:
Cash and cash equivalents $ 6,379,686 $ 9,280,233 $ 8,209,414
Accounts receivable 11,968,114 7,086,889 5,218,236
Other current assets 1,049,084 540,489 679,221
------------ ----------- -----------
Total current assets 19,396,884 16,907,611 14,106,871
Other assets 3,796,292 3,884,080 1,574,714
Plant and equipment, net 83,088,204 63,162,767 62,882,189
Intangible assets, net 8,369,395 1,894,350 2,165,192
------------ ----------- -----------
$114,650,775 $85,848,808 $80,728,966
============ =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,530,502 $ 5,732,783 $5,403,000
Accrued expenses 8,098,228 7,937,575 8,021,487
Dividends payable 3,762,521 3,658,468 2,375,271
Income taxes payable 257,588 186,642 2,510,508
Deferred revenue 8,412,552 7,344,830 6,511,902
Long-term debt, current
portion 126,812 79,805 73,893
------------ ----------- -----------
Total current liabilities 27,188,203 24,940,103 24,896,061
Long-term debt, due after
one year 13,538,027 2,633,164 2,878,714
Outstanding mutuel tickets
(payable after one year) 806,573 1,625,846 2,031,500
Deferred compensation 949,187 880,098 825,211
Deferred income taxes 6,937,797 2,377,100 2,316,600
Stockholders' equity:
Preferred stock, no par value;
authorized, 250,000 shares;
issued, none - - -
Common stock, no par value;
authorized, 20,000,000
shares, issued 7,525,041
shares, 1998, 7,316,934
shares, 1997 and 7,308,524
shares, 1996 8,926,975 3,614,567 3,493,042
Retained earnings 56,598,957 49,842,930 44,352,838
Deferred compensation costs (229,944) - -
Note receivable for common
stock (65,000) (65,000) (65,000)
------------- ----------- ------------
65,230,988 53,392,497 47,780,880
------------- ------------ ------------
$114,650,775 $85,848,808 $80,728,966
============= ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended December 31,
1998 1997 1996
Net revenues $147,300,299 $118,907,367 $107,858,818
------------ ------------- ------------
Operating expenses:
Purses 50,192,973 39,718,374 34,439,143
Other direct expenses 68,895,654 55,705,722 52,438,836
------------ ----------- ------------
119,088,627 95,424,096 86,877,979
------------ ----------- ------------
Gross profit 28,211,672 23,483,271 20,980,839
Selling, general and
administrative 11,068,262 9,077,983 8,665,942
------------ ----------- ------------
Operating income 17,143,410 14,405,288 12,314,897
------------ ----------- ------------
Other income (expense):
Interest income 679,782 575,084 390,669
Interest expense (896,067) (332,117) (337,438)
Miscellaneous income 342,423 325,087 673,398
------------ ----------- ------------
126,138 568,054 726,629
------------ ----------- ------------
Earnings before provision for
income taxes 17,269,548 14,973,342 13,041,526
Provision for income taxes 6,751,000 5,824,782 4,970,000
------------ ----------- ------------
Net earnings $10,518,548 $9,148,560 $8,071,526
============ =========== ============
Earnings per common share data:
Basic $1.41 $1.25 $1.08
Diluted $1.40 $1.25 $1.08
Weighted average shares :
outstanding
Basic 7,460,058 7,312,052 7,445,542
Diluted 7,539,482 7,320,670 7,447,706
The accompanying notes are an integral part of the consolidated financial
statements.
-5-
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
Note Deferred
Common Stock Retained Receivable Compensation
Shares Amount Earnings Common Stock Costs Total
Balances December 31, 1995 7,569,206 $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 $14.45 per share 7,818 112,970 112,970
Repurchase of common stock (268,500) (124,316) (4,829,877) (4,954,193)
Cash dividends, $.33 per share (2,375,271) (2,375,271)
--------- ---------- ------------ --------- ---------- ------------
Balances December 31, 1996 7,308,524 3,493,042 44,352,838 (65,000) - 47,780,880
Net earnings 9,148,560 9,148,560
Issuance of common stock
at $14.45 per share 8,410 121,525 121,525
Cash dividends, $.50 per share (3,658,468) (3,658,468)
--------- ---------- ----------- --------- ---------- ------------
Balances December 31, 1997 7,316,934 3,614,567 49,842,930 (65,000) - 53,392,497
Net earnings 10,518,548 10,518,548
Deferred compensation 344,046 (344,046) -
Deferred compensation
amortization 114,102 114,102
Issuance of common stock at
$24.25 per share in conjunction
with RCA acquisition 200,000 4,850,000 4,850,000
Issuance of common stock
at $14.60 per share 8,107 118,362 118,362
Cash dividends, $.50 per share (3,762,521) (3,762,521)
--------- ---------- ----------- --------- ---------- ------------
Balances December 31, 1998 7,525,041 $8,926,975 $56,598,957 $ (65,000) $(229,944) $65,230,988
========= ========== =========== ========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
-6-
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
1998 1997 1996
Cash flows from operating activities:
Net earnings $10,518,548 $9,148,560 $8,071,526
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 5,743,932 4,558,761 4,814,114
Deferred income taxes (121,000) 352,100 (461,000)
Deferred compensation 183,191 54,887 226,690
Increase (decrease) in cash resulting from
changes in operating assets and liabilities:
Accounts receivable (2,972,985) (2,053,211) (2,943,932)
Other current assets (292,994) (152,868) 232,699
Accounts payable (1,245,550) 329,783 (1,114,508)
Accrued expenses (579,904) (83,912) 4,710,605
Income taxes payable (refundable) 70,946 (2,323,866) 1,461,000
Deferred revenue 757,889 1,017,486 237,958
Other assets and liabilities (1,245,808) (377,523) (109,037)
------------ ----------- ------------
Net cash provided by operating activities 10,816,265 10,470,197 15,126,115
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of business, net of cash acquired
of $517,151 (17,232,849) - -
Additions to plant and equipment, net (3,524,032) (4,568,494) (2,570,795)
Purchase of minority-owned investment - (2,337,500) -
------------ ----------- ------------
Net cash used in investing activities (20,756,881) (6,905,994) (2,570,795)
------------ ----------- ------------
Cash flows from financing activities:
Decrease in long-term debt, net (140,164) (239,638) (3,468,569)
Borrowings on bank line of credit 22,000,000
Repayments of bank line of credit (11,000,000)
Dividends paid (3,658,468) (2,375,271) (1,892,302)
Common stock issued 118,362 121,525 112,970
Common stock repurchased - - (4,954,193)
Loan origination costs (279,661) - -
------------ ---------- -----------
Net cash provided by (used in) financing
activities 7,040,069 (2,493,384) (10,202,094)
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents (2,900,547) 1,070,819 2,353,226
Cash and cash equivalents, beginning of period 9,280,233 8,209,414 5,856,188
----------- ---------- -----------
Cash and cash equivalents, end of period $6,379,686 $9,280,233 $8,209,414
=========== ========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $497,307 $151,397 $277,149
Income taxes $7,129,540 $7,914,974 $3,970,000
Schedule of Non-cash Activities:
Issuance of common stock related to the
acquisition of RCA $4,850,000 - -
Invoicing for future Kentucky Derby and Oaks $677,733 $402,328 $586,886
Plant & equipment additions included in
accounts payable $95,055 - -
Compensation expense $344,406 - -
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, Summer and
Fall live race meetings for Thoroughbred horses and participates in
intrastate and interstate simulcast wagering at its racetracks in
Kentucky. In Indiana, the Company, through its subsidiary, Hoosier Park
L.P. (Hoosier Park), conducts live Thoroughbred, Quarter Horse and
Standardbred horse races and participates in interstate 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, Ellis Park Race Course
(Ellis Park), Churchill Downs Management Company (CDMC), Churchill Downs
Investment Company (CDIC), the Kentucky Horse Center and Anderson Park
Inc. (Anderson) and its majority-owned subsidiary, Hoosier Park. 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 calculated
using the straight-line method over the estimated useful lives of the
related assets.
-8-
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Basis of Presentation and Summary of Significant Accounting Policies:
(cont'd)
Intangible Assets:
Amortization of the cost of acquisition in excess of fair value of
assets acquired and the Indiana racing license is provided over 40 years
using the straight-line method. Organizational costs were amortized
using the straight-line method over 24 months to 60 months. Loan
origination costs on the Company's line of credit are being amortized
under the effective interest method over 36 months, the term of the
loan.
Long-lived Assets:
In the event that facts and circumstances indicate that the carrying
amount of tangible or intangible long-lived assets or groups of assets
may be impaired, an evaluation of recoverability would be performed. If
an evaluation is required, the estimated future undiscounted cash flows
associated with the assets would be compared to the assets' carrying
amount to determine if a write-down to market value or discounted cash
flow value is required.
Deferred Revenue:
Deferred revenue includes primarily advance sales related to the
Kentucky Derby and Oaks races in Kentucky.
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 (SFAS) No. 123 "Accounting for Stock-based Compensation"
proforma disclosure of net earnings and earnings per share are presented
in Note 10 as if SFAS No. 123 had been applied.
Reclassification:
Certain financial statement amounts have been reclassified in the prior
years to conform to current year presentation.
-9-
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Acquisitions:
On April 21, 1998, the Company acquired from TVI Corp., ("TVI") all of
the outstanding stock of Racing Corporation of America ("RCA") for a
purchase price of $22.6 million, including transaction costs. RCA owns
and operates Ellis Park Race Course in Henderson, Kentucky, and the
Kentucky Horse Center, a training facility located in Lexington,
Kentucky. The purchase price was paid as 200,000 shares of the Company's
common stock valued at $4.9 million with the remainder paid in cash. The
purchase price was allocated to the acquired assets and liabilities
based on their fair values on the acquisition date with the excess of
$6.4 being amortized over 40 years. The acquisition was accounted for by
the Company under the purchase method of accounting and, accordingly,
the results of operations of RCA subsequent to April 20, 1998, are
included in the Company's consolidated results of operations.
Pursuant to the terms of the purchase agreement between the Company and
TVI, if alternative gaming (whether full casino, slot machine or video
lottery) is legalized in the Commonwealth of Kentucky by December 31,
2015, TVI will receive royalty payments equal to 50% of annual earnings
before interest and taxes of the gaming operations at Ellis Park Race
Course and at the Kentucky Horse Center. Should gaming be legalized
before December 31, 2006, such royalties will be payable for ten years
from the date that such gaming becomes fully operational. The royalty
period will be reduced by one year for each year from 2006 through 2015
in which gaming is legalized.
Following are the unaudited pro forma results of operations as if the
April 21, 1998 transaction had occurred on January 1, 1997 (in
thousands, except per share and share amounts):
1998 1997
---- ----
Net revenues $149,272 $137,316
Net earnings $9,589 $8,845
Earnings per common share:
Basic $1.28 $1.18
Diluted $1.26 $1.18
Weighted average shares
outstanding:
Basic 7,520,332 7,512,052
Diluted 7,599,756 7,520,670
-10-
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Acquisitions: (cont'd)
This unaudited proforma financial information is not necessarily
indicative of the operating results that would have occurred had the
transaction been consummated as of January 1, 1997, nor is it
necessarily indicative of future operating results.
In July 1997, the Company purchased a 24% interest in the Kentucky Downs
racecourse in Franklin, Kentucky. The Company's investment of $2.2
million is accounted for under the equity method of accounting.
3. Plant and Equipment:
Plant and equipment is comprised of the following:
1998 1997 1996
---- ---- ----
Land $7,631,657 $5,999,036 $5,879,994
Grandstands and buildings 73,376,961 57,579,747 56,154,054
Equipment 4,979,383 3,416,306 2,936,129
Furniture and fixtures 5,341,119 4,327,797 3,603,276
Tracks and other improvements 37,997,696 33,118,100 31,377,753
Construction in process 249,438 113,210 74,206
----------- ----------- -----------
129,576,254 104,554,196 100,025,412
Accumulated depreciation (46,488,050) (41,391,429) (37,143,223)
------------ ------------ ------------
$83,088,204 $63,162,767 $62,882,189
=========== =========== ===========
Depreciation expense was $5,490,450, $4,287,916, and $4,038,135 for the
years ended December 31, 1998, 1997 and 1996.
4. Intangibles assets:
The Company's intangible assets are comprised of the following:
1998 1997 1996
---- ---- ----
Cost of acquisition in excess
of fair value of net assets
acquired $6,448,867 - -
Indiana racing license 2,085,428 $2,085,428 $2,085,428
Loan origination costs 279,661 - -
Organizational and preopening costs - - 932,738
----------- ----------- -----------
8,813,956 2,085,428 3,018,166
Accumulated amortization (444,561) (191,078) (852,974)
------------ ------------ ------------
$8,369,395 $1,894,350 $2,165,192
=========== =========== ===========
-11-
CHURCHILL DOWNS INCORPORATED (Continued)
4. Intangibles assets: (cont'd)
Amortization expense was $253,482, $270,845 and $775,979 for the years
ended December 31, 1998, 1997 and 1996.
5. Income Taxes:
Components of the provision for income taxes are as follows:
1998 1997 1996
---- ---- ----
Currently payable:
Federal $6,110,000 $4,616,800 $4,538,000
State & local 762,000 856,100 893,000
----------- ----------- -----------
6,872,000 5,472,900 5,431,000
----------- ----------- -----------
Deferred:
Federal 45,500 308,100 (382,000)
State & local 6,500 44,000 (79,000)
----------- ----------- ------------
52,000 352,100 (461,000)
----------- ----------- ------------
Reversal of valuation
allowance (173,000) - -
------------ ----------- -----------
$6,751,000 $5,825,000 $4,970,000
=========== =========== ===========
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:
1998 1997 1996
---- ---- ----
Federal statutory tax on
earnings before income tax $5,942,000 $5,141,000 $4,464,000
State income taxes, net of
federal income tax benefit 747,000 612,000 537,000
Permanent differences and other 235,000 72,000 (31,000)
Reversal of valuation allowance (173,000) - -
------------ ----------- -----------
$6,751,000 $5,825,000 $4,970,000
=========== =========== ===========
At December 31, 1998, the Company has net operating loss carryforwards
of approximately $3,885,000 for Indiana state income tax purposes
expiring from 2009 through 2011 and approximately $8,786,000 for
Kentucky state income tax purposes expiring from 2002 through 2011.
Management has determined that its ability to realize future benefits of
the state net operating loss carryforwards meets the "more likely than
not" criteria of SFAS No. 109, "Accounting for Income Taxes"; therefore,
no valuation allowance has been recorded at December 31, 1998.
-12-
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Income Taxes: (cont'd)
Components of the Company's deferred tax assets and liabilities are as
follows:
1998 1997 1996
---- ---- ----
Deferred tax liabilities:
Property & equipment in excess
of tax basis $7,804,600 $2,415,000 $2,284,000
Racing license in excess of tax
basis 650,000 636,000 657,000
----------- ----------- -----------
Deferred tax liabilities 8,454,600 3,051,000 2,941,000
----------- ----------- -----------
Deferred tax assets:
Supplemental benefit plan 315,400 295,000 273,000
State net operating loss
carryforwards 856,700 173,000 176,000
Allowance for uncollectible
receivables 87,100 71,000 66,000
Other assets 191,300 250,000 136,000
Other accruals 246,100 128,400 511,500
----------- ----------- -----------
Deferred tax assets 1,696,600 917,400 1,162,500
----------- ----------- -----------
Valuation allowance for state net
operating loss carryforwards - 173,000 176,000
----------- ----------- -----------
Net deferred tax liability $6,758,000 $2,306,600 $1,954,500
=========== =========== ===========
Income taxes are classified in the balance sheet as follows:
Net non-current deferred tax
liability $6,937,800 $2,377,100 $2,316,600
Net current deferred tax asset (179,800) (70,500) (362,100)
------------ ------------ ------------
$6,758,000 $2,306,600 $1,954,500
=========== ============ ===========
-13-
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Stockholders' Equity:
On March 19, 1998, the Company's Board of Directors authorized a 2-for-1
stock split of its common stock effective March 30, 1998. All share and
per share amounts in the accompanying consolidated financial statements
have been restated to give effect to the stock split.
Additionally, the Company's Board of Directors approved a stockholder
"Rights Plan" (the "Plan") on March 19, 1998, which grants each
stockholder the right to purchase a fraction of a share of Series 1998
Preferred Stock at the rate of one right for each share of the Company's
common stock. The rights will become exercisable 10 business days (or
such later date as determined by the Board of Directors) after any
person or group acquires, obtains a right to acquire or announces a
tender offer for 15% or more of the Company's outstanding common stock.
The rights would allow the holder to purchase preferred stock of the
Company at a 50% discount. The Plan is intended to protect stockholders
from takeover tactics that may be used by an acquirer that the Board
believes are not in the best interests of the shareholders. The Plan
expires on March 19, 2008.
7. Employee Benefit Plans:
The Company has a profit-sharing plan that 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 Company's contribution to the plan for
the years ended December 31, 1998, 1997 and 1996 was $806,000, $535,000,
and $402,000 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, 1998, 1997 and 1996 was $258,000, $205,000, and $183,000,
respectively.
The Company's policy is to fund this expense as accrued.
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, 1998, 1997 and 1996 was
$55,200, $51,000, and $51,000 respectively.
-14-
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Long-Term Debt:
On September 15, 1998, the Company obtained a $100 million line of
credit, which expires in September 2001, through a syndicate of banks
headed by its principal lender. The new credit facility replaces a $50
million line of credit obtained during the second quarter of 1998. The
interest rate on borrowings is based upon LIBOR plus 50 to 112.5
additional basis points which is determined by certain Company financial
ratios. There was $11.0 million outstanding on the line of credit at
December 31, 1998, and no borrowings outstanding at December 31, 1997
and 1996 under previous lines of credit. Provisions contained in the
line of credit agreement require the Company to maintain specified
levels of net worth, a specific ratio of consolidated funded debt to
consolidated earnings before interest, taxes, depreciation and
amortization and a specific ratio of consolidated earnings before
interest and taxes to the sum of consolidated interest expense and
consolidated dividends.
The Company also has two non-interest bearing notes payable in the
aggregate face amount of $900,000 relating to the purchase of an
intrastate wagering license from the former owners of the Louisville
Sports Spectrum property. Interest has been imputed at 8%. The balance
of these notes net of unamortized discount was $196,000, $276,000, and
$350,000 at December 31, 1998, 1997 and 1996, respectively. The notes
require aggregate annual payments of $110,000.
On May 31, 1996, the Company entered into a Partnership Interest
Purchase Agreement with Conseco, L.L.C. ("Conseco") for the sale of 10%
of the Company's partnership interest in Hoosier Park to Conseco. The
transaction also included assumption by Conseco of a loan to the Company
of approximately $2,600,000, of which the balance is $2,395,092 at
December 31, 1998. The loan requires interest of prime plus 2% (9.75% at
December 31, 1998) payable monthly with principal due November 2004. The
note is collateralized by 10% of the assets of Hoosier Park. Conseco had
an option to purchase an additional 47% interest in Hoosier Park which
expired unexercised on December 31, 1998.
Future aggregate maturities of long-term debt are as follows:
1999- $ 127,000
2000- 126,000
2001- 11,008,000
2002- 9,000
2003- -
Thereafter 2,395,000
-----------
$13,665,000
===========
-15-
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Operating Leases:
The Company has a long-term operating lease for the land in Anderson,
Indiana on which its Hoosier Park facility is located, as well as
operating leases for the Indianapolis off-track betting facility and
certain totalisator and audio/visual and other equipment and services.
The Anderson lease expires in 2003, with an option to extend the lease
for three additional ten year terms. The Indianapolis lease expires in
2009, with an option to extend the lease for two additional five year
terms. The leases include provisions for minimum lease payments as well
as contingent lease payments based on handle or revenues. Total rent
expense for all operating leases was $4,022,000, $3,803,000 and
$3,465,000 for the years ended December 31, 1998, 1997 and 1996.
Future minimum operating lease payments are as follows:
Minimum Lease
Payment
-------
1999 $ 725,604
2000 704,625
2001 556,214
2002 462,045
2003 372,840
Thereafter 1,694,301
-----------
$4,515,629
===========
10. Stock-Based Compensation Plans:
The Company sponsors both the "Churchill Downs Incorporated 1997 Stock
Option Plan" (the "97 Plan") and the "Churchill Downs Incorporated 1993
Stock Option Plan" (the "93 Plan"), stock-based incentive compensation
plans, which are described below. The Company applies APB Opinion 25 and
related interpretations in accounting for both the plans. However, pro
forma disclosures as if the Company adopted the cost recognition
provisions of SFAS 123 are presented below.
The Company is authorized to issue up to 300,000 shares and 400,000
shares of common stock (as adjusted for the stock split) under the 97
Plan and 93 Plan, respectively, 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 of the Company or
any subsidiary.
-16-
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Stock-Based Compensation Plans: (cont'd)
Employee Stock Options:
Both the 97 Plan and the 93 Plan provide that the exercise price of any
incentive stock option may not be less than the fair market value of the
common stock on the date of grant. The exercise price of any
nonqualified stock option is not so limited by the plans. The Company
granted stock options in 1998, 1997 and 1996. 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, 1998, 1997 and 1996 and the changes during the year ended on those
dates is presented below:
1998 1997 1996
-------------------- ---------------------- ---------------------
# of Shares Weighted # of Shares Weighted # of Shares Weighted
Underlying Average Underlying Average Underlying Average
Options Exercise Options Exercise Options Exercise
Prices Prices Prices
Outstanding at beginning
of the year 426,532 $19.45 337,000 $19.08 248,000 $22.34
Granted 51,766 $32.50 89,532 $20.83 274,400 $18.97
Exercised - - - - - -
Canceled - - - - 185,400 $23.27
Forfeited - - - - - -
Expired - - - - - -
Outstanding at end
of year 478,298 $20.86 426,532 $19.45 337,000 $19.08
Exercisable at
end of year 248,000 $21.02 207,400 $19.67 - -
Weighted-average fair value per
share of options granted
during the year $10.42 $6.34 $5.55
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 1998, 1997 and 1996,
respectively: dividend yields ranging from 1.20% to 1.54%; risk- free
interest rates are different for each grant and range from 5.75% to
6.63%; and the expected lives of options are different for each grant
and range from approximately 5.83 to 6.5 years, and expected volatility
rates of 24.86%, 19.38% and 18.75% for years ending December 31, 1998,
1997 and 1996.
-17-
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Stock-Based Compensation Plans: (cont'd)
The following table summarizes information about stock options
outstanding at December 31, 1998:
Options Outstanding Options Exercisable
----------------------------------------------- ----------------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/98 Contributing Life Exercise Price at 12/31/98 Exercise Price
$15.75 to $19.25 315,900 6.05 $18.72 211,000 $20.89
$21.25 to $32.50 162,398 8.20 $25.02 37,000 $21.71
------- -------
TOTAL 478,298 6.77 $20.86 248,000 $21.02
======= =======
Employee Stock Purchase Plan:
Under the Company's Employee Stock Purchase Plan (the "Employee Stock
Purchase Plan"), the Company is authorized to sell, pursuant to
short-term stock options, shares of its common stock to its full-time
(or part-time for at least 20 hours per week and at least five months
per year) employees at a discount from the common stock's fair market
value. The Employee Stock Purchase Plan operates on the basis of
recurring, consecutive one-year periods. Each period commences on August
1 and ends on the next following July 31.
On the first day of each 12-month period, August 1, the Company offers
to each eligible employee the opportunity to purchase common stock.
Employees elect to participate for each period to have a designated
percentage of their compensation withheld (after-tax) and applied to the
purchase of shares of common stock on the last day of the period, July
31. The Employee Stock Purchase Plan allows withdrawals, terminations
and reductions on the amounts being deducted. The purchase price for the
common stock is 85% of the lesser of the fair market value of the common
stock on (I) the first day of the period, or (ii) the last day of the
period. No employee may purchase common stock under the Employee Stock
Purchase Plan valued at more than $25,000 for each calendar year.
Under the Employee Stock Purchase Plan, the Company sold 8,107 shares of
common stock to 102 employees pursuant to options granted on August 1,
1997, and exercised on July 31, 1998. Because the plan year overlaps the
Company's fiscal year, the number of shares to be sold pursuant to
options granted on August 1, 1998, can only be estimated because the
1998 plan year is not yet complete. The Company's estimate of options
granted in 1998 under the Plan is based on the number of shares sold to
employees under the Plan for the 1997 plan year, adjusted to reflect the
change in the number of employees participating in the Plan in 1998.
-18-
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. 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, 1998, 1997 and 1996 and
the changes during the year ended on those dates is presented below:
1998 1997 1996
-------------------- ----------------------- ---------------------
# of Shares Weighted # of Shares Weighted # of Shares Weighted
Underlying Average Underlying Average Underlying Average
Options Exercise Options Exercise Options Exercise
Prices Prices Prices
Outstanding at beginning
of the year 8,030 $14.60 8,000 $14.45 7,818 $14.45
Adjustment to prior
year estimated grants 77 $14.60 410 $14.45 - -
Granted 5,238 $31.45 8,030 $18.94 8,000 $17.22
Exercised 8,107 $14.60 8,410 $14.95 7,818 $14.45
Forfeited - - - - - -
Expired - - - - - -
Outstanding at end
of year 5,238 $31.45 8,030 $18.94 8,000 $17.22
Exercisable at end
of year - - - - - -
Weighted-average
Fair value per share
of options granted
during the year $12.16 $5.36 $5.35
-19-
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Stock-Based Compensation Plans: (cont'd)
Had the compensation cost for the Company's stock-based compensation
plans been determined consistent with SFAS 123, the Company's net
earnings and earnings per common share for 1998, 1997 and 1996 would
approximate the pro forma amounts presented below:
1998 1997 1996
------------ ------------ ------------
Net earnings:
As reported $10,518,548 $9,148,560 $8,071,526
Pro-forma $10,086,914 $8,605,000 7,530,000
Earnings per common share:
As reported
Basic $1.41 $1.25 $1.08
Diluted $1.40 $1.25 $1.08
Pro-forma
Basic $1.35 $1.18 $1.01
Diluted $1.34 $1.18 $1.01
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. The Company anticipates making awards in
the future under its stock-based compensation plans.
11. 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.
-20-
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Contingencies:
On January 22, 1992, the Company acquired certain assets of Louisville
Downs, Incorporated for $5,000,000 including the site of the Louisville
Sports Spectrum. 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. All of the $1,000,000 hold
back had been utilized as of December 31, 1998 and additional costs of
remediation have not yet been conclusively determined. The sellers have
now received a reimbursement from the State of Kentucky of $995,000 for
remediation costs and that amount is now being held in an escrow account
to pay further costs of remediation. Approximately $985,000 remains in
the account. In addition to the hold back, the Company has obtained an
indemnity to cover the full cost of remediation from the prior owner 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 any of the
Company's property. Except as discussed herein, compliance with
environmental laws has not affected the ability to develop and operate
the Company's properties and the Company is not otherwise subject to any
material compliance costs in connection with federal or state
environmental laws.
13. Earnings Per Common Share Computations:
The following is a reconciliation of the numerator and denominator of
the earnings per common share computations:
1998 1997 1996
---- ---- ----
Net earnings (numerator) amounts
used for basic and diluted per
share computations: $10,518,548 $9,148,560 $8,071,526
=========== ========== ==========
Weighted average shares (denominator)
of common stock outstanding per
share computations:
Basic 7,460,058 7,312,052 7,445,542
Plus dilutive effect of stock
options 79,424 8,618 2,164
----------- ---------- ----------
Diluted 7,539,482 7,320,670 7,447,706
=========== ========== ==========
Earnings per common share:
Basic $1.41 $1.25 $1.08
Diluted $1.40 $1.25 $1.08
Options to purchase 51,766, 9,800 and 135,250 shares for the years ended
December 31, 1998, 1997 and 1996, respectively, were not included in the
computation of earnings per common share-assuming dilution because the
options' exercise prices were greater than the average market price of
the common shares.
-21-
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Segment Information
In 1998 the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." The Company has determined that
it currently operates in the following four segments: (1) Churchill
Downs racetrack and the Louisville Sports Spectrum simulcast facility,
(2) Ellis Park racetrack and its on-site simulcast facility, (3) Hoosier
Park racetrack and its on-site simulcast facility and the other three
Indiana simulcast facilities and (4) Other operations.
Most of the Company's revenues are generated from commissions on
pari-mutuel wagering at the Company's racetracks and simulcast wagering
facilities, as well as simulcast fees, admissions and concessions
revenue and other sources. Other operations includes the Kentucky Horse
Center and the Company's investments in various other business
enterprises. The Company's equity in the net income of equity method
investees is not significant. Eliminations include the elimination of
management fees and other intersegment transactions.
The accounting policies of the segments are the same as those described
in the "Summary of Significant Accounting Policies." The Company
evaluates the performance of its segments and allocates resources to
them based on earnings before interest, taxes, depreciation and
amortization ("EBITDA") and operating income.
-22-
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Segment Information: (cont'd)
The table below presents information about reported segments for the
years ending December 31, 1998, 1997 and 1996:
Segment Information (in thousands)
Churchill Hoosier Ellis Other Elimina-
Downs Park Park operations tions Total
Net revenues:
1998 $80,925 $47,744 $17,386 $2,497 $(1,252) $147,300
1997 77,404 41,503 - 1,299 (1,299) 118,907
1996 74,540 33,319 - 1,334 (1,334) 107,859
EBITDA:
1998 $14,417 $5,599 $2,305 $909 - $23,230
1997 14,205 4,282 - 802 - 19,289
1996 15,390 1,565 - 847 - 17,802
Operating income:
1998 $10,700 $4,499 $1,422 $522 - $17,143
1997 10,557 3,088 - 760 - 14,405
1996 11,482 6 - 827 - 12,315
Total assets:
1998 $89,427 $31,732 $23,038 $71,109 $(100,655) $114,651
1997 72,490 29,689 - 31,180 (47,510) 85,849
1996 71,047 28,626 - 26,062 (45,006) 80,729
Following is a reconciliation of total EBITDA to income before
provision for income taxes:
(in thousands) 1998 1997 1996
---- ---- ----
Total EBITDA $23,230 $19,289 $17,802
Depreciation and amortization (5,744) (4,559) (4,814)
Interest income (expense) (216) 243 53
------- ------- -------
Earnings before provision for
income taxes $17,270 $14,973 $13,041
======= ======= =======
-23-
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Subsequent Events:
On January 13, 1999, the Company acquired a 60% interest in Charlson
Broadcast Technologies, LLC ("CBT") for a purchase price of $5.4
million. CBT provides simulcast graphic software video services to
racetracks and simulcast wagering facilities throughout the United
States. The purchase agreement includes provisions for an additional
contingent purchase price to be paid by the Company to the former owners
of the 60% interest based upon the achievement of certain operating
targets.
On January 21,1999, the Company entered into an agreement to acquire all
of the outstanding shares of Calder Race Course, Inc., and Tropical
Park, Inc. ("Calder"), from KE Acquisition Corp., a private holding
company. Terms of the agreement include a purchase price of $86 million
subject to certain adjustments. Closing of the acquisition is expected
in early April 1999.
-24-
Supplementary Financial Information(Unaudited) Common Stock Information
Per Share of Common Stock
------------------------------------------------
Operating Basic Diluted
Net Income Net Earnings Earnings Earnings Market Price
Revenues (Loss) (Loss) (Loss) (Loss) Dividends High Low
-------- ---------- ------------ ------ -------- --------- ---- ---
1998 $147,300,299 $17,143,410 $10,518,548 $1.41 $1.40
Fourth Quarter 31,241,540 (1,290,562) (779,990) (.10) (.10) $0.50 $36.44 $27.25
Third Quarter 33,299,256 (1,016,288) (654,915) (.09) (.09) 41.44 27.63
Second Quarter 67,374,352 22,219,991 13,522,484 1.81 1.79 43.25 24.00
First Quarter 15,385,151 (2,769,731) (1,569,031) (.21) (.21) 25.31 19.31
- -------------------------------------------------------------------------------------------------------------
1997 $118,907,367 $14,405,288 $9,148,560 $1.25 $1.25
Fourth Quarter 28,021,261 (269,688) 30,749 0.00 0.00 $0.50 $23.38 $20.75
Third Quarter 16,827,607 (3,005,270) (1,819,209) (0.25) ( 0.25) 21.00 16.25
Second Quarter 60,779,635 20,815,669 12,785,706 1.75 1.75 19.00 16.50
First Quarter 13,278,864 (3,135,423) (1,848,686) (0.25) (0.25) 18.50 16.00
- -------------------------------------------------------------------------------------------------------------
1996 $107,858,818 $12,314,897 $ 8,071,526 $1.08 $1.08
Fourth Quarter 26,369,324 (1,092,044) (171,138) (0.02) (0.02) $0.33 $18.25 $17.00
Third Quarter 15,200,752 (2,782,430) (1,580,988) (0.21) (0.21) 18.75 17.00
Second Quarter 54,939,249 19,637,584 11,896,865 1.59 1.59 22.00 18.00
First Quarter 11,349,493 (3,448,213) (2,073,213) (0.27) (0.27) 20.00 16.00
- -------------------------------------------------------------------------------------------------------------
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 March
24, 1999, there were approximately 3,100 stockholders of record.
Earnings (loss) per share and other per share amounts have been retroactively
adjusted for the 2-for-1 stock split with a record date of March 30, 1998.
Quarterly earnings (loss) per share figures may not equal total earnings (loss)
per share for the year due in part to the fluctuation of the market price of the
stock.
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.
-25-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this amendment to be signed on its behalf by the
undersigned thereunto duly authorized.
CHURCHILL DOWNS INCORPORATED
June 15, 1999 \s\Thomas H. Meeker
Thomas H. Meeker
President and Chief Executive Officer
(Director and Principal Executive Officer)
June 15, 1999 \s\Robert L. Decker
Robert L. Decker
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
June 15, 1999 \s\Vicki L. Baumgardner
Vicki L. Baumgardner
Vice President, Finance and Treasurer
(Principal Accounting Officer)
-26-
EXHIBIT (21)
Subsidiary State/Jurisdiction of
Incorporation/Organization
Churchill Downs Management Company Kentucky
Hoosier Park, L.P. (limited partnership) Indiana
Ellis Park Race Course, Inc. Kentucky
Racing Corporation of America d/b/a Kentucky
Horse Center Delaware
Calder Race Course, Inc. Florida
Tropical Park, Inc Florida
-27-
EXHIBIT (23)
We consent to the incorporation by reference in the registration
statements of Churchill Downs Incorporated on Forms S-8 (File Nos. 33-85012,
333-62013 and 33-61111) of our report, dated February 24, 1999 on our audits of
the consolidated financial statements and consolidated financial statement
schedule of Churchill Downs Incorporated as of December 31, 1998, 1997 and 1996
and for each of the three years then ended which report is included in this
Annual report on Form 10-K/A.
\s\ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Louisville, Kentucky
June 15, 1999
-28