SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K/A CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): April 23, 1999 CHURCHILL DOWNS INCORPORATED ----------------------------- (Exact name of registrant as specified in its charter) KENTUCKY 0-01469 61-0156015 --------- --------- ------------ (State or other jurisdiction (Commission File Number) (IRS Employer of incorporation or Identification No.) organization) 700 Central Avenue, Louisville, KY 40208 ---------------------------------------- (Address of principal executive offices) (Zip Code) (502) 636-4400 ----------------------------------------- (Registrant's telephone number, including area code) NOT APPLICABLE (Former name or former address, if changed since last report) ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS A. FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors of Calder Race Course, Inc. In our opinion, the accompanying balance sheets and the related statements of income, of changes in shareholder's deficit and of cash flows present fairly, in all material respects, the financial position of Calder Race Course, Inc. (a wholly-owned subsidiary of K.E. Acquisition Corporation) at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. 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 Fort Lauderdale, Florida February 19, 1999 CALDER RACE COURSE, INC. (A WHOLLY-OWNED SUBSIDIARY OF K.E. ACQUISITION CORPORATION) BALANCE SHEETS - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. 2
DECEMBER 31, ------------------------------ 1998 1997 -------------- -------------- ASSETS Current assets: Cash and cash equivalents....................................................... $ 3,672,783 $ 311,519 Accounts receivable, net of allowance of $289,000 and $35,000 at December 31, 1998 and 1997, respectively................................................... 620,863 598,501 Restricted cash and investments................................................. 545,941 545,466 Prepaid expenses................................................................ 113,867 47,082 -------------- -------------- Total current assets.......................................................... 4,953,454 1,502,568 -------------- -------------- Property, plant and equipment: Land and improvements........................................................... 1,054,637 1,054,637 Buildings and improvements...................................................... 47,341,792 46,580,447 Furniture, fixtures, and equipment.............................................. 1,857,808 5,290,502 -------------- -------------- 50,254,237 52,925,586 Less accumulated depreciation................................................... 32,161,187 33,868,502 -------------- -------------- Property, plant and equipment, net............................................ 18,093,050 19,057,084 -------------- -------------- Restricted cash and investments--noncurrent....................................... 905,590 895,590 Other assets...................................................................... 203,287 89,137 -------------- -------------- 1,108,877 984,727 -------------- -------------- Total assets.................................................................. $ 24,155,381 $ 21,544,379 -------------- -------------- -------------- -------------- LIABILITIES AND SHAREHOLDER'S DEFICIT Current liabilities: Accounts payable................................................................ $ 322,783 $ 103,991 Funds held for stake racing--current............................................ 570,117 545,517 Mutuel tickets outstanding...................................................... 538,309 485,990 Accrued liabilities............................................................. 762,854 679,114 Redeemable preferred stock payable.............................................. -- 200,000 Due to affiliate and parent..................................................... 4,548,380 3,121,717 -------------- -------------- Total current liabilities..................................................... 6,742,443 5,136,329 Funds held for stake racing--noncurrent........................................... 817,401 817,108 Long-term debt.................................................................... 22,910,647 28,342,941 Deferred tax liability............................................................ 4,771,119 1,608,983 -------------- -------------- Total liabilities............................................................. 35,241,610 35,905,361 -------------- -------------- Mandatorily redeemable preferred stock, 7% cumulative, $1 par value. Authorized 190 shares; issued and outstanding -0- and 70 shares at December 31, 1998 and 1997, respectively; redemption amount of $10,000 per share...................... -- 700,000 Shareholder's deficit: Common stock, $.25 par value. Authorized 800,000 shares; issued and outstanding 667,440 shares at December 31, 1998 and 1997.................................. 166,860 166,860 Additional paid-in capital...................................................... 39,299,247 39,299,247 Accumulated deficit............................................................. (50,552,336) (54,527,089) -------------- -------------- Total shareholder's deficit................................................... (11,086,229) (15,060,982) -------------- -------------- Total liabilities and shareholder's deficit................................... $ 24,155,381 $ 21,544,379 -------------- -------------- -------------- -------------- CALDER RACE COURSE, INC. (A WHOLLY-OWNED SUBSIDIARY OF K.E. ACQUISITION CORPORATION) STATEMENTS OF INCOME - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. 3
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- Revenues: Pari-mutuel commissions........................................... $ 37,157,767 $ 33,700,053 $ 29,583,341 Interstate simulcast commissions.................................. 6,170,547 5,485,302 4,131,141 Stake fees for purses............................................. 1,595,950 1,531,608 1,273,970 Admissions........................................................ 575,153 608,177 698,693 Parking, programs and concessions................................. 1,122,232 1,199,114 1,311,421 Breakage.......................................................... 1,467,305 1,358,981 1,057,300 Sundry............................................................ 1,885,156 1,236,825 1,339,278 ------------- ------------- ------------- Total revenues.................................................. 49,974,110 45,120,060 39,395,144 ------------- ------------- ------------- Expenses: Purses and owners' awards......................................... 23,347,422 21,152,506 18,575,516 Advertising and promotion......................................... 1,480,848 1,647,781 1,334,982 Depreciation...................................................... 1,682,188 1,611,697 1,578,500 Insurance......................................................... 1,332,754 1,331,234 1,372,077 Maintenance and repairs........................................... 690,787 740,835 705,202 Payroll and other compensation.................................... 5,671,542 5,366,527 5,008,421 Taxes............................................................. 1,770,203 1,747,056 1,655,176 Services purchased................................................ 2,035,327 1,873,546 1,662,633 Totalisator rental................................................ 492,992 504,973 469,222 Utilities......................................................... 1,257,996 1,232,486 1,221,159 Other............................................................. 2,867,096 2,585,572 2,332,479 ------------- ------------- ------------- Total expenses.................................................. 42,629,155 39,794,213 35,915,367 ------------- ------------- ------------- Operating income................................................ 7,344,955 5,325,847 3,479,777 ------------- ------------- ------------- Other income (expense): Rental income..................................................... 1,010,807 1,067,848 871,676 Interest income................................................... 164,861 123,818 108,752 Interest expense.................................................. (1,866,600) (2,312,932) (2,453,517) ------------- ------------- ------------- (690,932) (1,121,266) (1,473,089) ------------- ------------- ------------- Income before income taxes...................................... 6,654,023 4,204,581 2,006,688 Provision for income taxes.......................................... 2,641,046 1,645,873 616,000 ------------- ------------- ------------- Net income.......................................................... 4,012,977 2,558,708 1,390,688 Dividends on preferred stock........................................ 38,224 67,822 91,000 ------------- ------------- ------------- Net income attributable to common shareholders...................... $ 3,974,753 $ 2,490,886 $ 1,299,688 ------------- ------------- ------------- ------------- ------------- ------------- CALDER RACE COURSE, INC. (A WHOLLY-OWNED SUBSIDIARY OF K.E. ACQUISITION CORPORATION) STATEMENTS OF CHANGES IN SHAREHOLDER'S DEFICIT - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. 4
COMMON STOCK ----------------------- ADDITIONAL TOTAL NUMBER PAR PAID-IN (ACCUMULATED SHAREHOLDER'S OF SHARES VALUE CAPITAL DEFICIT) DEFICIT ----------- ---------- ------------- -------------- -------------- Balance at January 1, 1996................ 667,400 $ 166,860 $ 39,299,247 $ (58,317,663) $ (18,851,556) Net income.............................. -- -- -- 1,390,688 1,390,688 Dividends on preferred stock............ -- -- -- (91,000) (91,000) ----------- ---------- ------------- -------------- -------------- Balance at December 31, 1996.............. 667,400 166,860 39,299,247 (57,017,975) (17,551,868) Net income.............................. -- -- -- 2,558,708 2,558,708 Dividends on preferred stock............ -- -- -- (67,822) (67,822) ----------- ---------- ------------- -------------- -------------- Balance at December 31, 1997.............. 667,400 166,860 39,299,247 (54,527,089) (15,060,982) Net income.............................. -- -- -- 4,012,977 4,012,977 Dividends on preferred stock............ -- -- -- (38,224) (38,224) ----------- ---------- ------------- -------------- -------------- Balance at December 31, 1998.............. 667,400 $ 166,860 $ 39,299,247 $ (50,552,336) $ (11,086,229) ----------- ---------- ------------- -------------- -------------- ----------- ---------- ------------- -------------- -------------- CALDER RACE COURSE, INC. (A WHOLLY-OWNED SUBSIDIARY OF K.E. ACQUISITION CORPORATION) STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. 5
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- Cash flows from operating activities: Net income......................................................... $ 4,012,977 $ 2,558,708 $ 1,390,688 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation....................................................... 1,682,188 1,611,697 1,578,500 Provision for deferred taxes....................................... 2,641,046 1,094,983 514,000 Provision for bad debts............................................ 254,000 -- -- Adjustment in carrying value of captive insurance company.......... -- 152,123 -- Changes in assets and liabilities: (Increase) decrease in: Restricted cash and investments................................ (10,475) (60,811) 16,172 Accounts receivable............................................ (276,362) (184,634) 66,300 Prepaid expenses............................................... (66,785) 147,171 (5,486) Other assets................................................... (114,150) 30,812 (14,960) Increase (decrease) in: Accounts payable............................................... 218,792 (15,073) (62,825) Funds held for stake racing.................................... 24,893 48,686 309,259 Mutuel tickets outstanding..................................... 52,319 35,749 (33,708) Accrued liabilities............................................ 83,740 239,556 (188,885) ------------- ------------- ------------- Net cash provided by operating activities...................... 8,502,183 5,658,967 3,569,055 ------------- ------------- ------------- Cash flows from investing activities: Payments for purchases of property and equipment................... (718,154) (629,471) (303,320) ------------- ------------- ------------- Net cash used in investing activities.......................... (718,154) (629,471) (303,320) ------------- ------------- ------------- Cash flows from financing activities: Advances to affiliate and parent, net.............................. 1,947,753 1,054,069 733,286 Redemption of mandatorily redeemable preferred stock............... (900,000) (400,000) -- Loan payments...................................................... (5,432,294) (5,900,000) (3,899,728) Dividends paid on preferred stock.................................. (38,224) (67,822) (91,000) ------------- ------------- ------------- Net cash used in financing activities.......................... (4,422,765) (5,313,753) (3,257,442) ------------- ------------- ------------- Net increase (decrease) in cash and cash equivalents........... 3,361,264 (284,257) 8,293 Cash and cash equivalents, beginning of period....................... 311,519 595,776 587,483 ------------- ------------- ------------- Cash and cash equivalents, end of period............................. $ 3,672,783 $ 311,519 $ 595,776 ------------- ------------- ------------- ------------- ------------- ------------- Supplemental cash flow information: Interest paid........................................................ $ 1,915,779 $ 2,316,208 $ 2,485,840 ------------- ------------- ------------- ------------- ------------- ------------- Supplemental schedule of noncash financing activities: Purchase of mandatorily redeemable preferred stock................... $ -- $ -- $ 200,000 ------------- ------------- ------------- ------------- ------------- ------------- Calder Race Course, Inc. (A Wholly-owned subsidiary of K.E. Acquisition Corporation) Notes to Financial Statements December 31, 1998 - -------------------------------------------------------------------------------- 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Calder Race Course, Inc. (the "Company"), holds a pari-mutuel racing permit from the State of Florida and conducts live race meetings for thoroughbred horses and participates in simulcast wagering as a host track and as a receiving track in Dade County, Florida. The Company's operations are classified under one business segment. As provided in the Florida statutes, the Company was authorized to operate a 122-day race meet during the years ended December 31, 1998, 1997 and 1996. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. RESTRICTED CASH Restricted cash consists of a surety bond made payable to the State of Florida, which is required by the State of Florida in order for Calder to be granted a license to race, and fines collected from horsemen, trainers and jockeys during meets, which are used to subsidize medical and funeral expenses of backside personnel, who are otherwise uninsured or in need. In addition, included in restricted cash at December 31, 1998 and 1997, respectively, are approximately $1,371,000 and $76,000 of amounts to be invested relating to the future Florida Stallion Stakes. INVESTMENTS Investments consist of interest-bearing Bankers acceptances and money market accounts held for the future Florida Stallion Stakes races. These securities are carried at accreted cost and are held to maturity. Interest income is accrued as earned. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment are stated at cost and are depreciated on a straight-line basis over the estimated useful lives of the respective assets, between 5 and 50 years. During 1998, the Company retired approximately $3.4 million of fully depreciated furniture, fixtures and equipment which are no longer being used in operations. 6 CALDER RACE COURSE, INC. (A WHOLLY-OWNED SUBSIDIARY OF K.E. ACQUISITION CORPORATION) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 - -------------------------------------------------------------------------------- 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews long-term assets for impairment and writes these down to fair value whenever events or changes in circumstances indicate that the carrying value may not be recoverable. FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 requires all entities to disclose the fair value of certain financial instruments in their financial statements. Accordingly, the Company reports that the carrying amount of cash and cash equivalents, trade receivables, accounts payable, long-term debt payable and accrued liabilities approximates fair value due to the short maturity of these instruments, and that the carrying amount of marketable securities is stated at fair value. INCOME TAXES The Company files a consolidated U.S. Federal income tax return with its parent, K.E. Acquisition Corporation (Parent). Under the terms of a tax sharing arrangement with its parent, the provision for income taxes is computed as if the Company filed a separate tax return, on a year to year, stand-alone basis, with the current tax balances determined based on a consolidated filing position. All current income tax related balances are included as due to parent in the accompanying financial statements. The Company accounts for income taxes using the asset and liability approach. The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of other assets and liabilities. The differences in 1998 and 1997 related primarily to accelerated tax depreciation. PURSES In accordance with Florida statutes, the Company is required to distribute a specific amount of purses and owners' awards based on a percentage of the pari-mutuel handle plus additional amounts based on contractual agreements with the Florida Horsemen's Benevolent Protective Association. The Company underpaid approximately $160,000 and $308,000 of purses and owners' awards during December 31, 1998 and 1997, respectively. Such amounts are included in accrued liabilities. The obligation at December 31, 1997 was fulfilled in 1998, and the obligation at December 31, 1998 is expected to be fulfilled in 1999. HORSEMEN ACCOUNT During the track meet the Company administers the Horsemen's bank account on their behalf. In addition to the opening balance, these funds include purses which have been paid by the Company to the Horsemen during the track meet but not yet withdrawn by the Horsemen. The funds held and 7 CALDER RACE COURSE, INC. (A WHOLLY-OWNED SUBSIDIARY OF K.E. ACQUISITION CORPORATION) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 - -------------------------------------------------------------------------------- 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) administered on behalf of the Horsemen amounted to $109,000 and $37,000 at December 31, 1998 and 1997, respectively. Such funds have been excluded from the financial statements. RECLASSIFICATIONS Certain reclassifications have been made to prior period financial statements to conform with current period presentation. 2. ACCOUNTS RECEIVABLE Accounts receivable consist primarily of amounts due from simulcasting, rent, and from concession activities. The Company maintains an allowance for doubtful accounts at a level which management believes is sufficient to cover potential losses. 3. DEBT The Company and its affiliate, Tropical Park, Inc. (Tropical), assumed debt of its former owner, of which the Company's allocable share at December 31, 1998 and 1997 amounted to $22,910,647 and $28,342,941, respectively. The debt, which is payable to its Parent, was allocated by agreement between the Company and Tropical. The debt is collateralized by substantially all of the Company's assets. The loan bears interest at adjusted LIBOR plus .75% (6.75% at December 31, 1998). In February 1999, the maturity date was extended to January 1, 2000. Interest payments are payable quarterly. The Company, and its affiliate, Tropical, are jointly and severally liable to their Parent for the total debt assumed which approximates $39,498,000 and $49,000,000 at December 31, 1998 and 1997, respectively. 4. MANDATORILY REDEEMABLE PREFERRED STOCK On August 5, 1988, the Company entered into a preferred stock exchange agreement whereby 190 shares of $1.00 par value, nonvoting, 7% cumulative preferred stock were authorized and issued. The preferred stock has a liquidation value of $10,000 per share. On August 28, 1998, the Company exercised an option to redeem all the remaining outstanding shares of preferred stock. The Company paid preferred stock dividends of $38,224, $67,822 and $91,000 during 1998, 1997 and 1996, respectively. 5. COMMITMENTS AND CONTINGENCIES LEASES AND CONTRACTS The Company entered into a lease with Tropical, an affiliate, for the rental of the Company's racing plant and facilities through March 2004. Rent is calculated at 1.5% of Tropical's on-site pari-mutuel handle. Total rental income under this lease was $803,199, $810,618 and $707,206 for 1998, 1997 and 1996, respectively. The rent, real estate taxes, and maintenance costs are reviewed annually to 8 CALDER RACE COURSE, INC. (A WHOLLY-OWNED SUBSIDIARY OF K.E. ACQUISITION CORPORATION) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 - -------------------------------------------------------------------------------- 5. COMMITMENTS AND CONTINGENCIES (CONTINUED) determine whether an adjustment should be made based on increases or decreases in various costs and expenses. The Company has also agreed to furnish Tropical with personnel necessary for its racing meets. For this service, Tropical is charged with the actual payroll cost plus a fringe benefit charge of 40% of this amount. The Company pays all related payroll costs. Fringe benefit fees for the year ended December 31, 1998, 1997 and 1996 totaled $896,410, $869,248 and $746,162, respectively. Payroll expenses have been reduced by this amount in the accompanying financial statements. LEGAL MATTERS The Company is involved in various matters of litigation which arise in the normal course of business. Management believes that liability, if any, arising from such litigation will not have a material adverse effect on the financial position of the Company. CONCESSION CONTRACT The Company has two years remaining on its three-year contract with its food and beverage concessionaire. Under the terms of the agreement, the Company is entitled to receive a percentage of the net concession sales, by location. In addition, the contract provides for the concessionaire to reimburse the Company for certain electricity costs in the main building. Amounts owed to the Company at December 31, 1998 and 1997 amounted to $196,278 and $34,300, respectively. LAND LEASE The Company has leased a portion of its land, through February 2025, to an operator of a national hotel franchise. As provided by the terms of the lease, the annual base rent is $63,000 plus a percentage of the rent based on the gross receipts of the hotel. SERVICE AGREEMENTS The Company has entered into a totalisator service agreement through 1999. The totalisator service charge is based on a tiered percentage of the daily handle, subject to a minimum fee of $2,000 for each racing day. Total charges amounted to $492,992, $504,973 and $469,222 for 1998, 1997 and 1996, respectively. In 1994, the Company entered into a five-year service agreement with a third party who provides on-track video and support operations. The charge for this service amounted to $468,793, $468,629 and $409,760 for 1998, 1997 and 1996, respectively. 9 CALDER RACE COURSE, INC. (A WHOLLY-OWNED SUBSIDIARY OF K.E. ACQUISITION CORPORATION) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 - -------------------------------------------------------------------------------- 5. COMMITMENTS AND CONTINGENCIES (CONTINUED) EMPLOYMENT AGREEMENTS The Company entered into three employment agreements with key employees for which the contract periods and termination dates vary from one year to three years. The agreements provide, in part, for combined compensation to be allocated between the Company and its affiliate, Tropical, of approximately $376,000, $350,000 and $314,000 in 1998, 1997 and 1996, respectively. The Company's portion was approximately $325,000, $296,000 and $255,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Total remaining annual commitments under these agreements amount to approximately $238,700, $183,000 and $42,000 for the years ending 1999, 2000 and 2001, respectively, of which the Company's allocated portion for 1999, 2000 and 2001 will be approximately $202,900, $155,600 and $35,700, respectively. FUNDS HELD FOR STAKE RACING Funds held for stake racing represent funds relating to nominating fees from horsemen for the Florida Stallion Stakes to be held in future years. These funds are included as investments and restricted cash in the accompanying financial statements. These funds consist primarily of interest bearing Bankers acceptances and money market accounts carried at accreted cost, maturing during the three years mentioned above. Market value approximates accreted cost. 401(K) PLAN All employees who have completed at least 1,000 hours of service, not covered by any other qualified pension or profit-sharing plan and are 21 years or older are eligible to participate in the Calder Race Course, Inc. 401(k) Plan. The Company's plan contributions, which are in the form of matching contributions equal to a percentage of the employees' contributions to the plan, totaled $13,281 and $8,948 for the years ended December 31, 1998 and 1997, respectively. 6. INCOME TAXES The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income primarily as a result of certain expenses where the deductions are accelerated for tax purposes. The Company's results are included in the consolidated U.S. federal income tax return with its parent. Under the terms of the agreed-upon tax sharing arrangement with its parent, the provision for income taxes is computed as if the Company filed a separate tax return, on a year to year, stand-alone basis. The consolidated current income tax liability of the Company's parent is allocated to the Company based on its pro-rata percentage of taxable income of the consolidated group and is included as Due to affiliate and parent in the accompanying financial statements. Other income tax related balances including those arising from temporary differences which generate deferred taxes and the difference in the current liability for income taxes computed as if the Company filed a separate tax return and the 10 CALDER RACE COURSE, INC. (A WHOLLY-OWNED SUBSIDIARY OF K.E. ACQUISITION CORPORATION) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 - -------------------------------------------------------------------------------- 6. INCOME TAXES (CONTINUED) parent's allocated amount, are included as Deferred tax liability in the accompanying financial statements. The aggregate amount of current and deferred tax expense, and the net amount of any tax-related balances due to parent was $2,641,046 and $4,771,119, respectively, for 1998 and $1,645,873 and $2,161,873, respectively, for 1997. The current and deferred tax expense was $616,000 for 1996. 7. DUE TO AFFILIATE AND PARENT Intercompany accounts with affiliate and parent consists of the following: 8. SUBSEQUENT EVENT On January 21, 1999, K.E. Acquisition Corporation entered into a definitive agreement to sell all of the outstanding shares of the Company and its affiliate, Tropical, to Churchill Downs, Inc. for cash consideration of $86,000,000 subject to certain adjustments at closing. The transaction remains subject to customary closing conditions, including the expiration of the waiting period under the Hard-Scott-Rodino Act and approval of the Florida Department of Business and Professional Regulation. Closing of the transaction is anticipated during the first quarter of 1999. * * * 11
AS OF DECEMBER 31, ---------------------------- 1998 1997 ------------- ------------- Due to affiliate, net........................................... $ (4,548,380) $ (2,568,827) Current taxes payable........................................... -- (552,890) ------------- ------------- Total due to affiliate and parent--current.................... $ (4,548,380) $ (3,121,717) ------------- ------------- ------------- ------------- Deferred tax liability--noncurrent.............................. $ (956,633) $ (1,030,720) Deferred tax sharing agreement liability--noncurrent............ (3,814,486) (578,263) ------------- ------------- Deferred tax liability (Due to parent--noncurrent)............ $ (4,771,119) $ (1,608,983) ------------- ------------- ------------- ------------- CALDER RACE COURSE, INC. (A WHOLLY-OWNED SUBSIDIARY OF K.E. ACQUISITION CORPORATION) BALANCE SHEET The accompanying notes are an integral part of these financial statements. 12
MARCH 31, 1999 ------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents........................................................................ $ 1,831,507 Accounts receivable, net of allowance of $294,000................................................ 430,288 Restricted cash and investments.................................................................. 696,289 Prepaid expenses................................................................................. 38,192 ------------- Total current assets........................................................................... 2,996,276 ------------- Property, plant and equipment: Land and improvements............................................................................ 1,054,637 Buildings and improvements....................................................................... 47,349,817 Furniture, fixtures, and equipment............................................................... 2,102,563 ------------- 50,507,017 Less accumulated depreciation.................................................................... 32,572,024 ------------- Property, plant and equipment, net............................................................. 17,934,993 ------------- Restricted cash and investments - noncurrent....................................................... 778,991 Other assets....................................................................................... 806,240 ------------- 1,585,231 ------------- Total assets................................................................................... $ 22,516,500 ------------- ------------- LIABILITIES AND SHAREHOLDER'S DEFICIT Current liabilities: Accounts payable................................................................................. $ 318,209 Funds held for stake racing--current............................................................. 696,288 Mutuel tickets outstanding....................................................................... 835,488 Accrued liabilities.............................................................................. 680,487 Due to affiliate and parent...................................................................... 4,670,751 ------------- Total current liabilities...................................................................... 7,201,223 Funds held for stake racing - noncurrent........................................................... 1,153,901 Long-term debt..................................................................................... 22,910,647 Deferred tax liability............................................................................. 3,691,519 ------------- Total liabilities.............................................................................. 34,957,290 ------------- Shareholder's deficit: Common stock, $.25 par value. Authorized 800,000 shares; issued and outstanding 667,440 shares... 166,860 Additional paid-in capital....................................................................... 39,299,247 Accumulated deficit.............................................................................. (51,906,897) ------------- Total shareholder's deficit.................................................................... (12,440,790) ------------- Total liabilities and shareholder's deficit.................................................... $ 22,516,500 ------------- ------------- CALDER RACE COURSE, INC. (A WHOLLY-OWNED SUBSIDIARY OF K.E. ACQUISITION CORPORATION) STATEMENTS OF INCOME The accompanying notes are an integral part of these financial statements. 13
FOR THE FOR THE THREE MONTHS THREE MONTHS ENDED MARCH 31, ENDED MARCH 31, 1999 1998 --------------- --------------- (UNAUDITED) (UNAUDITED) Revenues: Admissions................................................................... $ 2,280 $ -- Parking, programs and concessions............................................ 1,861 3,602 Sundry....................................................................... 608,271 561,625 --------------- --------------- Total revenues............................................................. 612,412 565,227 --------------- --------------- Expenses: Advertising and promotion.................................................... 68,318 35,970 Depreciation................................................................. 420,000 412,500 Insurance.................................................................... 350,372 335,217 Maintenance and repairs...................................................... 231,064 179,545 Payroll and other compensation............................................... 726,214 665,127 Taxes........................................................................ 332,388 311,660 Services purchased........................................................... 85,504 87,823 Utilities.................................................................... 169,462 169,096 Other........................................................................ 402,845 304,616 --------------- --------------- Total expenses............................................................. 2,786,167 2,501,554 --------------- --------------- Operating loss............................................................. (2,173,755) (1,936,327) --------------- --------------- Other income (expense): Rental income................................................................ 100,696 75,680 Interest income.............................................................. 25,844 13,349 Interest expense............................................................. (386,946) (479,937) --------------- --------------- (260,406) (390,908) --------------- --------------- Loss before benefit for income taxes....................................... (2,434,161) (2,327,235) Benefit for income taxes....................................................... 1,079,600 924,000 --------------- --------------- Net loss....................................................................... (1,354,561) (1,403,235) Dividends on preferred stock................................................... -- (13,728) --------------- --------------- Net loss attributable to common shareholders................................... $ (1,354,561) $ (1,416,963) --------------- --------------- --------------- --------------- CALDER RACE COURSE, INC. (A WHOLLY-OWNED SUBSIDIARY OF K.E. ACQUISITION CORPORATION) STATEMENTS OF CASH FLOWS The accompanying notes are an integral part of these financial statements. 14
FOR THE FOR THE THREE MONTHS THREE MONTHS ENDED MARCH 31, ENDED MARCH 31, 1999 1998 --------------- --------------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net loss..................................................................... $ (1,354,561) $ (1,403,235) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation................................................................. 420,000 412,500 Benefit for deferred taxes................................................... (1,079,600) (924,000) Provision for bad debts...................................................... 5,000 -- Changes in assets and liabilities: (Increase) decrease in: Restricted cash and investments.......................................... (23,749) (141,864) Accounts receivable...................................................... 185,575 64,959 Prepaid expenses......................................................... 75,675 47,082 Other assets............................................................. (602,953) (460,175) Increase (decrease) in: Accounts payable......................................................... (4,574) 355,951 Funds held for stake racing.............................................. 462,671 479,623 Mutuel tickets outstanding............................................... 297,179 167,632 Accrued liabilities...................................................... (82,367) 626,725 --------------- --------------- Net cash used in operating activities.................................... (1,701,704) (774,802) --------------- --------------- Cash flows from investing activities: Payments for purchases of property and equipment............................. (261,943) (464,170) --------------- --------------- Net cash used in investing activities...................................... (261,943) (464,170) --------------- --------------- Cash flows from financing activities: Advances from affiliate and parent, net...................................... 122,371 3,479,165 Redemption of mandatorily redeemable preferred stock......................... -- (200,000) Loan payments................................................................ -- (440,000) Dividends paid on preferred stock............................................ -- (13,726) --------------- --------------- Net cash provided by financing activities................................ 122,371 2,825,439 --------------- --------------- Net (decrease) increase in cash and cash equivalents..................... (1,841,276) 1,586,467 Cash and cash equivalents, beginning of period................................. 3,672,783 311,519 --------------- --------------- Cash and cash equivalents, end of period....................................... $ 1,831,507 $ 1,897,986 --------------- --------------- --------------- --------------- CALDER RACE COURSE, INC. (A WHOLLY-OWNED SUBSIDIARY OF K.E. ACQUISITION CORPORATION) NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 (UNAUDITED) 1. UNAUDITED FINANCIAL STATEMENTS The interim financial data is unaudited; however, in the opinion of Calder Race Course, Inc. (the "Company"), the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and the results of operations for the interim periods. 2. SUBSEQUENT EVENTS On April 23, 1999, Churchill Downs Incorporated acquired all of the outstanding stock of the Company and its affiliate, Tropical Park, Inc. from K.E. Acquisition Corporation for a purchase price of $86 million cash plus a closing net working capital adjustment of approximately $2.4 million cash and $0.6 million in transaction costs. The purchase included the licenses held by the Company and its affiliate, Tropical Park, Inc. to conduct horse racing at Calder Race Course. The results of operations of the Company and its affiliate, Tropical Park, Inc. will be included in Churchill Downs Incorporated's consolidated financial statements since the date of acquisition during the second quarter of 1999. 15 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors of Tropical Park, Inc. In our opinion, the accompanying balance sheets and the related statements of income, of changes in shareholder's deficit and of cash flows present fairly, in all material respects, the financial position of Tropical Park, Inc. (a wholly-owned subsidiary of K.E. Acquisition Corporation) at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. 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 Fort Lauderdale, Florida February 19, 1998 16 TROPICAL PARK, INC. (A WHOLLY-OWNED SUBSIDIARY OF K.E. ACQUISITION CORPORATION) BALANCE SHEETS - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. 17
DECEMBER 31, ---------------------------- 1998 1997 ------------- ------------- ASSETS Current assets: Cash and cash equivalents........................................................ $ 4,734,157 $ 7,302,918 Accounts receivable, net of allowance of $156,000 and $30,000 at December 31, 1998 and 1997, respectively.................................................... 5,330,266 3,758,584 Due from affiliate............................................................... 4,548,380 2,568,827 Prepaid expenses................................................................. 83,628 47,160 ------------- ------------- Total current assets......................................................... 14,696,431 13,677,489 ------------- ------------- Property and equipment: Building and equipment........................................................... 7,241,887 7,241,887 Racetrack improvements........................................................... 2,846,785 2,919,974 ------------- ------------- 10,088,672 10,161,861 Less accumulated depreciation.................................................... 8,371,902 8,317,543 ------------- ------------- Property and equipment, net.................................................. 1,716,770 1,844,318 ------------- ------------- Restricted cash.................................................................... 88,352 86,138 Other assets....................................................................... 149,013 149,013 ------------- ------------- 237,365 235,151 ------------- ------------- Total assets................................................................. $ 16,650,566 $ 15,756,958 ------------- ------------- ------------- ------------- LIABILITIES AND SHAREHOLDER'S DEFICIT Current liabilities: Accounts payable................................................................. $ 2,324,037 $ 1,135,343 Mutuel tickets outstanding....................................................... 382,696 392,120 Accrued and other liabilities.................................................... 2,074,835 1,792,651 Due to parent.................................................................... -- 280,522 ------------- ------------- Total current liabilities.................................................... 4,781,568 3,600,636 Long-term debt..................................................................... 16,587,174 20,311,000 Deferred tax liability............................................................. 2,652,934 1,127,965 ------------- ------------- Total liabilities............................................................ 24,021,676 25,039,601 ------------- ------------- Shareholder's deficit: Common stock, $31.25 stated value. Authorized 1,000 shares; issued and outstanding 195 shares at December 31, 1998 and 1997........................... 6,094 6,094 Additional paid-in capital....................................................... 19,044,657 19,044,657 Accumulated deficit.............................................................. (26,421,861) (28,333,394) ------------- ------------- Total shareholder's deficit.................................................. (7,371,110) (9,282,643) ------------- ------------- Total liabilities and shareholder's deficit.................................. $ 16,650,566 $ 15,756,958 ------------- ------------- ------------- ------------- TROPICAL PARK, INC. (A WHOLLY-OWNED SUBSIDIARY OF K.E. ACQUISITION CORPORATION) STATEMENTS OF INCOME - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. 18
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------- 1998 1997 1996 ------------- ------------- ------------- Revenues: Pari-mutuel commissions........................................... $ 14,583,809 $ 13,909,779 $ 12,361,514 Interstate simulcast commissions.................................. 4,445,505 4,207,286 3,496,869 Stake fees for purses............................................. 331,450 217,100 176,605 Admissions........................................................ 268,786 263,522 262,796 Parking, programs, and concessions................................ 487,481 500,113 420,560 Breakage.......................................................... 547,440 527,701 391,798 Sundry............................................................ 691,616 485,484 402,490 ------------- ------------- ------------- Total revenues.................................................. 21,356,087 20,110,985 17,512,632 ------------- ------------- ------------- Expenses: Purses and owners' awards......................................... 9,655,499 9,612,064 8,442,959 Advertising and promotion......................................... 752,163 638,339 616,728 Depreciation...................................................... 127,547 127,694 127,900 Insurance......................................................... 237,201 234,318 268,468 Rent.............................................................. 817,637 819,195 714,659 Personnel and related costs....................................... 2,945,426 2,862,383 2,449,635 Services purchased................................................ 858,590 830,216 732,691 Totalisator rental................................................ 217,448 209,666 191,337 Utilities......................................................... 472,112 453,827 560,537 Other............................................................. 1,036,245 860,225 930,222 ------------- ------------- ------------- Total expenses.................................................. 17,119,868 16,647,927 15,035,136 ------------- ------------- ------------- Operating income................................................ 4,236,219 3,463,058 2,477,496 ------------- ------------- ------------- Other income (expense): Rental income..................................................... 69,863 70,920 68,994 Interest income................................................... 173,846 138,206 110,841 Interest expense.................................................. (1,347,042) (1,155,340) (1,226,759) ------------- ------------- ------------- (1,103,333) (946,214) (1,046,924) ------------- ------------- ------------- Income before income taxes...................................... 3,132,886 2,516,844 1,430,572 Provision for income taxes.......................................... 1,221,353 933,487 585,000 ------------- ------------- ------------- Net income...................................................... $ 1,911,533 $ 1,583,357 $ 845,572 ------------- ------------- ------------- ------------- ------------- ------------- TROPICAL PARK, INC. (A WHOLLY-OWNED SUBSIDIARY OF K.E. ACQUISITION CORPORATION) STATEMENTS OF CHANGES IN SHAREHOLDER'S DEFICIT - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. 19
COMMON STOCK --------------------------------------- ADDITIONAL TOTAL NUMBER PAR PAID-IN ACCUMULATED SHAREHOLDER'S OF SHARES VALUE CAPITAL DEFICIT DEFICIT ------------- --------- ------------- -------------- -------------- Balance at January 1, 1996................... 195 $ 6,094 $ 19,044,657 $ (30,762,323) $ (11,711,572) Net income................................. -- -- -- 845,572 845,572 --- --------- ------------- -------------- -------------- Balance at December 31, 1996................. 195 6,094 19,044,657 (29,916,751) (10,866,000) Net income................................. -- -- -- 1,583,357 1,583,357 --- --------- ------------- -------------- -------------- Balance at December 31, 1997................. 195 6,094 19,044,657 (28,333,394) (9,282,643) Net income................................. -- -- -- 1,911,533 1,911,533 --- --------- ------------- -------------- -------------- Balance at December 31, 1998................. 195 $ 6,094 $ 19,044,657 $ (26,421,861) $ (7,371,110) --- --------- ------------- -------------- -------------- --- --------- ------------- -------------- -------------- TROPICAL PARK, INC. (A WHOLLY-OWNED SUBSIDIARY OF K.E. ACQUISITION CORPORATION) STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. 20
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------ 1998 1997 1996 ------------- ------------ ------------- Cash flows from operating activities: Net income.......................................................... $ 1,911,533 $ 1,583,357 $ 845,572 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation........................................................ 127,548 127,694 127,900 Provision for deferred taxes........................................ 1,221,353 617,965 510,000 Provision for bad debts............................................. 126,000 -- -- Adjustment in carrying value of captive insurance company........... -- 76,031 -- Changes in assets and liabilities: (Increase) decrease in: Accounts receivable............................................. (1,697,682) (175,367) -- Restricted cash................................................. (2,214) (12,376) (514) Prepaid expenses................................................ (36,468) 127,671 (124,624) Other assets.................................................... -- 55,280 199,962 Increase (decrease) in: Accounts payable.................................................. 1,188,694 114,002 (2,058,317) Mutuel tickets outstanding........................................ (9,424) 81,538 (133,361) Accrued liabilities............................................... 282,184 (571,609) 729,521 ------------- ------------ ------------- Net cash provided by operating activities......................... 3,111,524 2,024,186 96,139 ------------- ------------ ------------- Cash flows from investing activities: Payments for purchases of property and equipment.................... -- -- (4,800) ------------- ------------ ------------- Net cash used in investing activities............................. -- -- (4,800) ------------- ------------ ------------- Cash flows from financing activities: Advances from affiliate and parent.................................. (1,956,459) (397,656) (597,559) Loan payments....................................................... (3,723,826) -- (299,000) ------------- ------------ ------------- Net cash used in financing activities............................. (5,680,285) (397,656) (896,559) ------------- ------------ ------------- Net (decrease) increase in cash and cash equivalents.............. (2,568,761) 1,626,530 (805,220) Cash and cash equivalents, beginning of period........................ 7,302,918 5,676,388 6,481,608 ------------- ------------ ------------- Cash and cash equivalents, end of period.............................. $ 4,734,157 $ 7,302,918 $ 5,676,388 ------------- ------------ ------------- ------------- ------------ ------------- Supplemental cash flow information: Interest paid......................................................... $ 1,341,720 $ 1,158,104 $ 1,242,920 ------------- ------------ ------------- ------------- ------------ ------------- TROPICAL PARK, INC. (A WHOLLY-OWNED SUBSIDIARY OF K.E. ACQUISITION CORPORATION) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Tropical Park, Inc. (the "Company"), holds a pari-mutuel racing permit from the State of Florida and conducts live race meetings for thoroughbred horses and participates in simulcast wagering as a host track and as a receiving track. The Company's operations are classified under one business segment. The Company currently operates its meets at Calder Race Course, Inc. (Calder), an affiliate. As provided in Florida statutes, the Company was authorized to operate one race meet during the period from November 1998 to January 1999, for a period of 51 days. During 1997 and 1996 the race meets were authorized from November 1997 to January 1998 and from November 1996 to January 1997 for 51 days and 50 days, respectively. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. RESTRICTED CASH Restricted cash consists of a surety bond made payable to the State of Florida. Such bond is required by the State of Florida in order for Tropical to be granted a license to race. Such amounts include fines collected from horsemen, trainers and jockeys during meets which are used to subsidize medical and funeral expenses of backside personnel, who are otherwise uninsured or in need. PROPERTY AND EQUIPMENT The Company has made various improvements to the racing plant which it leases from Calder. Property and equipment are stated at cost and depreciated on the straight-line basis over the lesser of their estimated useful lives or the remaining term of the lease, between 5 and 31 years. During 1998, the Company retired approximately $73,000 of fully depreciated racetrack improvements which are no longer used in operations. IMPAIRMENT OF LONG-LIVED ASSETS The Company reviews long-term assets for impairment and writes these down to fair value whenever events or changes in circumstances indicate that the carrying value may not be recoverable. 21 TROPICAL PARK, INC. (A WHOLLY-OWNED SUBSIDIARY OF K.E. ACQUISITION CORPORATION) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 - ------------------------------------------------------------------------------- 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 requires all entities to disclose the fair value of certain financial instruments in their financial statements. Accordingly, the Company reports that the carrying amount of cash and cash equivalents, trade receivables, accounts payable, long term debt payable and accrued liabilities approximates fair value due to the short maturity of these instruments, and that the carrying amount of marketable securities is stated at fair value. INCOME TAXES The Company files a consolidated U.S. Federal income tax return with its parent K.E. Acquisition Corporation (Parent). Under the terms of a tax sharing arrangement with its parent, the provision for income taxes is computed as if the Company filed a separate tax return, on a year to year, stand-alone basis, with the current tax balances determined based on a consolidated filing position. All current income tax related balances are included as due to parent in the accompanying financial statements. The Company accounts for income taxes using the asset and liability approach. The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of other assets and liabilities. The differences in 1998 and 1997 related primarily to accelerated book depreciation for financial reporting purposes in excess of tax. PURSES In accordance with Florida statutes, the Company is required to distribute a specific amount of purses and owners' awards based on a percentage of the pari-mutuel handle plus additional amounts based on contractual agreements with the Florida Horsemen's Benevolent Protective Association. At December 31, 1998 and 1997, the Company underpaid approximately $968,000 and $779,000, respectively, of purses and owners' awards. Such amounts are included in accrued liabilities. In January 1999 and 1998, the majority of these obligations were fulfilled. HORSEMEN ACCOUNT During the track meet the Company administers the Horsemen's bank account on their behalf. In addition to the opening balance, these funds include purses which have been paid by the Company to the Horsemen during the track meet but not yet withdrawn by the Horsemen. The funds held and administered on behalf of the Horsemen amounted to $5,531,000 and $7,234,000 as of December 31, 1998 and 1997, respectively. Such funds have been excluded from the financial statements. RECLASSIFICATIONS Certain reclassifications have been made to prior period financial statements to conform with current period presentation. 22 TROPICAL PARK, INC. (A WHOLLY-OWNED SUBSIDIARY OF K.E. ACQUISITION CORPORATION) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 - ------------------------------------------------------------------------------- 2. ACCOUNTS RECEIVABLE Accounts receivable consist primarily of amounts due from simulcasting and from concession activities. The Company maintains an allowance for doubtful accounts at a level which management believes is sufficient to cover potential losses. 3. ACCRUED AND OTHER LIABILITIES Accrued and other liabilities is comprised of: 4. DEBT The Company and its affiliate, Calder, assumed debt of its former owner, of which the Company's allocable share at December 31, 1998 and 1997 amounted to $16,587,174 and $20,311,000, respectively. The debt which is payable to its Parent, was allocated by agreement between the Company and Calder. The debt is collateralized by substantially all of the Company's assets. The loan bears interest at adjusted LIBOR plus .75% (6.75% at December 31, 1998). In February 1999, the maturity date was extended to January 1, 2000. Interest payments are payable quarterly. The Company and its affiliate, Calder, are jointly and severally liable to their Parent for the total debt assumed which approximates $39,498,000 and $49,000,000 at December 31, 1998 and 1997, respectively. 5. COMMITMENTS AND CONTINGENCIES LEASES AND CONTRACTS The Company entered into a lease with Calder, an affiliate, for the rental of Calder's racing plant and facilities through March 2004. Rent is calculated at 1.5% of the Company's on-site pari-mutuel handle. Rent expense was $803,199, $810,618 and $707,406 during 1998, 1997 and 1996, respectively. The rent, real estate taxes, and maintenance costs are reviewed annually to determine whether an adjustment should be made based on increases or decreases in various costs and expenses. Calder has also agreed to furnish the Company with personnel necessary for its racing meets. For this service, the Company is charged with the actual payroll costs and expenses, plus a fringe benefit charge of 40% of this amount. Fringe benefit expense for the years ended December 31, 1998, 1997 and 1996 totaled $896,410, $869,248 and $746,162, respectively. 23
AS OF DECEMBER 31, ----------------------- 1998 1997 ---------- ---------- Purses liability . . . . . . . . $ 625,756 $ 840,306 Breeders awards liability. . . . 403,707 529,358 Other liabilities. . . . . . . . 1,045,372 422,987 ---------- ---------- $2,074,835 $1,792,651 ---------- ---------- ---------- ---------- TROPICAL PARK, INC. (A WHOLLY-OWNED SUBSIDIARY OF K.E. ACQUISITION CORPORATION) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 - ------------------------------------------------------------------------------- 5. COMMITMENTS AND CONTINGENCIES (CONTINUED) LEGAL MATTERS The Company is involved in various matters of litigation which arise in the normal course of business. Management believes that liability, if any, arising from such litigation will not have a material adverse effect on the financial position of the Company. CONCESSION CONTRACT The Company has two years remaining on its three-year contract with its food and beverage concessionaire. Under the terms of the agreement, the Company is entitled to receive a percentage of the net concession sales. In addition, the contract provides for the concessionaire to reimburse the Company for certain electricity costs in the main building. Amounts owed to the Company at December 31, 1998 and 1997 amounted to $146,589 and $109,713, respectively. SERVICE AGREEMENTS The Company entered into a totalisator service agreement through 1999. The totalisator service charge is based on a tiered percentage of the daily handle, subject to a minimum fee of $2,000 for each racing day. Total charges for 1998, 1997 and 1996 amounted to $217,448, $209,666 and $191,337, respectively. In 1994, the Company entered into a five year service agreement with a third party who provides on-track video and support operations. The charge for this service for 1998, 1997 and 1996 amounted to $197,444, $188,844 and $197,844, respectively. EMPLOYMENT AGREEMENTS An affiliate of the Company entered into three employment agreements with key employees for which the contract periods and termination dates vary from one year to three years. The agreements provide, in part, for combined compensation to be allocated between the Company and its affiliate, Calder, of approximately $376,000, $350,000 and $314,000 in 1998, 1997 and 1996, respectively. The Company's portion was approximately $51,000, $54,000 and $59,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Total remaining annual commitments under these agreements amount to approximately $238,700, $183,000 and $42,000 for the years ending 1999, 2000 and 2001, respectively of which the Company's allocated portion for 1999, 2000 and 2001 will be approximately $35,800, $27,400 and $6,300, respectively. 6. INCOME TAXES The provision for income taxes differs from the amount of income tax determined by applying the applicable U.S. statutory federal income tax rate to pretax income primarily as a result of certain expenses not deductible for tax purposes. 24 TROPICAL PARK, INC. (A WHOLLY-OWNED SUBSIDIARY OF K.E. ACQUISITION CORPORATION) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 - ------------------------------------------------------------------------------- 6. INCOME TAXES (CONTINUED) The Company's results are included in the consolidated U.S. federal income tax return with its parent. Under the terms of the agreed-upon tax sharing arrangement with its parent, the provision for income taxes is computed as if the Company filed a separate tax return, on a year to year, stand-alone basis. The consolidated current income tax liability of the Company's parent is allocated to the Company based on its pro-rata percentage of taxable income of the consolidated group and is included as Due to parent in the accompanying financial statements. Other income tax related balances including those arising from temporary differences which generate deferred taxes and the difference in the current liability for income taxes computed as if the Company filed a separate tax return and the parent's allocated amount are included as Deferred tax liability in the accompanying financial statements. The aggregate amount of current and deferred tax expense, and the net amount of any tax-related balances due to parent was $1,221,353 and $2,652,934, respectively, for 1998 and $933,487 and $1,408,487, respectively, for 1997. The current and deferred tax expense was $585,000 for 1996. 7. DUE TO/FROM AFFILIATE AND PARENT As of December 31, 1998 and 1997, the Company had a due from its affiliate, Calder, in the amount of $4,548,380 and $2,568,827, respectively, and the amounts due to parent consisted of the following: 8. SUBSEQUENT EVENTS On January 21, 1999, K.E. Acquisition Corporation entered into a definitive agreement to sell all of the outstanding shares of the Company and its affiliate, Calder, to Churchill Downs Inc. for cash consideration of $86,000,000, subject to certain adjustments at closing. The transaction remains subject to customary closing conditions, including the expiration of the waiting period under the Hart-Scott-Rodino Act and approval of the Florida Department of Business and Professional Regulation. Closing of the transaction is anticipated during the first quarter of 1999. * * * 25
AS OF DECEMBER 31, ------------------------- 1998 1997 ----------- ----------- Due to parent for income taxes-current. . . . . . . . $ - $ (280,522) ----------- ----------- ----------- ----------- Deferred tax asset-noncurrent . . . . . . . . . . . . $ 1,046,279 $ 1,102,078 Deferred tax sharing agreement liability-noncurrent (3,699,213) (2,230,043) ----------- ----------- Net deferred tax liability (Due to parent-noncurrent) $(2,652,934) $(1,127,965) ----------- ----------- ----------- ----------- TROPICAL PARK, INC. (A WHOLLY-OWNED SUBSIDIARY OF K.E. ACQUISITION CORPORATION) BALANCE SHEET The accompanying notes are an integral part of these financial statements. 26
MARCH 31, 1999 ----------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $ 5,407,966 Accounts receivable, net of allowance of $140,000 . . . . . . . . 500,900 Due from affiliate. . . . . . . . . . . . . . . . . . . . . . . . 4,670,751 ----------- Total current assets. . . . . . . . . . . . . . . . . . . . . . . 10,579,617 ----------- Property and equipment: Building and equipment. . . . . . . . . . . . . . . . . . . . . . 7,241,887 Racetrack improvements. . . . . . . . . . . . . . . . . . . . . . 2,846,785 ----------- 10,088,672 Less accumulated depreciation . . . . . . . . . . . . . . . . . . 8,404,901 ----------- Property and equipment, net . . . . . . . . . . . . . . . . . . . 1,683,771 ----------- Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . 96,136 Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 149,013 ----------- 245,149 ----------- Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . $12,508,537 ----------- ----------- LIABILITIES AND SHAREHOLDER'S DEFICIT Current liabilities: Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . $ 133,424 Mutuel tickets outstanding. . . . . . . . . . . . . . . . . . . . 243,002 Accrued and other liabilities . . . . . . . . . . . . . . . . . . 514,236 ----------- Total current liabilities . . . . . . . . . . . . . . . . . . . . 890,662 Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . 16,587,174 Deferred tax liability. . . . . . . . . . . . . . . . . . . . . . 2,542,534 ----------- Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . 20,020,370 ----------- Shareholder's deficit: Common stock, $31.25 stated value. Authorized 1,000 shares; issued and outstanding 195 shares . . . . . . . . . . . . . . . 6,094 Additional paid-in capital. . . . . . . . . . . . . . . . . . . . 19,044,657 Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . (26,562,584) ----------- Total shareholder's deficit . . . . . . . . . . . . . . . . . . . (7,511,833) ----------- Total liabilities and shareholder's deficit . . . . . . . . . . . $12,508,537 ----------- ----------- TROPICAL PARK, INC. (A WHOLLY-OWNED SUBSIDIARY OF K.E. ACQUISITION CORPORATION) STATEMENTS OF INCOME The accompanying notes are an integral part of these financial statements. 27
FOR THE FOR THE THREE MONTHS THREE MONTHS ENDED MARCH 31, ENDED MARCH 31, 1999 1998 --------------- --------------- (UNAUDITED) (UNAUDITED) Revenues: Pari-mutuel commissions. . . . . . . . . $ 705,146 $ 683,297 Interstate simulcast commissions . . . . 325,136 318,242 Admissions . . . . . . . . . . . . . . . 12,708 14,330 Parking, programs, and concessions . . . 21,894 27,235 Breakage . . . . . . . . . . . . . . . . 20,343 19,668 Sundry . . . . . . . . . . . . . . . . . 99,106 156,207 ---------- ---------- Total revenues. . . . . . . . . . . . . 1,184,333 1,218,979 ---------- ---------- Expenses: Purses and owners' awards. . . . . . . . 499,330 501,694 Advertising and promotion. . . . . . . . 41,803 60,469 Depreciation . . . . . . . . . . . . . . 33,000 33,000 Insurance. . . . . . . . . . . . . . . . 53,000 49,000 Rent . . . . . . . . . . . . . . . . . . 53,917 31,861 Personnel and related costs. . . . . . . 225,887 187,185 Services purchased . . . . . . . . . . . 40,615 47,565 Totalisator rental . . . . . . . . . . . 7,656 8,557 Utilities. . . . . . . . . . . . . . . . 129,158 94,130 Other. . . . . . . . . . . . . . . . . . 150,643 108,156 ---------- ---------- Total expenses. . . . . . . . . . . . . 1,235,009 1,121,617 ---------- ---------- Operating (loss) income . . . . . . . . (50,676) 97,362 ---------- ---------- Other income (expense): Rental income . . . . . . . . . . . . . 15,000 15,000 Interest income . . . . . . . . . . . . 64,638 74,335 Interest expense. . . . . . . . . . . . (280,085) (342,045) ---------- ---------- (200,447) (252,710) ---------- ---------- Loss before benefit for income taxes. . (251,123) (155,348) Benefit for income taxes. . . . . . . . . 110,400 60,600 ---------- ---------- Net loss. . . . . . . . . . . . . . . . $(140,723) $ (94,748) ---------- ---------- ---------- ---------- TROPICAL PARK, INC. (A WHOLLY-OWNED SUBSIDIARY OF K.E. ACQUISITION CORPORATION) STATEMENTS OF CASH FLOWS The accompanying notes are an integral part of these financial statements. 28
FOR THE FOR THE THREE MONTHS THREE MONTHS ENDED MARCH 31, ENDED MARCH 31, 1999 1998 --------------- --------------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net loss . . . . . . . . . . . . . . . . . . $ (140,723) $ (94,748) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation . . . . . . . . . . . . . . . . 33,000 33,000 Benefit for deferred taxes . . . . . . . . . (110,400) (60,600) Changes in assets and liabilities: (Increase) decrease in: Accounts receivable. . . . . . . . . . . . 4,829,366 3,465,641 Restricted cash. . . . . . . . . . . . . . (7,784) (933) Prepaid expenses . . . . . . . . . . . . . 83,628 33,554 Increase (decrease) in: Accounts payable . . . . . . . . . . . . . 2,190,614 (982,400) Mutuel tickets outstanding . . . . . . . . (139,694) (85,690) Accrued liabilities. . . . . . . . . . . . (1,560,599) (1,015,321) ---------- ---------- Net cash provided by operating activities. 796,180 1,292,503 ---------- ---------- Cash flows from financing activities: Advances to affiliate and parent . . . . . . (122,371) (4,351,580) ---------- ---------- Net cash used in financing activities . . . (122,371) (4,351,580) Net increase (decrease) in cash and cash equivalents. . . . . . . . . . . . . 673,809 (3,059,077) Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . 4,734,157 7,302,918 ---------- ---------- Cash and cash equivalents, end of period. . $5,407,966 $4,243,841 ---------- ---------- ---------- ---------- TROPICAL PARK, INC. (A WHOLLY-OWNED SUBSIDIARY OF K.E. ACQUISITION CORPORATION) NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 (UNAUDITED) 1. UNAUDITED FINANCIAL STATEMENTS The interim financial data is unaudited; however, in the opinion of Tropical Park, Inc. (the "Company"), the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and the results of operations for the interim periods. 2. SUBSEQUENT EVENTS On April 23, 1999, Churchill Downs Incorporated acquired all of the outstanding stock of the Company and its affiliate, Calder Race Course, Inc. from K.E. Acquisition Corporation for a purchase price of $86 million cash plus a closing net working capital adjustment of approximately $2.4 million cash and $0.6 million in transaction costs. The purchase included the licenses held by the Company and its affiliate, Calder Race Course, Inc. to conduct horse racing at Calder Race Course. The results of operations of the Company and its affiliate, Calder Race Course, Inc. will be included in Churchill Downs Incorporated's consolidated financial statements since the date of acquisition during the second quarter of 1999. 29 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS B. PRO FORMA FINANCIAL INFORMATION CHURCHILL DOWNS INCORPORATED UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following unaudited pro forma condensed balance sheet was derived from our unaudited consolidated balance sheet and the unaudited balance sheets of Calder Race Course, Inc. ("Calder") and Tropical Park, Inc. ("Tropical") (which together comprise Calder Race Course) as of March 31, 1999. The unaudited pro forma condensed statements of earnings for the three-month periods ended March 31, 1999 and 1998 were derived from our unaudited consolidated statements of earnings and the unaudited statements of income of Calder and Tropical for the three-month periods ended March 31, 1999 and 1998 and of Racing Corporation of America (Ellis Park) for the three-month period ended March 31, 1998. The unaudited pro forma condensed statements of earnings for the year ended December 31, 1998 were derived from our audited consolidated statement of earnings for the year ended December 31, 1998, the audited statements of earnings of Calder and Tropical for the year ended December 31, 1998 and the unaudited statement of earnings of Ellis Park for the period from January 1, 1998 through April 21, 1998. The unaudited pro forma financial statements reflect the pro forma effects of the acquisitions of Ellis Park and Calder and Tropical, and our new credit agreement. These unaudited pro forma financial statements give effect to the acquisitions and the new credit agreement as if they had occurred on January 1, 1998 for the statements of earnings and as of March 31, 1999 for the balance sheet. The statements do not purport to represent what our results of operations or financial position actually would have been if the acquisitions and the new credit agreement had occurred on or as of such dates and are not necessarily indicative of future operating results or financial position. The unaudited pro forma condensed consolidated financial statements are based upon, and should be read in conjunction with, the historical consolidated financial statements of Churchill Downs Incorporated, including notes thereto, included in its report on Form 10-K for the year ended December 31, 1998 and its unaudited interim financial statements including notes thereto, included in its report on Form 10-Q for the quarterly period ended March 31, 1999 and the audited annual financial statements and the unaudited interim financial statements of Calder and Tropical, and the notes thereto included in this Form 8-K. The acquisitions of Ellis Park and Calder Race Course have been accounted for using the purchase method of accounting. Under the purchase method of accounting, the purchase price is allocated to the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed. The pro forma adjustments related to the Calder Race Course acquisition are based on preliminary assumptions of the allocation of the purchase price and are subject to revision once appraisals, evaluations and other studies of the fair value of the assets acquired and liabilities assumed are completed. Actual purchase accounting adjustments related to the Calder Race Course acquisition may differ from the pro forma adjustments presented in this prospectus. 30 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET MARCH 31, 1999 - -------------------- (1) Adjustments give pro forma effect to the Calder Race Course acquisition and Churchill Downs' new credit agreement as if these transactions had occurred on March 31, 1999. 31
Historical Calder Pro Forma Race Course(1) Adjustments Pro Forma Historical ----------------- and Churchill Churchill Downs Calder Tropical Eliminations(1) Downs --------------- ------ -------- --------------- ----------- ASSETS Current assets: Cash and cash equivalents........ $ 12,590 $ 1,832 $ 5,408 $ -- $ 19,830 Accounts receivable.............. 8,402 430 501 -- 9,333 Due from affiliate............... -- -- 4,671 (4,671)(2) Other current assets............. 3,325 734 -- -- 4,059 -------- -------- -------- ------ -------- Total current assets........... 24,317 2,996 10,580 (4,671) 33,222 Other assets..................... 5,427 1,585 245 -- 7,257 Property, plant and equipment, net............................ 85,827 17,935 1,684 24,659(3) 130,105 Intangibles, net of amortization. 11,407 -- -- 48,204(4) 2,500(5) 62,111 -------- -------- -------- ------ -------- Total assets................... $126,978 $22,516 $12,509 $70,692 $232,695 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable................. $ 11,330 $ 318 $ 133 $ -- $ 11,781 Accrued liabilities.............. 5,308 2,212 758 -- 8,278 Due to affiliate................. -- 4,671 -- (4,671)(2) -- Dividends payable................ -- -- -- -- -- Income tax payable............... -- -- -- -- -- Deferred revenue................. 15,462 -- -- -- 15,462 Long-term debt, current portion.. 570 -- -- -- 570 -------- -------- -------- ------ -------- Total current liabilities...... 32,670 7,201 891 (4,671) 36,091 Long term liabilities: Due to parent.................... -- 22,911 16,587 (39,498)(6) -- Long-term debt, due after one year................. 21,237 -- -- 91,997 (7) 113,234 Other liabilities................ 3,810 1,154 -- -- 4,964 Deferred income taxes............ 7,011 3,691 2,543 (6,460)(8) -- 9,371 (9) 16,156 -------- -------- -------- ------ -------- Total liabilities.............. 64,728 34,957 20,021 50,739 170,445 -------- -------- -------- ------ -------- Shareholders' equity: Common stock..................... 8,927 167 6 (173)(10) 8,927 Retained earnings (accumulated deficit)....................... 53,589 (51,907) (26,563) 78,470 (10) 53,589 Additional paid in capital....... -- 39,299 19,045 (58,344)(10) -- Deferred compensation costs...... (201) -- -- -- (201) Notes receivable for common stock (65) -- -- -- (65) -------- -------- -------- ------ -------- Total shareholders' equity..... 62,250 (12,441) (7,512) 19,953 62,250 -------- -------- -------- ------ -------- Total liabilities and shareholders' equity......... $126,978 $ 22,516 $12,509 $70,692 $232,695 -------- -------- -------- ------ -------- -------- -------- -------- ------ -------- (2) To eliminate the intercompany balances between Calder and Tropical. (3) To record the revaluation of acquired property, plant and equipment to its estimated fair value. (4) To record the excess of the purchase price over the fair value of tangible and identifiable intangible net assets acquired. (5) To record deferred financing costs associated with Churchill Downs' new credit agreement. (6) To eliminate liabilities of Calder and Tropical that were not assumed by Churchill Downs in the transaction. (7) To record the borrowings on Churchill Downs' line of credit necessary to finance the purchase price of $86.0 million plus a working capital adjustment of $2.9 million, related acquisition costs of $600,000 and deferred financing costs of $2.5 million associated with Churchill Downs' new credit agreement. (8) To record the elimination of income taxes payable not assumed in the acquisition. (9) To record the revaluation of the deferred tax assets and liabilities based on the revaluation of assets acquired and liabilities assumed. (10) To eliminate the historical equity accounts of Calder and Tropical. 32 Unaudited Pro Forma Condensed Consolidated Statement of Earnings For the Three-Month Period ended March 31, 1999 (1) Adjustments necessary to give pro forma effect to the Calder Race Course acquisition and Churchill Downs' new credit agreement as if these transactions had occurred on January 1, 1998. Historical statement of earnings information is based on the unaudited financial statements for the three month period ended March 31, 1999. (2) To eliminate intercompany rental income and expense between Calder and Tropical. (3) To record the estimated increase in depreciation expense as a result of the revaluation of the acquired Calder and Tropical property, plant and equipment to its fair value and estimated useful lives. (4) To record estimated amortization over 40 years of the excess of the Calder Race Course purchase price over the fair value of net assets acquired of $48.2 million. 33
Historical Calder Pro Forma Historical Race Course(1) Adjustments Pro Forma Churchill ------------------- and Churchill Downs Calder Tropical Eliminations(1) Downs (in thousands, except per share data) Net revenues..................................... $17,663 $ 612 $1,184 $ - $19,459 --------- -------- ------- --------- --------- Operating expenses: Purses........................................ 5,872 - 499 - 6,371 Other direct expenses......................... 13,285 2,217 551 (54)(2) 58 (3) 16,057 --------- -------- ------- --------- --------- 19,157 2,217 1,050 4 22,428 --------- -------- ------- --------- --------- Gross profit (loss)........................ (1,494) (1,605) 134 (4) (2,969) Selling, general and administrative expenses.... 3,130 569 185 - 3,884 Amortization Expense............................ 173 - - 301(4) 474 --------- -------- ------- --------- --------- Operating income (loss).................... (4,797) (2,174) (51) (305) (7,327) --------- -------- ------- --------- --------- Other income (expense) Interest income.............................. 147 26 65 - 238 Interest expense............................. (435) (387) (280) (991)(5) (135)(6) (2,228) Rental income................................ - 101 15 (54)(2) 62 Miscellaneous income......................... 44 - - - 44 --------- -------- ------- --------- --------- (244) (260) (200) (1,180) (1,884) Earnings (loss) before income tax provision (benefit)............................ (5,041) (2,434) (251) (1,485) (9,211) Federal and state income tax provision (benefit) (2,031) (1,080) (110) (474)(7) (3,695) --------- -------- ------- --------- --------- Net earnings (loss)............................. $(3,010) $(1,354) $(141) $(1,011) $(5,516) --------- -------- ------- --------- --------- --------- -------- ------- --------- --------- Earnings (loss) per common share Basic........................................ $(0.40) $(0.73) --------- --------- --------- --------- Diluted...................................... $(0.40) $(0.73) --------- --------- --------- --------- Weighted average shares outstanding Basic........................................ 7,525 7,525 Diluted...................................... 7,525 7,525 - -------------------------- (5) To record the estimated incremental interest expense using an average 6.70% interest rate on borrowings of $92.0 million necessary to finance the Calder Race Course acquisition and fund deferred financing costs, including amortization expense of $125,000 related to deferred financing costs of $2.5 million over 5 years. (6) To record the estimated annual commitment fee expense under the new credit agreement on the unused portion of the $250.0 million line of credit of $150.5 million at 0.375%. (7) To record the income tax effect of the estimated increase in depreciation and incremental interest expense resulting from the Calder Race Course acquisition at our estimated federal and state income tax rate of 40%. 34 Unaudited Pro Forma Condensed Consolidated Statement of Earnings For the Three-Month Period ended March 31, 1998 - --------------------- (1) The Ellis Park acquisition occurred on April 21, 1998, and the results of operations of Ellis Park have been included in the historical statement of earnings of Churchill Downs since that date. The pro forma Ellis Park adjustments give effect to the Ellis Park acquisition and Churchill Downs' new credit agreement as if these transactions had occurred on January 1, 1998. Historical Ellis Park statement of earnings information is based on the unaudited financial statements for the three-month period ended March 31, 1998. 35
Historical Calder Pro Forma Historical Historical Pro Forma Race Course(2) Adjustments Pro Forma Churchill Ellis Ellis Park Pro Forma ----------------- and Churchill Downs Park (1) Adjustments(1) Combined Calder Tropical Elimination(2) Downs ---------- ----------- -------------- --------- ------ -------- -------------- --------- (in thousands, except per share data) Net revenues.............. $15,385 $1,556 $ - $16,941 $565 $1,219 $ - $18,725 ---------- ----------- -------------- --------- ------ -------- -------------- --------- Operating expenses: Purses................. 5,374 396 - 5,770 - 502 - 6,272 Other direct expenses.. 10,625 1,546 144(3) 12,315 2,018 449 (32)(7) 65 (8) 14,815 ---------- ----------- -------------- --------- ------ -------- -------------- --------- 15,999 1,942 144 18,085 2,018 951 33 21,087 Gross profit (loss).... (614) (386) (144) (1,144) (1,453) 268 (33) (2,362) Selling, general and administrative expenses.. 2,134 226 - 2,360 483 171 - 3,014 Amortization Expense...... 22 - 40(4) 62 - - 301(9) 363 ---------- ----------- -------------- --------- ------ -------- -------------- --------- Operating income (loss)... (2,770) (612) (184) (3,566) (1,936) 97 (334) (5,739) ---------- ----------- -------------- --------- ------ -------- -------------- --------- Other income (expense) Interest income........ 189 - - 189 13 74 - 276 Interest expense....... (104) (12) (273)(5) (389) (480) (342) (836)(10) (135)(11) (2,182) Rental income.......... - - - - 76 15 (32)(7) 59 Miscellaneous income... 117 - - 117 - - - 117 ---------- ----------- -------------- --------- ------ -------- -------------- --------- 202 (12) (273) (83) (391) (253) (1,003) (1,730) Earnings (loss) before income tax benefit...... (2,568) (624) (457) (3,649) (2,327) (156) (1,337) (7,469) Federal and state income tax benefit............. (999) (204) (212)(6) (1,415) (924) (61) (414)(12) (2,814) ---------- ----------- -------------- --------- ------ -------- -------------- --------- Net earnings (loss)....... (1,569) (420) (245) (2,234) (1,403) (95) (923) (4,655) Dividends on preferred stock......... - - - - 14 - - 14 ---------- ----------- -------------- --------- ------ -------- -------------- --------- Net earnings (loss) attributable to common shareholders............ $(1,569) $(420) $(245) $(2,234) $(1,417) $(95) $(923) $(4,669) ---------- ----------- -------------- --------- ------ -------- -------------- --------- ---------- ----------- -------------- --------- ------ -------- -------------- --------- Earnings (loss) per common share Basic................... (0.21) $(0.30) $(0.62) ---------- -------- -------- ---------- -------- -------- Diluted $(0.21) $(0.30) $(0.62) ---------- -------- -------- ---------- -------- -------- Weighted average shares outstanding...... Basic................... 7,317 200 7,517 7,517 Diluted................. 7,317 200 7,517 7,517 (2) Adjustments necessary to give pro forma effect to the Calder Race Course acquisition and Churchill Downs' new credit agreement as if these transactions had occurred on January 1, 1998. Historical statement of earnings information is based on the unaudited financial statements for the three month period ended March 31, 1998. (3) To record additional depreciation expense for the three-month period ended March 31, 1998 as a result of the revaluation of the Ellis Park plant and equipment to its fair value and estimated useful lives. (4) To record estimated amortization over 40 years for the three-month period ended March 31, 1998 of the excess of the Ellis Park purchase price over the fair value of net assets acquired of $6.4 million. (5) To record the estimated incremental interest expense using an average of 6.70% interest rate on borrowings of $16.2 million necessary to finance the Ellis Park acquisition. (6) To adjust historical Ellis Park tax benefit and to record the income tax effect of the estimated increase in depreciation and incremental interest expense resulting from the Ellis Park acquisition at our estimated federal and state income tax rate of 40%. (7) To eliminate intercompany rental income and expense between Calder and Tropical. (8) To record the estimated increase in depreciation expense as a result of the revaluation of the acquired Calder and Tropical property, plant and equipment to its fair value and estimated useful lives. (9) To record estimated amortization over 40 years of the excess of the Calder Race Course purchase price over the fair value of net assets acquired of $48.2 million. (10) To record the estimated incremental interest expense using an average 6.70% interest rate on borrowings of $92.0 million necessary to finance the Calder Race Course acquisition and fund deferred financing costs, including amortization expense of $125,000 related to deferred financing costs of $2.5 million over 5 years. (11) To record the estimated annual commitment fee expense under the new credit agreement on the unused portion of the $250.0 million line of credit of $150.5 million at 0.375%. (12) To record the income tax effect of the estimated increase in depreciation and incremental interest expense resulting from the Calder Race Course acquisition at our estimated federal and state income tax rates of 40%. 36 Unaudited Pro Forma condensed Consolidated Statement of Earnings For the Year ended December 31, 1998 - --------------------------------- (1) The Ellis Park acquisition occurred on April 21, 1998, and the results of operations of Ellis Park have been included in the historical statement of earnings of Churchill Downs since that date. The pro forma Ellis Park adjustments give effect to the Ellis Park acquisition and Churchill Downs' new credit agreement as if these transactions had occurred on January 1, 1998. Historical Ellis Park statement of earnings information is based on the unaudited financial statements for the period from January 1, 1998 to April 21, 1998. 37
Historical Calder Pro Forma Historical Historical Pro Forma Race Course(2) Adjustments Pro Forma Churchill Ellis Ellis Park Pro Forma ----------------- and Churchill Downs Park (1) Adjustments(1) Combined Calder Tropical Elimination(2) Downs ---------- ----------- -------------- --------- ------ -------- -------------- --------- (in thousands, except per share data) Net revenues.............. $147,,300 $1,972 $ - $149,272 $49,974 $21,356 $ - $220,602 ---------- ----------- -------------- --------- ------- -------- -------------- --------- Operating expenses: Purses.................. 50,193 491 - 50,684 23,347 9,655 83,686 Other direct expenses... 68,896 2,062 221(3) 71,179 16,858 6,535 (803)(7) 234 (8) 94,003 ---------- ----------- -------------- --------- ------- -------- -------------- --------- 119,089 2,553 221 121,863 40,205 16,190 (569) 177,689 ---------- ----------- -------------- --------- ------- -------- -------------- --------- Gross profit (loss)..... 28,211 (581) (221) 27,409 9,769 5,166 569 42,913 Selling, general and administrative expenses. 10,815 269 - 11,084 2,424 930 - 14,438 Amortization Expense...... 253 - 28(4) 281 - - 1,205 (9) 1,486 ---------- ----------- -------------- --------- ------- -------- -------------- --------- (625) Operating income (loss)...... 17,143 (850) (249) 16,044 7,345 4,236 (636) 26,989 ---------- ----------- -------------- --------- ------- -------- -------------- --------- Other income (expense) Interest income........ 680 - - 680 165 174 - 1,019 Interest expense....... (896) (9) (333)(5) (1,238) (1,867) (1,347) (3,420)(10) (518)(11) (8,390) Rental income.......... - - - - 1,011 70 (803)(7) 278 Miscellaneous income... 342 - - 342 - - - 342 ---------- ----------- -------------- --------- ------- -------- -------------- --------- 126 (9) (333) (216) (691) (1,103) (4,741) (6,751) Earnings (loss) before income tax provision............... 17,269 (859) (582) 15,828 6,654 3,133 (5,377) 20,238 Federal and state income tax provision.... 6,751 - (565)(6) 6,186 2,641 1,221 (1,669)(12) 8,379 ---------- ----------- -------------- --------- ------- -------- -------------- --------- Net earnings (loss)....... $10,518 $(859) $(17) $9,642 $4,013 $1,912 $(3,708) $11,859 Dividends on preferred stock.................. - - - - 38 - - 38 ---------- ----------- -------------- --------- ------- -------- -------------- --------- Net earnings (loss) attributable to common shareholders........... $10,518 $(859) $(17) $9,642 $3,975 $1,912 $(3,708) $11,821 ---------- ----------- -------------- --------- ------- -------- -------------- --------- ---------- ----------- -------------- --------- ------- -------- -------------- --------- Earnings (loss) per common share Basic.................. $1.41 $1.28 $1.57 --------- -------- ------- --------- -------- ------- Diluted................ $1.40 $1.27 $1.56 --------- -------- ------- --------- -------- ------- Weighted average shares outstanding Basic.................. 7,460 60 7,520 7,520 Diluted............... 7,539 60 7,599 7,599 (2) Adjustments necessary to give pro forma effect to the Calder Race Course acquisition and Churchill Downs' new credit agreement as if these transactions had occurred on January 1, 1998 and the elimination of the historical Calder and Tropical intercompany transactions. (3) To record additional depreciation expense from January 1, 1998 through April 21, 1998 as a result of the revaluation of the Ellis Park property, plant and equipment to its fair value and estimated useful lives. (4) To record estimated amortization over 40 years from January 1, 1998 through April 21, 1998 of the excess of the Ellis Park purchase price over the fair value of net assets acquired of $6.4 million. (5) To record the estimated incremental interest expense using an average 6.70% interest rate on borrowings of $16.2 million necessary to finance the Ellis Park acquisition. (6) To adjust historical Ellis Park tax benefit and to record the income tax effect of the estimated increase in depreciation and incremental interest expense resulting from the Ellis Park acquisition at our estimated federal and state income tax rate of 40%. (7) To eliminate intercompany rental income and expense between Calder and Tropical. (8) To record the estimated increase in depreciation expense as a result of the revaluation of the acquired Calder and Tropical property, plant and equipment to its fair value and estimated useful lives. (9) To record estimated amortization over 40 years of the excess of the Calder Race Course purchase price over the fair value of net assets acquired of $48.2 million. (10) To record the estimated incremental interest expense using an average 6.70% interest rate on borrowings of $92.0 million necessary to finance the Calder Race Course acquisition and fund deferred financing costs, including amortization of $500,000 expense related to deferred financing costs of $2.5 million over 5 years. (11) To record the estimated annual commitment fee expense under the new credit agreement on the unused portion of the $250.0 million line of credit of $150.5 million at 0.375%. (12) To record the income tax effect of the estimated increase in depreciation and incremental interest expense resulting from the Calder Race Course acquisition at our estimated federal and state income tax rate of 40%. 38 ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS - ----------- * Previously filed
C. EXHIBITS Description of Document 2.1 Stock Purchase Agreement and Joint Escrow Instructions dated as of January 21, 1999 by and among Churchill Downs Incorporated and KE Acquisition Corp.* 2.2 First Amendment to Stock Purchase Agreement dated as of April 19, 1999 by and between Churchill Downs Incorporated, Churchill Downs Management Company and KE Acquisition Corp.* 2.3 Agreement and Plan of Merger and Amendment to Stock Purchase Agreement dated as of April 22, 1999 by and among Churchill Downs Incorporated, Churchill Downs Management Company, CR Acquisition Corp., TP Acquisition Corp., Calder Race Course, Inc., Tropical Park, Inc. and KE Acquisition Corp.* 23 Consent of PricewaterhouseCoopers LLP 99 Press release issued on April 26, 1999 by Churchill Downs Incorporated.* SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CHURCHILL DOWNS INCORPORATED June 17, 1999 /s/ Robert L. Decker ------------------------------ Robert L. Decker Executive Vice President, Chief Financial Officer (Principal Financial Officer) June 17, 1999 /s/ Vicki L. Baumgardner ------------------------------ Vicki L. Baumgardner Vice President, Finance/Treasurer (Principal Accounting Officer)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Nos. 33-85012, 333-62013, and 33-61111) of Churchill Downs Incorporated of our reports dated February 19, 1999, relating to the financial statements of Calder Race Course, Inc. and Tropical Park, Inc. which appear in the Current Report on Form 8-K/A of Churchill Downs Incorporated dated June 18, 1999. PricewaterhouseCoopers LLP Fort Lauderdale, Florida June 15, 1999