UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For year ended December 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission File Number 0-1469
CHURCHILL DOWNS INCORPORATED
Exact name of registrant as specified in its charter
KENTUCKY 61-0156015
State or other jurisdiction of IRS Employer Identification No.
incorporation or organization
700 CENTRAL AVENUE, LOUISVILLE, KENTUCKY 40208
Address of principal executive offices Zip Code
Registrant's telephone number, including area code 502-636-4400
Securities registered pursuant to Section 12(b) of the Act:
None None
Title of each class registered Name of each exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
Title of class
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. (_________)
As of March 14, 2001, 13,048,717 shares of the Registrant's Common Stock were
outstanding, and the aggregate market value of the shares held by nonaffiliates
of the Registrant was $166,432,105.
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on June 21, 2001 are incorporated by reference herein in
response to Items 10, 11, 12 and 13 of Part III of Form 10-K. The exhibit index
is located on pages 56 to 59.
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PART I
ITEM 1. BUSINESS
A. INTRODUCTION
Churchill Downs Incorporated (the "Company") is a racing company that primarily
conducts pari- mutuel wagering on live Thoroughbred, Quarter Horse and
Standardbred horse racing and simulcast signals of races. Additionally, we offer
racing services through our other business interests. We were organized as a
Kentucky corporation in 1928. Our principal executive offices are located at 700
Central Avenue, Louisville, Kentucky, 40208.
We own and operate our flagship operation, Churchill Downs racetrack, in
Louisville, Kentucky ("Churchill Downs"). Churchill Downs has conducted
Thoroughbred racing continuously since 1875 and is internationally known as the
home of the Kentucky Derby. The Churchill Downs operation also encompasses the
Churchill Downs Sports Spectrum ("Louisville Sports Spectrum"), an off-track
betting facility ("OTB"). In addition, the management of Churchill Downs
oversees Ellis Park Race Course, Inc. ("Ellis Park"), which operates a
Thoroughbred track in Henderson, Kentucky.
Churchill Downs Management Company ("CDMC"), a wholly owned subsidiary, manages
all of our other racing operations. CDMC oversees Arlington Park, a
pari-mutuel horse racing operation in Arlington Heights, Illinois, effective
with the merger in September 2000. Arlington Park operates five off-track
betting facilities ("OTBs") in Illinois. CDMC also oversees Calder Race Course
which holds licenses to conduct Thoroughbred horse racing in Miami, Florida. In
addition, CDMC oversees Hollywood Park, a Thoroughbred racetrack in Inglewood,
California. Calder Race Course and Hollywood Park were acquired in April 1999
and September 1999, respectively.
Additionally, CDMC manages Hoosier Park at Anderson in Anderson, Indiana
("Hoosier Park"). Hoosier Park conducts Thoroughbred, Quarter Horse and
Standardbred horse racing. Hoosier Park is owned by Hoosier Park, L.P. ("HPLP"),
an Indiana limited partnership. Anderson Park, Inc. ("Anderson"), a wholly owned
subsidiary of CDMC, is the sole general partner of HPLP, and currently owns a
77% interest. The remaining 23% is held by unrelated third parties, Centaur
Racing, LLC ("Centaur"), and Conseco HPLP, LLC ("Conseco"). We previously
entered into a definitive agreement with Centaur, Inc., which was subsequently
assigned to Centaur, to sell an additional 26% interest in HPLP for a purchase
price of $8.5 million. On September 12, 2000, we announced that approval for the
sale had been denied as a result of action taken by the Indiana Horse Racing
Commission ("IHRC") against Centaur, and as a result the ownership structure has
not changed. Centaur's performance under the definitive agreement was guaranteed
by an irrevocable Letter of Credit in the amount of $2.5 million, which was made
available to us during the fourth quarter of 2000. These funds were used to set
up Churchill Downs Foundation, Inc., a non-profit private charitable foundation
pursuant to section 501(c)(3) of the Internal Revenue Code for the purpose of
funding future contributions to qualifying charitable, civic and community
causes in
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locations where we do business. CDMC also manages three OTBs in Indiana owned by
Hoosier Park ("Indiana Sports Spectrum"). These OTBs conduct simulcast wagering
on horse racing year- round.
We formed Churchill Downs Investment Company ("CDIC"), a wholly owned
subsidiary, to oversee other industry related investments. CDIC owns a 60%
ownership interest in Charlson Broadcast Technologies, LLC ("CBT"), a privately
held company that provides television production and computer graphic software
to the racing industry. CBT's proprietary software displays odds statistical
data and other racing information on television in real-time for customers at
racetracks and OTBs.
Other investments owned by CDIC include a 35% interest in EquiSource, LLC
("EquiSource"), a procurement business that assists in the group purchasing of
supplies and services for the equine industry, and a 30% interest in
NASRIN Services, LLC ("NASRIN"), a telecommunications service provider for the
pari-mutuel and simulcasting industries. CDIC also holds a 24% minority
interest investment in Kentucky Downs, LLC ("Kentucky Downs"), a Franklin,
Kentucky, racetrack that conducts a limited Thoroughbred race meet with seven
live racing days in September, as well as year-round simulcasting. Our
investments in CBT, EquiSource, NASRIN and Kentucky Downs are not material to
the Company's financial position or results of operations.
B. LIVE RACING OPERATIONS
We conduct live horse racing at Churchill Downs, Hollywood Park, Calder Race
Course, Arlington Park, Hoosier Park and Ellis Park, which produces revenues
through pari-mutuel wagering at our racetracks and OTBs, simulcast fees,
admissions and concessions revenue.
The Kentucky Derby and the Kentucky Oaks, both held at Churchill Downs, continue
to be our premier racing events. The Kentucky Derby offers a minimum $1.0
million in purse money, and the Kentucky Oaks offers a minimum $0.5 million in
purse money. Calder Race Course is home to The Festival of the Sun, Florida's
richest day in Thoroughbred racing, offering approximately $1.5 million in total
purse money. Hollywood Park is home to the Hollywood Gold Cup, which offers $1.0
million in purse money. Hollywood Park's Autumn Meet is highlighted by the
annual $2.1 million Autumn Turf Festival, comprised of six graded stakes races.
The Arlington Million, which is run during the International Festival of Racing
at Arlington Park, with a purse of $1.0 million, is one of three North American
stops for the Emirates World Series Racing Championship. Other significant
racing events are the Indiana Derby for Thoroughbreds and the Dan Patch
Invitational for Standardbreds held at Hoosier Park, as well as the Gardenia
Stakes for older fillies and mares held at Ellis Park.
Churchill Downs hosted the Breeders' Cup Championship ("Breeders' Cup") in 1988,
1991, 1994, 1998 and 2000. Hollywood Park has also hosted the Breeders' Cup in
1984, 1987 and 1997. Breeders' Cup Limited, a tax-exempt organization chartered
to promote Thoroughbred racing and
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breeding, sponsors Breeders' Cup races, which feature $13.0 million in purses.
These races are held annually for the purpose of determining Thoroughbred
champions in eight different events. Racetracks across North America compete for
the privilege of hosting the prestigious Breeders' Cup races each year.
Churchill Downs
The Churchill Downs racetrack site and improvements are located in Louisville,
Kentucky ("Churchill facility"). The Churchill facility consists of
approximately 147 acres of land with a one- mile oval dirt track, a
seven-eighths (7/8) mile turf track, permanent grandstands and a stabling area.
The facility includes clubhouse and grandstand seating for approximately 48,500
persons, a state-of- the-art simulcast wagering facility designed to accommodate
450 persons, a general admission area, and food and beverage facilities ranging
from fast food to full-service restaurants. The site also has a saddling
paddock, infield accommodations for groups and special events, parking areas for
the public, and our racetrack and corporate office facilities. The backside
stable area has barns sufficient to accommodate approximately 1,400 horses, a
114-room dormitory and other facilities for backstretch personnel.
To supplement the facilities at Churchill Downs, we provide additional stabling
facilities sufficient to accommodate 500 horses and a three-quarter (3/4) mile
dirt track, which is used for training Thoroughbreds, at the Louisville Sports
Spectrum. The facilities provide a year-round base of operation for many
horsemen and enable us to attract new horsemen to race at Churchill Downs.
We continue to make numerous capital improvements to the Churchill facility in
order to better serve our horsemen and patrons, including the construction of a
$4.8 million expansion of Churchill Downs' main entrance and corporate offices
completed during 2000.
Hollywood Park
Hollywood Park and the Hollywood Park Casino site and improvements are located
in Inglewood, California ("Hollywood Park facility"). The Hollywood Park
facility consists of approximately 240 acres of land upon which the racetrack
and casino are located with a one and one-eighth (1 1/8) mile oval dirt track, a
one-mile oval turf track, permanent grandstands and stabling area. The facility
includes clubhouse and grandstand seating for 16,675 persons, a general
admission area, a saddling paddock area and food and beverage facilities ranging
from fast food to full-service restaurants. The stabling area consists of stalls
to accommodate approximately 2,000 horses, tack rooms, feed rooms, a federally
approved quarantine facility, a half-mile oval training track, and a
not-for-profit Equine Teaching Hospital and Research Center operated under the
direction of the Southern California Equine Foundation. The Hollywood Park
facility also features parking areas for the public and office facilities.
The Hollywood Park Casino is a state-of-the-art facility that is open 24 hours a
day, 365 days a year. The casino features more than 150 gaming tables offering a
variety of California approved casino
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games. Under California gaming law, the casino is a card club. Thus, it is not
authorized to operate slot machines or video lottery terminals but instead rents
tables to casino patrons for a seat fee charged on a per hand basis. The casino
also offers facilities for simulcast wagering. We lease the facility to Pinnacle
Entertainment, Inc., formerly Hollywood Park, Inc., under a 10-year lease for an
annual rent of $3.0 million and, therefore, do not operate the casino. The lease
includes a 10-year renewal option and is subject to an adjustment to the rent at
the time the option is exercised.
Calder Race Course
The Calder Race Course racetrack and improvements are located in Miami, Florida
("Calder Race Course facility"). The Calder Race Course facility is adjacent to
Pro Player Stadium, home of the Florida Marlins and Miami Dolphins. The Calder
Race Course facility consists of approximately 220 acres of land with a one-mile
dirt track, a seven-eighths (7/8) mile turf track, a training area with a
five-eighths (5/8) mile training track, permanent grandstand and a stabling
area. The facility includes clubhouse and grandstand seating for approximately
15,000 persons, a general admission area, and food and beverage facilities
ranging from fast food to full-service restaurants. The stable area consists of
a receiving barn, feed rooms, tack rooms, detention barns and living quarters
and can accommodate approximately 1,800 horses. The Calder Race Course facility
also features a saddling paddock, parking areas for the public and office
facilities.
Arlington Park
Arlington Park was constructed in 1927 and reopened its doors in 1989 after a
devastating fire engulfed the clubhouse four years earlier. The updated
racecourse sits on 325 acres, has a one and one-eighths (1 1/8) mile oval dirt
track, a one-mile turf course and a five-eighths (5/8) mile training track.
The facility includes permanent clubhouse, grandstand and suite seating for
6,045 persons, and food and beverage facilities ranging from fast food to full-
service restaurants. The backstretch consists of a stable area with 31 barns to
accommodate approximately 2,030 horses. In February 2001, Arlington Park
announced the construction of three new barns, a $3.0 million project, which
will add 164 stalls and is expected to be completed during the second quarter of
2001. The Arlington Park facility also features a saddling paddock, parking
areas for the public and office facilities.
Ellis Park
The Ellis Park racetrack and improvements, located in Henderson, Kentucky
("Ellis Park facility"), consist of approximately 230 acres of land just north
of the Ohio River with a one and one-eighths (1 1/8) mile dirt track, a one-mile
turf course, permanent grandstands and a stabling area for 1,290 horses. The
facility includes clubhouse and grandstand seating for 8,000 people, a general
admission area, and food and beverage facilities ranging from fast food to
full-service restaurants. The Ellis Park facility also features a saddling
paddock, parking areas for the public and office facilities.
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Hoosier Park
Hoosier Park is located in Anderson, Indiana, about 40 miles northeast of
downtown Indianapolis ("Hoosier Park facility"). Hoosier Park leases the land
under a long-term lease with the city of Anderson and owns all of the
improvements on the site. The Hoosier Park facility consists of approximately
110 acres of leased land with a seven-eighths (7/8) mile oval dirt track,
permanent grandstands and stabling area. The facility includes seating for
approximately 2,400 persons, a general admission area, and food and beverage
facilities ranging from fast food to a full-service restaurants. The site also
has a saddling paddock, parking areas for the public and office facilities. The
stable area has barns sufficient to accommodate 780 horses and other facilities
for backstretch personnel.
C. SIMULCAST OPERATIONS
We generate a significant portion of our revenues by transmitting signals of
races from our racetracks to other facilities ("export"), and receiving signals
from other tracks ("import"). Revenues are earned through pari-mutuel wagering
on signals that we both import and export.
Churchill Downs, Arlington Park and Calder Race Course conduct simulcast
wagering only during live race meets, while Hollywood Park, Hoosier Park and
Ellis Park offer year-round simulcast wagering. The Louisville Sports Spectrum
primarily conducts simulcast wagering only when Churchill Downs is not operating
a live race meet. The Indiana Sports Spectrums, Arlington Park's five OTBs and
the Kentucky Off-Track Betting facilities conduct simulcast wagering year-round.
The Churchill Downs Simulcast Network ("CDSN"), the product content provider of
the Company, will present 680 racing programs from our six racetracks to
wagering outlets worldwide during 2001. The role of CDSN is to drive simulcast
growth by marketing a superior simulcast product.
Louisville Sports Spectrum
The Louisville Sports Spectrum is located in Louisville, Kentucky, about seven
miles from Churchill Downs. This 100,000-square-foot property, on approximately
88 acres of land, is a Thoroughbred training and stabling annex which has
state-of-the-art audio visual capabilities for pari-mutuel wagering. The
Louisville Sports Spectrum provides audio and visual technology, seating for
approximately 3,000 persons, parking, offices and related facilities for
simulcasting races.
Illinois Sports Spectrums
Arlington Park also operates five OTBs that accept wagers on races at Arlington
Park as well as on races simulcast from other locations. Arlington Trackside is
located on the Arlington Park property, Arlington in Rockford is located in
Rockford, Illinois and consists of approximately 8.6 acres, and Quad Cities
Betting Parlor is located in Moline, Illinois approximately 232.6 acres.
Arlington Park also leases two OTBs. Arlington in Waukegan is located in
Waukegan, Illinois and consists of
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approximately 25,000 square feet and Mud Bug OTB is located in Chicago, Illinois
and consists of approximately 19,700 square feet.
Indiana Sports Spectrums
Hoosier Park owns and operates the Indiana Sports Spectrums, consisting of three
OTBs providing a statewide distribution system for Hoosier Park's racing signal,
and additional simulcast markets for our products. The Indiana Sports Spectrum
at Merrillville, located about 30 miles southeast of Chicago, consists of
approximately 27,300 square feet of space. The Indiana Sports Spectrum at Fort
Wayne consists of approximately 15,750 square feet of space. A third Indiana
Sports Spectrum is located in downtown Indianapolis where Hoosier Park leases
approximately 24,800 square feet of space for the OTB.
Hoosier Park is continuing to evaluate sites for the location of a fourth
Indiana Sports Spectrum facility. The state of Indiana has enacted legislation
that requires a county's fiscal body to adopt an ordinance permitting OTBs
before such a facility can be located in that county, which may require local
voter approval. This legislation may affect Hoosier Park's ability to locate its
fourth facility in certain counties.
Kentucky Off-Track Betting, LLC
In 1992, the Company and three other Kentucky Thoroughbred racetracks formed
Kentucky Off- Track Betting, Inc., of which we are a 50% owner. In December
2000, Kentucky Off-Track Betting, Inc. converted into a limited liability
company, Kentucky Off-Track Betting, LLC ("KOTB"). KOTB's purpose is to own and
operate facilities for the simulcasting of races and the acceptance of wagers on
such races at locations other than a racetrack. These OTBs may be located no
closer than 75 miles from an existing racetrack without the track's consent and
in no event closer than 50 miles to an existing track. Each OTB must first be
approved by the Kentucky Racing Commission ("KRC") and the local government
where the facility is to be located. KOTB currently owns or leases and operates
OTBs in Corbin, Maysville, Jamestown and Pineville, Kentucky.
OTBs developed by KOTB provide additional markets for the intrastate
simulcasting of and wagering on Churchill Downs' and Ellis Park's live races and
interstate simulcasting of and wagering on out-of-state signals. KOTB did not
contribute significantly to our operations in 2000 and is not anticipated to
have a substantial impact on operations in the future. Our investment in KOTB is
not material to the Company's financial position or results of operations.
In-Home Wagering
Technological innovations have opened the distribution channels for live racing
products to include in-home wagering. Television Games Network ("TVG"),
affiliated with Gemstar- TV Guide International, Inc., offers high-quality live
racing video signals in conjunction with its interactive television wagering
system. We have entered into agreements to broadcast our racetrack simulcast
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products as part of TVG's programming content. This new network is anticipated
to eventually offer 24-hour-a-day programming throughout the United States that
will be primarily devoted to developing new fans for racing. In jurisdictions
where lawful, in-home patrons of TVG can wager on our live races as well as
other race signals. As the originator of the live racing signal, we will receive
a simulcast fee on in-home wagers placed on our races.
In the past, the U.S. Justice Department has raised concerns whether interstate
account wagering conducted through TVG's wagering hub would be legal under
existing federal gambling laws. In addition, certain state attorneys general
expressed concern over the legality of interstate account wagering. In December
2000, legislation was enacted amending the Interstate Horse Racing Act of 1978
("IHA"). We believe this legislation clarifies that simulcasting and account
wagering conducted by the racing industry is authorized under federal law, but
the full scope of the legislation is still unclear. TVG-related revenues are not
material to our operations.
D. OTHER SOURCES OF REVENUE
In addition to revenues generated from commissions on pari-mutuel wagering, we
also generate revenues from Indiana riverboat admissions subsidy revenue,
admissions, concessions revenue, sponsorship revenues, licensing rights and
broadcast fees, lease income and other sources.
Financial information about our segments required by this Item is incorporated
by reference to the information contained in the Notes to Consolidated Financial
Statements, in conformity with accounting principles generally accepted in the
United States of America, included in Item 8 of this Report.
Riverboat Admissions Subsidy
To compensate for the adverse impact of riverboat competition, the horse
industry in Indiana presently receives $0.65 per $3 admission to riverboats in
the state. By IHRC rule we are required to allocate 70% of any revenue received
from the subsidy directly for purse expenses, breed development and
reimbursement of approved marketing costs. The balance, or 30%, is received by
Hoosier Park as the only horse racetrack currently operating in Indiana. In
November 1999, the Company and the IHRC agreed to a $6.8 million ceiling on
Hoosier Park's share of the subsidy beginning in 2000. The ceiling represents an
8% decrease from the $7.4 million Hoosier Park earned for 1999. A more
significant change in Hoosier Park's share of the subsidy, as a result of a
possible second track approved in Indiana, would impact funding for operating
expenditures, potentially reducing the number of race dates at Hoosier Park
The need for the subsidy may be diminished if pending legislation allowing
pari-mutuel pull tabs at Hoosier Park and the Indianapolis Sports Spectrum
passes both Indiana chambers. The legislation, which also eliminates the
requirement that riverboat casinos cruise while gaming is conducted, was passed
by the Indiana House of Representatives in January 2001 and is currently before
the Senate. The legislation retains the 65-cents share of riverboat admissions
going to the horse racing industry but phases out and caps the portion going to
Hoosier Park. While this legislation protects Hoosier
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Park from increased riverboat competition, it could have an adverse impact on
our Kentucky operations if passed.
E. LICENSES AND LIVE RACING DATES
Kentucky's racetracks, including Churchill Downs and Ellis Park, are subject to
the licensing and regulation of the KRC. Licenses to conduct live Thoroughbred
race meets and to participate in simulcasting are approved annually by the KRC
based upon applications submitted by the racetracks in Kentucky. Although to
some extent Churchill Downs and Ellis Park compete with other racetracks in
Kentucky for the award of racing dates, the KRC is required by state law to
consider and seek to preserve each racetrack's usual and customary live racing
dates. Generally, there is no substantial change from year to year in the racing
dates awarded to each racetrack.
We received approval from the KRC to conduct two live Thoroughbred racing meets
at Churchill Downs from April 28 through July 8, 2001 ("Spring Meet"), and from
October 28 through November 24, 2001 ("Fall Meet"), for a total of 76 days.
Churchill Downs conducted live racing from April 29 through July 9, 2000, and
from October 29 through November 25, 2000, for a total of 76 racing days,
excluding the Breeders' Cup on November 4, 2000, compared to a total of 71
racing days in 1999. KRC approved a one week increase in Churchill Downs' Spring
Meet during 2000, which was a reduction to Ellis Park's customary racing
schedule.
The KRC also awarded Ellis Park approval to conduct live Thoroughbred racing
from July 11 through September 3, 2001, for a total of 41 live racing days.
Ellis Park conducted live racing from July 12 through September 4, 2000, for a
total of 41 racing days compared to 61 racing days in 1999. The decrease of 20
live race dates for 2000 compared to 1999 is the result of reducing the live
racing week from 6 days of live racing to 5 days of live racing and the movement
of one week of live racing to Churchill Downs' Spring Meet to better utilize the
operations of both racetracks. This change had a positive effect on our 2000
results.
In California, licenses to conduct live Thoroughbred racing and to participate
in simulcasting are approved annually by the California Horse Racing Board based
upon applications submitted by California racetracks. Generally, there is no
substantial change from year to year in the racing dates awarded to each
racetrack. Hollywood Park has been approved to conduct two live Thoroughbred
race meets from April 20 through July 16, 2001 ("Spring/Summer Meet"), and from
November 7 through December 17, 2001 ("Autumn Meet"), for a total of 97 live
racing days. Hollywood Park conducted live racing during two live Thoroughbred
race meets from April 28 through July 24, 2000 ("Spring/Summer Meet"), and from
November 8 through December 24, 2000 ("Autumn Meet"), for a total of 100 days
combined compared to 97 days of racing during 1999.
In Florida, licenses to conduct live Thoroughbred racing and to participate in
simulcasting are approved by the Department of Business and Professional
Regulation, Division of Pari-Mutuel Wagering ("DPW"). The DPW is responsible for
overseeing the network of state offices located at every pari-mutuel wagering
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facility, as well as issuing the permits necessary to operate a pari- mutuel
wagering facility. The DPW also approves annual licenses for Thoroughbred,
Standardbred and Quarter Horse races. Calder Race Course received approval from
the DPW to conduct two consecutive live Thoroughbred race meets from May 2
through November 3, 2001 ("Calder Meet"), and from November 4, 2001 through
January 2, 2002 ("Tropical Meet"), for a total of 174 days of live racing. In
2000, Calder Race Course conducted live racing from May 23 through November 2,
2000, and from November 3, 2000 through January 2, 2001, for a collective total
of 174 days of racing compared to 169 days during the 1999 live racing season,
which included 2 days of racing in January 2000.
Tax laws in Florida historically discouraged the three Miami-area racetracks in
Florida from applying for licenses for race dates outside of their traditional
racing season. Effective July 1, 2001, a new tax structure will eliminate this
deterrent. Accordingly, Calder Race Course may face direct competition from
other Florida racetracks and may have the ability to increase live racing dates
or lose live racing dates in the future.
At Arlington Park, an increase in wagering competition from non-horse racing
sources such as casinos, riverboats and lotteries had an adverse impact on
Arlington Park's operating results, such that in September 1997, Arlington
announced the suspension of live racing and withdrew its application for
Thoroughbred racing dates. In 1999, the Illinois Legislature amended the
Illinois Horse Racing Act and the Illinois Gaming Act (collectively, the
"Legislation"). Provisions within the Legislation favorably altered the
economics of racing in Illinois. As a result, Arlington Park applied to the
Illinois Racing Board, and received, dates to host Thoroughbred racing in 2000.
Arlington Park has been approved to conduct live Thoroughbred racing from June
13 through October 28, 2001, for a total of 102 live racing days compared to 103
days of live racing during 2000.
In Indiana, licenses to conduct live Standardbred and Thoroughbred race meets,
including Quarter Horse races, and to participate in simulcasting are approved
annually by the IHRC based upon applications submitted by Hoosier Park.
Currently, Hoosier Park is the only facility in Indiana licensed to conduct
pari-mutuel wagering on live Standardbred, Quarter Horse or Thoroughbred racing
and to participate in simulcasting. The IHRC has approved Hoosier Park to
conduct live Standardbred racing from February 23 through August 22, 2001, and
live Thoroughbred racing from September 7 through December 3, 2001, for a total
of 193 live racing dates. Hoosier Park conducted live racing from April 7
through August 23, 2000, and from September 8 through December 3, 2000, for a
combined total of 166 days of racing during 2000 compared to 167 total days of
racing during 1999. Indiana law requires us to conduct live racing for at least
120 days each year in order to simulcast races. The increase in the number of
race dates in 2001 is anticipated to alleviate demands for a second track in
that state.
In February 2001, the IHRC accepted an application for a Standardbred racetrack
near Shelbyville, Indiana, about 50 miles from Hoosier Park. The IHRC is not
expected to make a decision until May 2001. The addition of a second racetrack
in Indiana could potentially impact Hoosier Park's share of the riverboat
admissions revenue, create an increase in competition in the market and reduce
the
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quality of racing. A reduction in Hoosier Park's live racing dates as a result
of a second racetrack could also result in an adverse impact on long-term
profitability of the facility.
The total number of days on which each racetrack conducts live racing fluctuates
annually according to the calendar year. A substantial change in the allocation
of live racing days at any of our six racetracks could adversely impact our
operations and earnings in future years.
F. COMPETITION
North American bloodstock sales climbed again in 2000, continuing a trend that
began in 1995. According to The Blood-Horse magazine, gross revenues for
Thoroughbred weanlings, yearlings, juveniles and broodmares topped $1.0 billion
in 2000 in North America for the first time in history. The increase in
Thoroughbred sales is an indicator of a resurgence of the Thoroughbred breeding
industry, reversing a trend of declines from 1986 to 1995. The increase in the
number of Thoroughbreds enables racetracks to increase the number of horses
participating in live racing.
We generally do not directly compete with other racetracks or OTBs for patrons
due to geographic separation of facilities or differences in seasonal timing of
meets. However, we compete with other sports, entertainment and gaming options,
including riverboat, cruise ship and land-based casinos and lotteries, for
patrons for both live racing and simulcasting. We attempt to attract patrons by
providing high quality racing products in attractive entertainment facilities
with fairly priced, appealing concession services.
We have successfully grown our live racing product and positioned ourselves to
compete by strengthening our flagship operations, in anticipation of projected
growth for in-home wagering simulcast markets, and geographically expanding our
racing operations. We also continue to seek asset utilization strategies for our
racetrack facilities as a means to develop those facilities into earning assets
year-round.
The development of riverboat gaming facilities began in Indiana pursuant to
authorizing legislation passed by the state of Indiana in 1993. Illinois had
previously authorized riverboat gaming. There are currently six riverboat
casinos operating on the Ohio River along Kentucky's border, including three in
the southeastern Indiana cities of Lawrenceburg, Rising Sun, and Florence; one
in southwestern Indiana in Evansville and one in Metropolis, Illinois. The sixth
riverboat casino, licensed to RDI/Caesars, opened in November 1998 in Harrison
County, Indiana, 10 miles from Louisville. We experienced some decreases in
attendance and pari-mutuel wagering at the Churchill Downs Sports Spectrum
("Louisville Sports Spectrum") during 2000 as compared to 1998. However, we
experienced an increase in pari-mutuel wagering on Churchill Downs races,
including export simulcasting, during the same period. It is impossible to
accurately determine the extent of the riverboat's impact on our business at
these facilities. Other factors, such as unfavorable weather conditions, may
also have had an impact.
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In addition to those riverboats operating along the Ohio River, five riverboat
casinos are located along the Indiana shore of Lake Michigan and four are
situated in Illinois near Chicago. These riverboats have adversely impacted
pari-mutuel wagering activities at our Merrillville, Indiana, Sports Spectrum.
Arlington Park also faces competition from state lotteries and riverboat casino
operations in northeastern Illinois and northwestern Indiana. There are also
Indian gaming operations in Wisconsin which have drawn from the Chicago market
as well. Two additional gaming operations have been proposed in Wisconsin along
the Illinois border. An additional Chicago riverboat operation is pending in
Rosemont, Illinois, approximately 12 miles from Arlington Park. The increased
competition from these additional gaming operations serving the Chicago market
could adversely affect our revenues and profits.
Additionally, several Native American tribes in Florida have expressed interest
in opening casinos in southern Florida, which could compete with Calder Race
Course. Construction for a casino operated by the Seminole Tribe of Florida,
located approximately 10 miles from Calder Race Course, began in January 2001
and is expected to be open during 2002. Also, the state of Michigan has approved
a proposal by the Pokagon Band of the Potawatomi Indian Tribe to develop a
casino in New Buffalo, Michigan, which is approximately 45 miles from our
Merrillville facility. The development of these casinos may negatively impact
pari-mutuel activities at our nearby facilities.
The potential integration of alternative gaming products at our racetrack
facilities is one of our four core business strategies developed to position us
to compete in this changing environment. We have successfully grown our live
racing product by implementing our other core business strategies by
strengthening our flagship operations, increasing our share of the interstate
simulcast market and geographically expanding our racing operations in Kentucky,
California, Florida, Illinois and Indiana. Alternative gaming in the form of
video lottery terminals may enable us to more effectively compete with riverboat
casinos and provide new revenue for purse money and capital investment.
G. LEGISLATIVE CHANGES
In Kentucky, two pieces of legislation significant to our operations were passed
in the 2000 session of the Kentucky General Assembly. First, an excise tax
credit for racetracks was included in the 2000-2002 Kentucky state budget. The
measure results in an ultimate credit of nearly $1.4 million in new revenue, and
is earmarked for horsemen's incentives and necessary capital improvements at
Churchill Downs racetrack over the next two years.
The Kentucky General Assembly also enacted legislation that eliminates the
excise tax on Breeders' Cup Championship Day wagering at any Kentucky track that
hosts the event. This legislation is aimed at attracting the Breeders' Cup to
Kentucky, and Churchill Downs, on a more frequent basis. On-track wagering for
the 2000 Breeders' Cup Day at Churchill Downs totaled $13.6 million and
generated excise taxes of approximately $475,000. This tax exemption will became
effective January 1, 2001, and therefore did not apply to the 2000 Breeders' Cup
at Churchill Downs. The
12
exemption will continue if the Breeders' Cup returns to Kentucky within three
years of the previously held event.
In 1999, the state of Illinois enacted legislation that provides for pari-mutuel
tax relief and related tax credits for Illinois racetracks, as well as
legislation providing for subsidies to Illinois horse racing tracks from
revenues generated by the relocation of a license to operate a riverboat casino
gaming facility. Arlington's share of subsidies from the proposed Rosemont
casino under the 1999 legislation would range from $4.6 million to $8.0 million
annually, based on publicly available sources. In the event Arlington Park
receives such subsidies, additional shares of common stock would be issued to
Duchossois Industries, Inc., to a maximum of 1.25 million shares. In January
2001, the Illinois Gaming Board ("IGB") denied a license application of Emerald
Casino, Inc. to operate the Rosemont casino. The group has the option to appeal
the decision. The IGB may also award the license to other applicants in the
future.
Effective July 1, 2000, the Florida legislature passed a bill that provides the
state's Thoroughbred industry approximately $4.5 million in annual pari-mutuel
tax relief. Calder Race Course received approximately $1.8 million in additional
revenues during 2000, of which two-thirds was allocated to the horsemen. These
new monies provide resources for purse increases and enhancement of Florida-bred
races. The legislation also allows the DPW to enter into compacts with other
states for uniform licensing.
H. ENVIRONMENTAL MATTERS
Hollywood Park received cease and desist orders from the California Regional
Water Quality Control Board addressing storm water runoff and dry weather
discharge issues. We retained an engineering firm to develop a plan for
compliance and to construct certain drainage and waste disposal systems. The
construction of the system is complete. As part of the 1999 asset acquisition of
Hollywood Park, the seller agreed to indemnify us in the amount of $5.0 million
for costs incurred in relation to the waste water runoff issue. Amounts under
the indemnification have been expended and the ultimate cost to the Company
was $1.7 million, which was incurred during 2000.
The septic system at our Ellis Park facility must be replaced with hook-up to
city sewers. The cost of the hook-up is estimated by the City of Henderson,
Kentucky to be $1.2 million. Ellis Park will seek partial reimbursement from
the state of Kentucky. The project is estimated to be completed by
November 2001.
In 1992, we acquired certain assets of Louisville Downs Incorporated for $5.0
million including the site of the Louisville Sports Spectrum. In conjunction
with this purchase, we withheld $1.0 million from the amount due to the sellers
to offset certain costs related to the remediation of environmental
contamination associated with underground storage tanks at the site. All of the
$1.0 million hold back had been utilized as of December 31, 2000 and additional
costs of remediation have not yet been conclusively determined. The sellers have
now received a reimbursement from the Commonwealth of Kentucky of $1.0 million
13
for remediation costs, and that amount is now being held in an escrow account to
pay further costs of remediation. Approximately $1.2 million, including interest
on the escrow principal, remains in the account. The seller has submitted a
Corrective Action Plan to the state and has reported to the state that all
wells, with the exception of one, are "below action."Well-testing continues and
the Kentucky Natural Resources and Environmental Protection Cabinet will
consider the course of action to take. In addition to the hold back, we have
obtained an indemnity to cover the full cost of remediation from the prior owner
of the property. We do not believe the cost of further investigation and
remediation will exceed the amount of funds in the escrow.
It is not anticipated that we will have any material liability as a result of
compliance with environmental laws with respect to any of our properties.
Compliance with environmental laws has not materially affected the ability to
develop and operate our properties and we are not otherwise subject to any
material compliance costs in connection with federal or state environmental
laws.
I. SERVICE MARKS
We hold numerous state and federal service mark registrations on specific names
and designs in various categories including entertainment business, apparel,
paper goods, printed matter and housewares and glass. We license the use of
these service marks and derive revenue from such license agreements.
J. EMPLOYEES
As of December 31, 2000, we employed approximately 1,500 full-time employees
Company-wide. Due to the seasonal nature of our live racing business, the number
of seasonal and part-time persons employed will vary throughout the year. During
2000, average full-time and seasonal employment per pay period was approximately
3,500 individuals Company-wide.
14
ITEM 2. PROPERTIES
Information concerning property owned by us required by this Item is
incorporated by reference to the information contained in Item 1. "Business" of
this Report.
Our real and personal property (but not including the property of Hoosier Park,
KOTB or Charlson) is encumbered by liens securing our $250 million line of
credit facility. The shares of stock of certain of our subsidiaries are also
pledged to secure this facility.
The Kentucky Derby Museum is located on property which is adjacent to, but not
owned by, Churchill Downs. The Museum is owned and operated by the Kentucky
Derby Museum Corporation, a tax-exempt organization under Section 501(c)(3) of
the Internal Revenue Code of 1986.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine
litigation incidental to our business, to which we are a party or of which any
of our property is the subject and no such proceedings are known to be
contemplated by governmental authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our shareholders during the fourth quarter
of the fiscal year covered by this report.
15
PART II
ITEM 6. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Our common stock is traded on the National Association of Securities Dealers,
Inc.'s National Market automated quotation system ("Nasdaq") under the symbol
CHDN. As of March 14, 2001, there were approximately 3,420 shareholders of
record.
The following table sets forth the high and low sale prices, as reported by
Nasdaq, and dividend payment information for our common stock during the last
two years:
2000 - By Quarter 1999 - By Quarter
----------------- -----------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
--------------------------------------------------------------------
High Sale $29.00 $26.44 $26.00 $36.13 $40.88 $37.00 $34.50 $27.50
Low Sale $21.00 $21.75 $21.50 $24.75 $25.00 $26.50 $21.19 $20.00
Dividend per share: $.50 $.50
In July 1999, we issued 2,300,000 shares of common stock at a public offering
price of $29 a share.
In September 2000, we issued 3,150,000 shares of common stock at a price of
$16.28 related to the Arlington Park merger.
We presently expect that comparable annual cash dividends (adjusted for any
stock splits or other similar transactions) will continue to be paid in the
future.
16
ITEM 6. CONSOLIDATED SELECTED FINANCIAL DATA
(In thousands, expect per share data)
Years ended December 31,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
Operations:
Net revenues $362,016 $258,427 $147,300 $118,907 $107,859
Operating income $46,578 $32,513 $17,143 $14,405 $12,315
Net earnings $19,164 $14,976 $10,518 $9,148 $8,072
Basic net earnings
per share $1.77 $1.74 $1.41 $1.25 $1.08
Diluted net earnings
per share $1.75 $1.72 $1.40 $1.25 $1.08
Dividend paid per share
Annual $.50 $.50 $.50 $.25 $.25
Special - - - $.25 $.08
Balance Sheet Data at Period End:
Total assets $470,004 $398,046 $114,651 $85,849 $80,729
Working capital surplus
(deficiency) $(31,507) $800 $(7,791) $(8,032) $(10,789)
Long-term debt $158,040 $181,450 $13,665 $2,713 $2,953
Other Data:
Shareholders' equity $202,485 $138,121 $65,231 $53,393 $47,781
Shareholders' equity
per share $15.55 $14.02 $8.67 $7.30 $6.54
Additions to racing
plant and equipment,
exclusive of business
acquisitions $22,419 $12,083 $3,524 $4,568 $2,571
Earnings, dividend and shareholders' equity per share amounts have been
retroactively adjusted for the 2-for-1 stock split with a record date of March
30, 1998.
17
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Information set forth in this discussion and analysis contain various
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Private
Securities Litigation Reform Act of 1995 ( the "Act") provides certain "safe
harbor" provisions for forward-looking statements. All forward-looking
statements made in this Annual Report on Form 10-K are made pursuant to the Act.
These statements represent our judgment concerning the future and are subject to
risks and uncertainties that could cause our actual operating results and
financial condition to differ materially. Forward-looking statements are
typically identified by the use of terms such as "anticipate," "believe,"
"could," "estimate," "expect," "intend," "may," "might," "plan," "predict,"
"project," "should," "will," and similar words, although some forward-looking
statements are expressed differently. Although we believe that the expectations
reflected in such forward-looking statements are reasonable we can give no
assurance that such expectations will prove to be correct. Important factors
that could cause actual results to differ materially from our expectations
include: the financial performance of our racing operations; the impact of
gaming competition (including lotteries and riverboat, cruise ship and land-
based casinos) and other sports and entertainment options in those markets in
which we operate; a substantial change in law or regulations affecting our
pari-mutuel activities; a substantial change in allocation of live racing days;
litigation surrounding the Rosemont, Illinois, riverboat casino; changes in
Illinois law that impact revenues of racing operatons in Illinois; a decrease in
riverboat admissions subsidy revenue from our Indiana operations; the impact of
an additional racetrack near our Indiana operations; our continued ability to
effectively compete for the country's top horses and trainers necessary to field
high-quality horse racing; our continued ability to grow our share of the
interstate simulcast market; the impact of interest rate fluctuations; our
ability to execute our acquisition strategy and to complete or successfully
operate planned expansion projects; the economic environment; our ability to
adequately integrate acquired businesses; market reaction to our expansion
projects; the loss of our totalisator companies or their inability to keep their
technology current; our accountability for environmental contamination; the loss
of key personnel and the volatility of our stock price.
You should read this discussion together with the financial statements and other
financial information included in the report.
General Information About Our Business
We conduct pari-mutuel wagering on live Thoroughbred, Quarter Horse and
Standardbred horse racing and simulcast signals of races. Additionally, we offer
racing services through our other interests.
We own and operate the Churchill Downs racetrack in Louisville, Kentucky, which
has conducted Thoroughbred racing since 1875 and is internationally known as the
home of the Kentucky Derby. We also own and operate Hollywood Park, a
Thoroughbred racetrack in Inglewood, California, Arlington Park, a pari-mutuel
horse racing operation in Arlington Heights, Illinois, Calder Race
18
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Course, a Thoroughbred racetrack in Miami, Florida, and Ellis Park, a
Thoroughbred racetrack in Henderson, Kentucky. Additionally, we are the majority
owner and operator of Hoosier Park in Anderson, Indiana, which conducts
Thoroughbred, Quarter Horse and Standardbred horse racing. We conduct simulcast
wagering on horse racing at nine simulcast wagering facilities in Kentucky,
Indiana and Illinois, as well as at our six racetracks.
Because of the seasonal nature of our business and recent acquisitions and
merger activity, revenues and operating results for any interim quarter are
likely not indicative of the revenues and operating results for the year and are
not necessarily comparable with results for the corresponding period of the
previous year. We normally earn a substantial portion of our net earnings in the
second and third quarters of each year during which all our operations are open
for some or all of this period and the Kentucky Derby and the Kentucky Oaks are
run.
Our revenues are generated from commissions on pari-mutuel wagering at our
racetracks and off-track betting facilities, plus simulcast fees, Indiana
riverboat admissions subsidy revenue, admissions, concessions revenue,
sponsorship revenues, licensing rights and broadcast fees, lease income and
other sources.
19
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Pari-mutuel wagering information, including intercompany transactions, for our
six live racing facilities and nine separate OTBs, which are included in their
respective racetracks, during the years ended December 31, 2000 and 1999 is as
follows ($ in thousands):
Churchill Calder
Downs Hollywood Race Arlington Hoosier Ellis
Racetrack Park* Course* Park* Park Park
--------- ---------- -------- --------- -------- --------
Live racing
2000 handle $129,618 $203,593 $186,439 $ 65,679 $15,505 $16,686
2000 no. of days 76 100 174 103 166 41
1999 handle $125,258 $198,683 $183,439 - $15,888 $19,790
1999 no. of days 71 97 169 - 167 61
Export simulcasting
2000 handle $537,704 $756,400 $523,140 $267,432 $91,670 $102,512
2000 no. of days 76 100 174 103 166 41
1999 handle $459,545 $730,479 $489,519 - $68,994 $159,964
1999 no. of days 71 97 169 - 167 61
Import simulcasting
2000 handle $105,419 $234,956 - $410,751 $136,620 $38,281
2000 no. of days 227 175 - 1,820 1,218 316
1999 handle $121,160 $228,556 - $285,893 $139,379 $38,040
1999 no. of days 234 175 - 1,820 1,205 290
Number of OTBs 1 - - 5 3 -
Totals
2000 handle $772,741 $1,194,949 $709,579 $743,862 $243,795 $157,479
1999 handle $705,963 $1,157,718 $672,958 $285,893 $224,261 $217,794
* Pari-mutuel wagering information is provided for years ended December 31,
2000 and 1999. Although the summary reflects handle for the full year, only
revenues generated since the subsidiaries' acquisition and merger dates
have been included in the Company's results of operations.
Arlington Park did not open for live racing during 1999, however, off-track
betting facilities remained open for import simulcasting.
20
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Net Revenues
Net revenues increased $103.6 million (40%) from $258.4 million in 1999 to
$362.0 million in 2000. Churchill Downs racetrack revenues increased $7.1
million due primarily to $4.4 million of increased pari-mutuel wagering as a
result of having an additional week of live racing, which was transferred from
Ellis Park. In addition, Churchill Downs racetrack had increases in corporate
sponsor event ticket prices, admissions and seat revenue as a result of record
attendance on Kentucky Oaks and Kentucky Derby days. Arlington Park contributed
$14.8 million to 2000 net revenues. Hollywood Park revenues increased $75.1
million to $105.6 million in 2000 from $30.5 million in 1999 and Calder Race
Course revenues increased $5.1 million to $77.5 million in 2000 from $72.4
million in 1999 due to the timing of the 1999 acquisitions. The Arlington Park
merger was completed in the third quarter of 2000, Hollywood Park was acquired
in the third quarter of 1999 and Calder Race Course was acquired in the second
quarter of 1999. The remaining increase recorded in other investments represents
the $5.8 million Arlington Park management contract that was in effect from July
1 through the closing of the Arlington Park merger on September 8, 2000.
Operating Expenses
Operating expenses increased $80.2 million (39%) from $207.4 million in 1999 to
$287.6 million in 2000 primarily as a result of $13.1 million of operating
expenses of Arlington Park, incurred subsequent to the merger, and increases in
Hollywood Park and Calder Race Course operating expenses of $60.2 million and
$6.0 million, respectively, due to the timing of the acquisitions.
Gross Profit
Gross profit increased $23.3 million (46%) from $51.1 million in 1999 to $74.4
million in 2000. The increase in gross profit was primarily the result of the
acquisition of Hollywood Park, the merger with Arlington Park and the increase
in gross profit for Churchill Downs racetrack due to an increase in the number
of live race days and record attendance on Kentucky Oaks and Kentucky Derby
days. The Arlington Park management fee also contributed to the increased gross
profit for 2000.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses increased by $9.3 million
(50%) from $18.5 million in 1999 to $27.8 million in 2000. SG&A expenses at
Churchill Downs corporate increased $3.3 million due primarily to increased
corporate staffing and compensation expenses reflecting the Company's
strengthened corporate services to meet the needs of new business units. The
1999
21
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
acquisitions of Calder Race Course and Hollywood Park resulted in increases of
$1.3 million and $3.1 million, respectively. In addition, Arlington Park had
expenses of $2.8 million during 2000.
Other Income and Expense
Interest expense increased $7.0 million from $7.8 million in 1999 to $14.8
million in 2000 primarily as a result of borrowings to finance the acquisitions
of Calder Race Course and Hollywood Park during 1999 resulting in a full year of
interest expense on the borrowings during 2000. We received $2.5 million as a
result of Centaur Racing, LLC's performance under an agreement to sell an
additional 26% interest in Hoosier Park. These funds were subsequently expensed
to set up Churchill Downs Foundation, Inc., a non-profit private charitable
foundation pursuant to section 501(c)(3) of the Internal Revenue Code for the
purpose of funding future contributions to qualifying charitable, civic and
community causes in locations where we do business.
Income Tax Provision
The Company's effective income tax rate declined from 42.1% in 1999 to 41.2% in
2000 primarily as a result of the reduced impact of non-deductible expenses.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net Revenues
Net revenues increased $111.1 million (75%) from $147.3 million in 1998 to
$258.4 million in 1999. Calder Race Course contributed $72.4 million and
Hollywood Park contributed $30.5 million to the increase in 1999 net revenues.
Churchill Downs revenues increased $1.5 million due primarily to an increase in
corporate sponsor event ticket prices, admissions and seat revenue, concessions,
and program revenue as a result of record attendance on Kentucky Oaks and
Kentucky Derby days. Hoosier Park revenues increased $3.5 million primarily due
to increased simulcasting revenues and a $2.0 million increase in the riverboat
gross admissions subsidy of which a portion was required to be spent on purses
and marketing expenses. Net revenues for Ellis Park for 1999 increased $2.3
million primarily due to the timing of the 1998 acquisition and increased
pari-mutuel wagering revenue for 1999. Other operations, which include Charlson
Broadcast Technologies, LLC ("CBT") and Kentucky Horse Center, comprised the
remaining $0.9 million of the increase.
Operating Expenses
Operating expenses increased $88.4 million (74%) from $119.0 million in 1998 to
$207.4 million in 1999, including Calder Race Course and Hollywood Park
operating expenses of $54.4 million and $26.5 million, respectively. Churchill
Downs operating expenses increased $1.9 million. Hoosier Park operating expenses
increased $2.8 million due primarily to increases in purses payable consistent
with the increase in pari-mutuel revenue and an increase in required purses and
marketing expenses related to the riverboat admissions subsidy. Ellis Park
operating expenses increased $2.8 million during 1999 as compared to expenses
after the acquisition date of April 21, 1998 for the prior year.
22
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gross Profit
Gross profit increased $22.7 million (80%) from $28.3 million in 1998 to $51.0
million in 1999. The increase was primarily due to a $18.0 million and $4.0
million increase in gross profit from Calder Race Course and Hollywood Park,
respectively.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses increased by $7.4 million
(66%) from $11.2 million in 1998 to $18.6 million in 1999. Calder Race Course
and Hollywood Park added $2.4 million and $1.5 million, respectively, and the
inclusion of Ellis Park during all of 1999 contributed $0.2 million of the
increase. SG&A expenses at Churchill Downs racetrack and corporate expenses
increased $1.7 million due primarily to increased corporate staffing and
compensation expenses reflecting the Company's strengthened corporate services
to meet the needs of new business units. Other operations accounted for the
remaining $1.6 million of the increase in SG&A expenses.
Other Income and Expense
Interest expense increased $6.9 million from $0.9 million in 1998 to $7.8
million in 1999 primarily as a result of borrowings to finance the acquisitions
of Calder Race Course, Hollywood Park and CBT during 1999 and the acquisition of
Ellis Park in April 1998.
Income Tax Provision
Our income tax provision increased by $4.1 million during 1999 as compared to
1998 as a result of increased pre-tax earnings and an increase in the estimated
effective tax rate from 39.1% in 1998 to 42.1% in 1999 due primarily to
non-deductible goodwill amortization expense related to the acquisitions of
Calder Race Course and CBT.
Significant Changes in the Balance Sheet December 31, 2000 to December 31, 1999
Restricted cash increased $9.0 million due to the current period separate
classification of restricted assets. Restricted cash represents refundable
deposits and amounts due to horsemen for purses, stakes and awards.
23
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net plant and equipment increased $67.9 million primarily as a result of the
merger with Arlington Park. Additional increases were due to routine capital
spending at our operating units offset by current year depreciation expense and
the sale of the Kentucky Horse Center assets during the second quarter of 2000.
Accounts payable increased $15.4 million primarily due to the merger with
Arlington Park. In addition, there were increases in purses payable and other
expenses related to simulcast wagering for Churchill Downs racetrack and Hoosier
Park.
Accrued expenses increased $11.5 million primarily due to the merger with
Arlngton Park.
Internally generated funds in 2000 enabled us to reduce our long-term debt by
$25.2 million, from $180.9 million to $155.7 million.
Common stock increased by $51.6 million primarily due to the issuance of 3.15
million shares of common stock to complete the merger with Arlington Park during
the third quarter of 2000.
Significant Changes in the Balance Sheet December 31, 1999 to December 31, 1998
The net plant and equipment increase of $191.8 million during 1999 included
$189.2 million for the acquisitions of Hollywood Park, Calder Race Course and
CBT. The remaining increase was due to routine capital spending at our operating
units offset by current year depreciation expense.
Intangible assets increased $54.0 million primarily a result of the addition of
approximately $52.0 million of goodwill due to the acquisitions of Calder Race
Course and CBT. In addition, deferred financing costs of $3.1 million related to
our new $250 million revolving loan facility are included. These increases were
partially offset by current year amortization expense.
The long-term debt increase of $167.4 million was the result of additional
borrowings on our bank line of credit during 1999 used to fund the 1999
acquisitions of Hollywood Park, Calder Race Course and CBT.
Deferred income tax liabilities increased by $8.5 million primarily as a result
of the Calder Race Course acquisition during the second quarter of 1999.
Common stock increased by $62.7 million primarily due to $62.1 million in net
proceeds received from our public offering during the third quarter of 1999.
24
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The change in working capital between December 31, 2000 and 1999 is a result of
the Arlington merger as well as the use of internally generated funds to reduce
long term debt. Cash flows provided by operations were $27.2 million, $39.7
million and $10.8 million for years ended December 31, 2000, 1999 and 1998,
respectively. The net decrease in cash provided by operations as compared to
1999 was primarily a result of current period separate classification of
restricted assets which represent refundable deposits and amounts due to
horsemen for purses, stakes and awards. The increase in depreciation and
amortization is primarily due to the timing of the acquisitions of Calder Race
Course and Hollywood Park and the merger of Arlington Park. Management believes
cash flows from operations and available borrowings during 2001 will be
sufficient to fund our cash requirements for the year.
Cash flows used in investing activities were $17.5 million, $240.4 million and
$20.8 million for the years ended December 31, 2000, 1999 and 1998,
respectively. We used $22.4 million during 2000 for capital spending at our
facilities including $3.0 million for completion of the expansion of Churchill
Downs' main entrance and corporate offices. Cash used for 1999 business
acquisitions consisted of $142.5 million for the acquisition of Hollywood Park
during the third quarter, $82.4 million net of cash acquired for the acquisition
of Calder Race Course during the second quarter and $2.9 million net of cash
acquired for the acquisition of Charlson Broadcast Technologies, LLC during the
first quarter.
Cash flows (used in) provided by financing activities were $(28.0) million,
$223.3 million and $7.0 million for the years ended December 31, 2000, 1999 and
1998, respectively. Cash flows from operations were used to reduce borrowings on
our line of credit in 2000. Cash provided by financing activities in 1999 and
1998 were used to finance the aforementioned acquisitions.
We have a $250 million line of credit under a revolving loan facility, of which
$153.2 million was outstanding at December 31, 2000. This line of credit is
secured by substantially all of our assets and matures in 2004. This credit
facility is intended to meet working capital and other short-term requirements
and to provide funding for future acquisitions.
25
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Significant Accounting Pronouncements
In June 1998 the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivatives and Hedging Activities (SFAS 133), as amended by SFAS
137 and SFAS 138, which established accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. The only derivatives typically used by the Company are interest rate
swaps. Management anticipates that the adoption of SFAS 133 will not have a
material effect on the Company's results of operations or financial position.
26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
At December 31, 2000, we had $153.2 million of debt outstanding
under our revolving loan facility, which bears interest at LIBOR
based variable rates. We are exposed to market risk on variable
rate debt due to potential adverse changes in the LIBOR rate.
Assuming the outstanding balance on the revolving loan facility
remains constant, a one percentage point increase in the LIBOR
rate would reduce annual pre-tax earnings and cash flows by $1.5
million.
In order to mitigate a portion of the market risk associated with
our variable rate debt, we have entered into interest rate swap
contracts with major financial institutions. Under terms of these
separate contracts we receive a LIBOR based variable interest
rate and pay a fixed interest rate of 7.015% and 7.30% on
notional amounts of $35.0 million each which mature in March 2003
and May 2002, respectively. We have also entered into a contract
in which we pay a fixed interest rate of 6.40% on a notional
amount of $30.0 million which matures in November 2002. Assuming
the December 31, 2000, notional amounts under the interest rate
swap contracts remain constant, a one percentage point increase
in the LIBOR rate would increase annual pre-tax earnings and cash
flows by $1.0 million.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Churchill Downs Incorporated
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a) (1), present fairly, in all material respects, the
financial position of Churchill Downs Incorporated and its subsidiaries as of
December 31, 2000, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 14 (a) (2), presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America 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 our opinion.
\s\ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Louisville, Kentucky
February 27, 2001
28
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31,
(in thousands)
ASSETS 2000 1999 1998
---- ---- ----
Current assets:
Cash and cash equivalents $ 10,807 $ 29,060 $ 6,380
Restricted cash 9,006 - -
Accounts receivable 32,535 24,279 11,968
Other current assets 2,932 2,751 1,049
--------- --------- ---------
Total current assets 55,280 56,090 19,397
Other assets 8,116 4,740 3,796
Plant and equipment, net 342,767 274,882 83,088
Intangible assets, net 63,841 62,334 8,370
--------- --------- ---------
$470,004 $398,046 $114,651
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 38,396 $ 23,012 $ 6,381
Accrued expenses 27,115 15,603 8,248
Dividends payable 6,508 4,927 3,762
Income taxes payable 1,091 336 258
Deferred revenue 11,353 10,860 8,412
Long-term debt, current portion 2,324 552 127
--------- --------- ---------
Total current liabilities 86,787 55,290 27,188
Long-term debt 155,716 180,898 13,538
Other liabilities 9,837 8,263 1,756
Deferred income taxes 15,179 15,474 6,938
Commitments and contingencies - - -
Shareholders' equity:
Preferred stock, no par value;
250 shares authorized; no shares issued - - -
Common stock, no par value; 50,000 shares
authorized; issued: 13,019 shares in
2000; 9,854 shares in 1999; and 7,525
shares in 1998 123,227 71,634 8,927
Retained earnings 79,323 66,667 56,599
Note receivable for common stock (65) (65) (65)
Deferred compensation costs - (115) (230)
--------- --------- ---------
202,485 138,121 65,231
--------- --------- ---------
$470,004 $398,046 $114,651
========= ========= ---------
The accompanying notes are an integral part of the consolidated
financial statements.
29
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended December 31,
(in thousands, except per share data)
2000 1999 1998
---- ---- ----
Net revenues $362,016 $258,427 $147,300
Operating expenses:
Purses 128,982 97,585 50,193
Other direct expenses 158,624 109,783 68,788
--------- --------- ---------
287,606 207,368 118,981
--------- --------- ---------
Gross profit 74,410 51,059 28,319
Selling, general and administrative
expenses 27,832 18,546 11,176
--------- --------- ---------
Operating income 46,578 32,513 17,143
--------- --------- ---------
Other income (expense):
Interest income 1,023 847 680
Interest expense (14,848) (7,839) (896)
Miscellaneous, net (166) 334 342
--------- --------- ---------
(13,991) (6,658) 126
--------- --------- ---------
Earnings before provision for income
taxes 32,587 25,855 17,269
Provision for income taxes (13,423) (10,879) (6,751)
--------- --------- ---------
Net earnings $ 19,164 $ 14,976 $ 10,518
========= ========= =========
Earnings per common share data:
Basic $1.77 $1.74 $1.41
Diluted $1.75 $1.72 $1.40
Weighted average shares outstanding:
Basic 10,849 8,598 7,460
Diluted 10,940 8,718 7,539
The accompanying notes are an integral part of the consolidated
financial statements.
30
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 2000, 1999 and 1998
(in thousands, except per share data)
Note Deferred
Common Stock Retained Receivable Compensation
Shares Amount Earnings Common Stock Costs Total
Balances December 31, 1997 7,317 $ 3,615 $49,843 $ (65) - $ 53,393
Net earnings 10,518 10,518
Deferred compensation 344 $ (344) -
Deferred compensation
amortization 114 114
Issuance of common stock at
$24.25 per share in conjunction
with RCA acquisition 200 4,850 4,850
Issuance of common stock for
employee benefit plans 8 118 118
Cash dividends, $.50 per share (3,762) (3,762)
------ -------- -------- ---------- ------------ ---------
Balances December 31, 1998 7,525 8,927 56,599 (65) (230) 65,231
Net earnings 14,976 14,976
Deferred compensation
amortization 115 115
Issuance of common stock at
$29.00 per share 2,300 62,122 62,122
Issuance of common stock for
employee benefit plans 29 585 19 604
Cash dividends, $.50 per share (4,927) (4,927)
------ -------- -------- ---------- ------------ ---------
Balances December 31, 1999 9,854 71,634 66,667 (65) (115) 138,121
Net earnings 19,164 19,164
Deferred compensation
amortization 115 115
Issuance of common stock at
$16.28 per share in conjunction
with Arlington merger 3,150 51,290 51,290
Issuance of common stock for
employee benefit plans 15 303 303
Cash dividends, $.50 per share (6,508) (6,508)
------ -------- -------- ---------- ------------ ---------
Balances December 31, 2000 13,019 $123,227 $79,323 $ (65) $ - $202,485
====== ======== ======== ========== ============ =========
The accompanying notes are an integral part of the consolidated
financial statements.
31
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
(in thousands)
2000 1999 1998
--------- --------- --------
Cash flows from operating activities:
Net earnings $ 19,164 $ 14,976 $ 10,518
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization, includes
amortization of loan origination costs
classified as interest expense of $609
in 2000 and $463 in 1999 17,286 11,306 5,744
Deferred income taxes (275) (502) (121)
Deferred compensation 115 115 114
Increase (decrease) in cash resulting from
changes in operating assets and liabilities:
Restricted cash (9,006) - -
Accounts receivable 9,312 (8,971) (2,973)
Other current assets (32) (1,119) (293)
Accounts payable (2,474) 15,837 (2,211)
Accrued expenses (2,220) 2,932 386
Income taxes payable 755 98 71
Deferred revenue (4,631) (231) 758
Other assets and liabilities (783) 5,291 (1,177)
---------- ---------- ---------
Net cash provided by operating
activities 27,231 39,732 10,816
---------- ---------- ---------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired
of $4,200 in 1999 and $517 in 1998 - (228,303) (17,232)
Proceeds from the sale of Training Facility
assets 4,969 - -
Additions to plant and equipment, net (22,419) (12,083) (3,524)
---------- ---------- ---------
Net cash used in investing activities (17,450) (240,386) (20,756)
---------- ---------- ---------
Cash flows from financing activities:
Increase (decrease) in long-term debt, net 2,487 (1,295) (140)
Borrowings on bank line of credit 146,618 269,500 22,000
Repayments of bank line of credit (172,515) (102,500) (11,000)
Payment of loan origination costs - (2,867) (280)
Payment of dividends (4,927) (3,762) (3,658)
Capital contribution by minority interest in
subsidiary - 1,551 -
Common stock issued 303 62,707 118
---------- ---------- ---------
Net cash (used in) provided by financing
activities (28,034) 223,334 7,040
---------- ---------- ---------
Net (decrease) increase in cash and cash
equivalents (18,253) 22,680 (2,900)
Cash and cash equivalents, beginning of period 29,060 6,380 9,280
---------- ---------- ---------
Cash and cash equivalents, end of period $ 10,807 $ 29,060 $ 6,380
========== ========== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 13,794 $ 6,858 $ 497
Income taxes $ 13,117 $ 10,796 $ 7,130
Schedule of Non-cash Activities:
Issuance of common stock related to
merger with Arlington Park $ 51,291 - -
Issuance of common stock related to the
acquisition of RCA - - $ 4,850
Invoicing for future events $ 4,706 $ 2,678 $ 678
Plant & equipment additions included in
accounts payable $ 292 $ 502 $ 95
Compensation expense - - $ 344
The accompanying notes are an integral part of the consolidated
financial statements.
32
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
1. Basis of Presentation and Summary of Significant Accounting Policies
--------------------------------------------------------------------
Basis of Presentation
Churchill Downs Incorporated (the "Company") conducts pari-mutuel wagering
on live race meetings for Thoroughbred horses and participates in
intrastate and interstate simulcast wagering at its racetracks in Kentucky,
California, Florida and Illinois. In addition, the Company, through its
subsidiary Hoosier Park L.P. ("Hoosier Park"), conducts pari-mutuel
wagering on live Thoroughbred, Quarter Horse and Standardbred horse races
and participates in interstate simulcast wagering. The Company's Kentucky,
California, Florida, Illinois and Indiana operations are subject to
regulation by the racing commissions of the respective states.
The accompanying consolidated financial statements include the accounts of
the Company, its wholly owned subsidiaries, Churchill Downs California
Company d/b/a Hollywood Park("Hollywood Park"), Calder Race Course, Inc.
and Tropical Park, Inc. which hold licenses to conduct horse racing at
Calder Race Course ("Calder Race Course"), Arlington International
Racecourse, Inc., Arlington Management Services, Inc. and Turf Club of
Illinois, Inc.(collectively referred to as "Arlington Park"), Ellis Park
Race Course, Inc. ("Ellis Park"), Churchill Downs Management Company
("CDMC"), Churchill Downs Investment Company ("CDIC") and Anderson Park
Inc. ("Anderson"), and its majority-owned subsidiary, Hoosier Park,
and Charlson Broadcast Technologies, LLC ("CBT"). All significant
intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
A Summary of Significant Accounting Policies Followed
Cash Equivalents
The Company considers investments with original maturities of three months
or less to be cash equivalents. The Company has, from time to time, cash in
the bank in excess of federally insured limits.
Restricted Cash
Restricted cash represents refundable deposits and amounts due to horsemen
for purses, stakes and awards.
33
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
1. Basis of Presentation and Summary of Significant Accounting
-----------------------------------------------------------
Policies(cont'd)
---------
Plant and Equipment
Plant and equipment are recorded at cost. Depreciation is calculated using
the straight-line and accelerated methods over the estimated useful lives
of the related assets as follows: 10 to 40 years for grandstands and
buildings, 3 to 18 years for equipment, 5 to 10 years for furniture and
fixtures and 10 to 20 years for tracks and other improvements.
Intangible Assets
Amortization of the cost of acquisitions in excess of fair value of assets
acquired, the Indiana racing license and the Arlington Park trademarks are
provided over 40 years using the straight-line method. Loan origination
costs on the Company's line of credit are being amortized under the
effective interest method over 60 months, the term of the loan. The
intangible asset relating to the Illinois Horse Race Equity fund will not
be amortized until revenues relating to the intangible are recongnized.
Long-lived Assets
In the event thatfacts and circumstances indicate that the carrying amount
of tangible or intangible long-lived assets or groups of assets may be
impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows
associated with the assets would be compared to the assets' carrying amount
to determine if a write-down to market value or discounted cash flow value
is required.
Interest Rate Swaps
The Company utilizes interest rate swap contracts to hedge exposure to
interest rate fluctuations on its variable rate debt. The differential
between the fixed interest rate paid and the variable interest rate
received under the interest rate swap contracts is recognized as an
adjustment to interest expense in the period in which the differential
occurs. Differential amounts incurred under the rate swap contracts
but not settled in cash at the end of a reporting period are recorded as
receivables or payables in the balance sheet. Any gains or losses realized
on the early termination of interest rate swap contracts are deferred and
amortized as an adjustment to interest expense over the emaining term
of the underlying debt instrument.
Deferred Revenue
Deferred revenue includes primarily advance sales related to the Kentucky
Derby and Oaks races in Kentucky and other advanced billings on racing
events.
34
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
1. Basis of Presentation and Summary of Significant Accounting
-----------------------------------------------------------
Policies (cont'd)
---------
Stock-Based Compensation
The Company accounts or stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees". In accordance with Statement of Financial Accounting Standards
(SFAS) No. 123 "Accounting for Stock-based Compensation" pro forma
disclosure of net earnings and earnings per share are presented in Note
10 as if SFAS No. 123 had been applied.
Reclassifications
Certain financial statement amounts have been reclassified in the prior
years to conform to current year presentation.
2. Acquisitions and Other Transactions
-----------------------------------
On September 8, 2000, three of the Company's wholly owned subsidiaries
merged with Arlington International Racecourse, Inc., Arlington Management
Services, Inc. and Turf Club of Illinois, Inc. (collectively referred to as
"Arlington Park"). The Company issued 3.15 million shares of its common
stock, with a fair value of $51.3 million, to Duchossois Industries, Inc.
("DII") and could issue up to an additional 1.25 million shares of common
stock dependent upon the opening of the riverboat casino at Rosemont,
Illinois, and the amount of subsidies received by Arlington as a result
thereof. For this purpose, the purchase price was recorded based upon the
fair value of shares issued to DII at the announcement of the mergers on
June 23, 2000, plus approximately $2.2 million in merger-related costs.
The acquired tangible and intangible assets of $87.7 million and assumed
liabilities of $34.1 million of Arlington Park were recorded at their
estimated fair values on the merger date. The allocation of the purchase
price may require adjustment in the Company's future financial statements
based on a final determination of the fair value of certain liabilities
assumed in the merger. The Company also received $5.8 million in management
fees related to the Arlington Park management contract that was in effect
from July 1 through the closing of the Arlington Park merger on September
8,2000. The merger was accounted for by the Company as an asset purchase
and, accordingly, the financial position and results of operations of
Arlington Park have been included in the Company's consolidated financial
statements since the date of merger.
On April 21, 2000, Keeneland Association, Inc. purchased the Company's
Thoroughbred training and boarding facility known as Kentucky Horse Center
for a cash payment of $5.0 million, which approximated its carrying value.
35
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
2. Acquisitions and Other Transactions (cont'd)
-----------------------------------
On September 10, 1999, the Company acquired the assets of the Hollywood
Park and the Hollywood Park Casino in Inglewood, California, including
approximately 240 acres of land upon which the racetrack and casino are
located, for a purchase price of $140.0 million plus approximately $2.5
million in transaction costs. The Company leases the Hollywood Park Casino
to the seller under a 10-year lease with one 10-year renewal option. The
lease provides for annual rent of $3.0 million, subject to adjustment
during the renewal period. The entire purchase price of $142.5 million was
allocated to the acquired assets and liabilities based on their fair
values on the acquisition date. The acquisition was accounted for by the
Company as an asset purchase and, accordingly, the financial position
and results of operations of Hollywood Park have been included in the
Company's consolidated financial statements since the date of acquisition.
On April 23, 1999, the Company acquired all of the outstanding stock of
Calder Race Course, Inc. and Tropical Park, Inc. from KE Acquisition Corp.
for a purchase price of $86 million cash plus a closing net working capital
adjustment of approximately $2.9 million cash and $0.6 million in
transaction costs. The purchase included Calder Race Course in Miami and
the licenses held by Calder Race Course, Inc. and Tropical Park, Inc. to
conduct horse racing at Calder Race Course. The purchase price, including
additional costs, of $89.5 million was allocated to the acquired tangible
and intangible assets of $103.9 million and assumed liabilities of $14.4
million based on their fair values on the acquisition date with the excess
of $49.4 million being recorded as goodwill, which is being amortized over
40 years. The acquisition was accounted for by the Company under the
purchase method of accounting and, accordingly, the financial position and
results of operations of Calder Race Course, Inc. and Tropical Park, Inc.
have been included in the Company's consolidated financial statements since
the date of acquisition.
On April 21, 1998, the Company acquired from TVI Corp. ("TVI") all of the
outstanding stock of Racing Corporation of America ("RCA"). As part of the
transaction, TVI received 0.2 million shares of the Company's common
stock valued at $4.9 million with the remaining balance of $17.1 million
paid from cash on hand and a draw on the Company's bank line of credit.
The purchase price of $22.6 million, including $0.6 million in transaction
costs was allocated to acquired tangible and intangible assets of $23.8
million and assumed liabilities of $7.9 million based on their fair values
on the acquisition date with the excess of $6.7 million being recorded as
goodwill which is being amortized over 40 years. The acquisition was
accounted for by the Company under the purchase method of accounting and,
accordingly, the results of operations of RCA subsequent to April 20,
1998, are included in the Company's consolidated results of operations.
36
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
2. Acquisitions and Other Transactions (cont'd)
-----------------------------------
Following are the unaudited pro forma results of operations as if the
September 8, 2000 merger with Arlington Park, the September 10, 1999
acquisition of Hollywood Park, the July 20, 1999 stock issuance and the
April 23, 1999 acquisition of Calder Race Course all had occurred on
January 1,1999:
December 31,
2000 1999
---- ----
Net revenues $425,077 $357,284
Net earnings $18,556 $14,222
Earnings per common
share:
Basic $1.43 $1.10
Diluted $1.42 $1.09
Weighted average shares
outstanding:
Basic 13,015 12,983
Diluted 13,106 13,103
This unaudited pro forma financial information is not necessarily
indicative of the operating results that would have occurred had the
transactions been consummated as of January 1, 1999, nor is it necessarily
indicative of future operating results.
3. Plant and Equipment
-------------------
Plant and equipment is comprised of the following:
2000 1999 1998
---- ---- ----
Land $132,034 $ 98,445 $ 7,632
Grandstands and buildings 191,172 167,648 73,377
Equipment 23,703 15,845 4,979
Furniture and fixtures 20,342 8,057 5,341
Tracks and other
improvements 44,927 40,271 37,998
Construction in process 2,439 2,411 249
--------- --------- --------
414,617 332,677 129,576
Accumulated depreciation (71,850) (57,795) (46,488)
--------- --------- --------
$342,767 $274,882 $83,088
========= ========= ========
Depreciation expense was approximately $14,917, $9,506, and $5,490 for
the years ended December 31, 2000, 1999 and 1998.
37
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
4. Intangibles assets
------------------
The Company's intangible assets are comprised of the following:
2000 1999 1998
---- ---- ----
Cost of acquisitions in excess of fair value
of net assets acquired $59,433 $59,433 $6,449
Illinois Horse Race Equity Fund 3,307 - -
Arlington Park trademarks 494 - -
Indiana racing license 2,085 2,085 2,085
Loan origination costs 3,076 3,076 280
--------- -------- -------
68,395 64,594 8,814
Accumulated amortization (4,554) (2,260) (444)
-------- -------- -------
$63,841 $62,334 $8,370
======== ======== =======
Amortization expense related to the loan origination costs of $609 and
$463 for the years ended December 31, 2000 and 1999 is classified as
interest expense. Amortization expense for other intangibles of
approximately $1,760, $1,353 and $253 for the years ended December 31,
2000, 1999 and 1998 is classified in operating expenses.
5. Income Taxes
------------
Components of the provision for income taxes are as follows:
2000 1999 1998
---- ---- ----
Currently payable:
Federal $11,347 $ 9,528 $5,795
State & local 2,374 1,853 1,077
-------- -------- -------
13,721 11,381 6,872
-------- -------- -------
Deferred:
Federal (246) (439) 46
State & local (52) (63) 6
-------- -------- -------
(298) (502) 52
-------- -------- -------
Reversal of valuation allowance - - (173)
-------- -------- -------
$13,423 $10,879 $6,751
======== ======== =======
The Company's income tax expense is different from the amount computed
by applying the statutory federal income tax rate to income before
taxes as follows:
2000 1999 1998
---- ---- ----
Federal statutory tax on
earnings before income tax $11,405 $9,049 $5,942
State income taxes, net of
federal income tax benefit 1,502 1,154 747
Permanent differences and other 516 676 235
Reversal of valuation allowance - - (173)
------- ------- -------
$13,423 $10,879 $6,751
======= ======= =======
38
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
5. Income Taxes (cont'd)
------------
Components of the Company's deferred tax assets and liabilities are as
follows:
2000 1999 1998
---- ---- ----
Deferred tax liabilities:
Property & equipment in excess
of tax basis $15,419 $16,288 $7,805
Racing license in excess of tax basis 650 650 650
Other 189 66 -
------- ------- ------
Deferred tax liabilities 16,258 17,004 8,455
------- ------- ------
Deferred tax assets:
Supplemental benefit plan 372 337 316
State net operating loss carryforwards - 638 857
Allowance for uncollectible receivables 404 345 87
Other 926 830 437
------- ------- ------
Deferred tax assets 1,702 2,150 1,697
------- ------- ------
Net deferred tax liability $14,556 $14,854 $6,758
======= ======= ======
Income taxes are classified in the balance sheet as follows:
Net non-current deferred tax liability $15,179 $15,474 $6,938
Net current deferred tax asset (623) (620) (180)
-------- -------- -------
$14,556 $14,854 $6,758
======== ======== =======
6. Shareholders' Equity
--------------------
On September 8, 2000, the Company issued 3.15 million shares of the
Company's common stock to DII in conjunction with the Arlington Park
merger.
On July 20, 1999 the Company issued 2.3 million shares of the Company's
common stock at a price of $29 per share. The total proceeds net of
offering expenses was $62.1 million, and was used for the repayment of
bank borrowings.
On March 19, 1998, the Company's Board of Directors authorized a 2-for-1
stock split of its common stock effective March 30, 1998. All share and
per share amounts in the accompanying consolidated financial statements
have been restated to give effect to the stock split.
On March 19,1998, the Company's Board of Directors approved a stockholder
rights plan, which grants each shareholder the right to purchase a
fraction of a share of Series 1998 preferred stock at the rate of one
right for each share of the Company's common stock. This plan expires on
March 19, 2008.
39
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
7. Employee Benefit Plans
----------------------
The Company has a profit-sharing plan that covers all employees with one
year or more of service and one thousand or more worked hours. The
Company will match contributions made by the employee up to 3% of the
employee's annual compensation. The Company will also match at 50%,
contributions made by the employee up to an additional 2%. The Company
may also contribute a discretionary amount determined annually by the
Board of Directors as well as a year end discretionary match not to
exceed 4%. The Company's contribution to the plan for the years ended
December 31, 2000, 1999 and 1998 was approximately $840, $819 and $806
respectively.
The Company is a member of a noncontributory defined benefit
multi-employer retirement plan for all members of the Pari-mutuel
Clerk's Union of Kentucky and several other collectively-bargained
retirement plans which are administered by unions. Contributions are
made in accordance with negotiated labor contracts. Retirement plan
expense for the years ended December 31, 2000, 1999 and 1998 was
approximately $1,706, $665 and $258, respectively. The Company's policy
is to fund this expense as accrued.
The estimated present value of future payments under a supplemental
benefit plan is charged to expense over the period of active employment
of the employees covered under the plan. Supplemental benefit plan
expense for the years ended December 31, 2000, 1999 and 1998 was
approximately $87, $55 and $55, respectively.
8. Long-Term Debt
--------------
The Company has a $250 million line of credit under a revolving loan
facility through a syndicate of banks to meet working capital and other
short-term requirements and to provide funding for acquisitions. The
interest rate on the borrowing is based upon LIBOR plus 75 to 250
additional basis points, which is determined by certain Company
financial ratios. The weighted average interest rate was 7.94% on the
outstanding balance at December 31, 2000. There was $153.2 million
outstanding on the line of credit at December 31, 2000 compared to
$178.0 million and $11.0 million outstanding at December 31, 1999 and
1998, respectively. The line of credit is collateralized by
substantially all of the assets of the Company and its wholly owned
subsidiaries, and matures in 2004.
The Company has entered into interest rate swap contracts with major
financial institutions. Under terms of these separate contracts we
receive a LIBOR based variable interest rate and pay a fixed interest
rate of 7.015% and 7.30% on notional amounts of $35.0 million each which
mature in March 2003 and May 2002, respectively. The Company has also
entered into a contract which pays a fixed interest rate of 6.40% on a
notional amount of $30.0 million and matures in November 2002. The
variable interest rate paid on the contracts is determined based on
LIBOR on the last day of each month, which is consistent with the
variable rate determination on the underlying debt.
40
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
8. Long-Term Debt (cont'd)
--------------
On May 31, 1996, the Company entered into a Partnership Interest
Purchase Agreement with Conseco, LLC ("Conseco") for the sale of 10% of
the Company's partnership interest in Hoosier Park to Conseco. The
transaction also included assumption by Conseco of a loan to the Company
of approximately $2.6 million, of which the balance is $2.4 million at
December 31, 2000. The loan requires interest of prime plus 2% (11.5% at
December 31, 2000) payable monthly with principal due November 2004. The
note is collateralized by 10% of the assets of Hoosier Park.
During 2000 the Company entered into a short-term note payable which
expires in April 2001, bears interest at approximately prime, and is
secured by a blanket lien on CBT's assets. There was $2.0 million
outstanding on the note payable at December 31, 2000.
Future aggregate maturities of long-term debt are as follows:
2001 $ 2,324
2002 157
2003 17
2004 155,542
--------
$158,040
9. Operating Leases
----------------
The Company has a long-term operating lease for the land in Anderson,
Indiana on which its Hoosier Park facility is located and an operating
lease for the Indianapolis off-track betting facility ("OTB"). The
Anderson lease expires in 2003, with an option to extend the lease for
three additional ten year terms. The Indianapolis lease expires in 2009,
with an option to extend the lease for two additional five year terms.
The leases include provisions for minimum lease payments as well as
contingent lease payments based on handle or revenues.
The Company also has a long term operating lease agreement for land in
Arlington Heights, Illinois on which the backside facilities of
Arlington Park are located and two operating lease agreements for
Arlington Park OTBs. The Arlington lease expires in 2010 with an option
to purchase, the Mud Bug OTB lease expires in 2006 with an option to
extend the lease for an additional five years and the Waukegan OTB lease
expires in 2003, with an option to purchase.
The Company also leases certain totalisator and audio/visual equipment
and services as well as land and facilities. The Company's total rent
expense for all operating leases was approximately $7,629, $6,832 and
$4,022 for the years ended December 31, 2000, 1999 and 1998. Total annual
rent expense for contingent lease payments was approximately $6,991,
$6,287 and $3,942 for the years ended December 31, 2000, 1999 and 1998.
41
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
9. Operating Leases (cont'd)
----------------
Future minimum operating lease payments are as follows:
Minimum Lease
Payment
-------
2001 $ 1,856
2002 1,725
2003 1,485
2004 1,270
2005 1,251
Thereafter 4,082
-------
$11,669
10. Stock-Based Compensation Plans
------------------------------
Employee Stock Options:
The Company sponsors both the "Churchill Downs Incorporated 1997 Stock
Option Plan" (the "97 Plan") and the "Churchill Downs Incorporated 1993
Stock Option Plan" (the "93 Plan"), stock-based incentive compensation
plans, which are described below. The Company applies APB Opinion 25 and
related interpretations in accounting for both the plans. However, pro
forma disclosures are as if the Company adopted the cost recognition
provisions of SFAS 123 are presented below.
The Company is authorized to issue up to 600 shares and 400 shares of
common stock (as adjusted for the stock split) under the 97 Plan and 93
Plan, respectively, pursuant to "Awards" granted in the form of
incentive stock options (intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended) and non-qualified stock
options. Awards may be granted to selected employees of the Company or
any subsidiary.
Both the 97 Plan and the 93 Plan provide that the exercise price of any
incentive stock option may not be less than the fair market value of the
common stock on the date of grant. The exercise price of any
nonqualified stock option is not so limited by the plans. The Company
granted stock options in 2000, 1999 and 1998. The stock options granted
in those years have contractual terms of 10 years and varying vesting
dates, ranging from one to three years following the date of grant. In
accordance with APB 25, the Company has not recognized any compensation
cost for these stock options.
42
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
10. Stock-Based Compensation Plans (cont'd)
------------------------------
A summary of the status of the Company's stock options as of December
31, 2000, 1999 and 1998 and the changes during the year ended on those
dates is presented below:
2000 1999 1998
---------------------- ---------------------- ----------------------
Weighted Weighted Weighted
# of Shares Average # of Shares Average # of Shares Average
Underlying Exercise Underlying Exercise Underlying Exercise
Options Prices Options Prices Options Prices
Outstanding at beginning
of the year 600 $21.62 478 $20.86 426 $19.45
Granted 179 $27.60 154 $23.70 52 $32.50
Exercised 4 $19.56 22 $19.30 - -
Canceled - - - - - -
Forfeited 2 $30.24 10 $22.53 - -
Expired - - - - - -
Outstanding at end
of year 773 $22.98 600 $21.62 478 $20.86
Exercisable at
end of year 393 $19.46 311 $19.09 248 $21.02
Weighted-average fair value per
share of options granted
during the year $15.32 $12.01 $10.42
The fair value of each stock option granted is estimated on the date of
grant using the Black- Scholes option-pricing model with the following
weighted-average assumptions for grants in 2000, 1999 and 1998,
respectively: dividend yields ranging from 1.40% to 1.83%; risk- free
interest rates are different for each grant and range from 5.05% to
6.76%; and the expected lives of options are different for each grant
and range from approximately 6.5 to 9.3 years, and expected volatility
rates of 55.23%, 43.74%, and 24.86% for years ending December 31, 2000,
1999 and 1998.
The following table summarizes information about stock options
outstanding at December 31, 2000:
Options Outstanding Options Exercisable
---------------------------------------------- ----------------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/00 Contributing Life Exercise Price at 12/31/00 Exercise Price
---------------- ------------ ----------------- -------------- ------------ --------------
$13.40 to $16.75 18 4.5 $15.75 18 $15.75
$16.76 to $20.10 273 5.2 $18.93 273 $18.93
$20.11 to $23.45 238 7.4 $22.17 102 $21.54
$23.46 to $26.80 8 9.1 $24.13 - -
$26.81 to $30.15 178 9.8 $27.84 - -
$30.16 to $33.50 58 8.0 $32.67 - -
---- --- ------ --- ------
TOTAL 773 7.2 $22.98 393 $19.09
43
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
10. Stock-Based Compensation Plans (cont'd)
------------------------------
Employee Stock Purchase Plan:
Under the Company's Employee Stock Purchase Plan (the "Employee Stock
Purchase Plan"), the Company is authorized to sell, pursuant to
short-term stock options, shares of its common stock to its full-time
(or part-time for at least 20 hours per week and at least five months
per year) employees at a discount from the common stock's fair market
value. The Employee Stock Purchase Plan operates on the basis of
recurring, consecutive one-year periods. Each period commences on August
1 and ends on the next following July 31.
On the first day of each 12-month period, August 1, the Company offers
to each eligible employee the opportunity to purchase common stock.
Employees elect to participate for each period to have a designated
percentage of their compensation withheld (after-tax) and applied to the
purchase of shares of common stock on the last day of the period, July
31. The Employee Stock Purchase Plan allows withdrawals, terminations
and reductions on the amounts being deducted. The purchase price for the
common stock is 85% of the lesser of the fair market value of the common
stock on (i) the first day of the period, or (ii) the last day of the
period. No employee may purchase common stock under the Employee Stock
Purchase Plan valued at more than $25 for each calendar year.
Under the Employee Stock Purchase Plan, the Company sold 12 shares of
common stock to 173 employees pursuant to options granted on August 1,
1999, and exercised on July 30, 2000. Because the plan year overlaps the
Company's fiscal year, the number of shares to be sold pursuant to
options granted on August 1, 2000, can only be estimated because the
2000 plan year is not yet complete. The Company's estimate of options
granted in 2000 under the Plan is based on the number of shares sold to
employees under the Plan for the 1999 plan year, adjusted to reflect the
change in the number of employees participating in the Plan in 2000.
44
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
10. Stock-Based Compensation Plans (cont'd)
------------------------------
A summary of the status of the Company's stock options under the
Employee Stock Purchase Plan as of December 31, 2000, 1999 and 1998 and
the changes during the year ended on those dates is presented below:
2000 1999 1998
-------------------- --------------------- ---------------------
Weighted Weighted Weighted
# of Shares Average # of Shares Average # of Shares Average
Underlying Exercise Underlying Exercise Underlying Exercise
Options Prices Options Prices Options Prices
Outstanding at beginning
of the year 9 $19.00 5 $24.00 8 $14.60
Adjustment to prior year
estimated grants 3 $19.00 2 $24.00 0 $14.60
Granted 16 $19.50 9 $23.90 5 $31.45
Exercised 12 $19.00 7 $24.00 8 $14.60
Forfeited - - - - - -
Expired - - - - - -
Outstanding at end
of year 16 $19.50 9 $23.90 5 $31.45
Exercisable at end
of year - - - - - -
Weighted-average
Fair value per share
of options granted
during the year $7.79 $8.67 $12.16
Had the compensation cost for the Company's stock-based compensation
plans been determined consistent with SFAS 123, the Company's net
earnings and earnings per common share for 2000, 1999 and 1998 would
approximate the pro forma amounts presented below:
2000 1999 1998
-------- ------- -------
Net earnings:
As reported .............. $19,164 $14,976 $10,518
Pro-forma ................ $18,286 $14,451 $10,087
Earnings per common share:
As reported
Basic ................ $1.77 $ 1.74 $1.41
Diluted .............. $1.75 $ 1.72 $1.40
Pro-forma
Basic ................ $1.69 $ 1.68 $1.35
Diluted .............. $1.67 $ 1.66 $1.34
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. The Company anticipates making awards in
the future under its stock-based compensation plans.
45
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
11. Fair Values of Financial Instruments
------------------------------------
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and Cash Equivalents - The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Long-Term Debt - The carrying amounts of the Company's borrowings under
its line of credit agreements and other long-term debt approximates fair
value, based upon current interest rates.
Interest Rate Swaps - The carrying amounts of the Company's interest
rate swaps are a payable of an approximate mark-to-market value of $558
and $77, at December 31, 2000 and 1999, respectively, using current
interest rates.
12. Commitments and contingencies
-----------------------------
Hollywood Park received cease and desist orders from the California
Regional Water Quality Control Board addressing storm water runoff and
dry weather discharge issues. We retained an engineering firm to develop
a plan for compliance and to construct certain drainage and waste
disposal systems. The construction of the system has been completed. As
part of the 1999 asset acquisition of Hollywood Park, the seller agreed
to indemnify our Company in the amount of $5.0 million for costs
incurred in relation to the waste water runoff issue. Amounts under the
indemnification have been expended and the ultimate cost to the Company
was $1.7 million, incurred during 2000.
The septic system at the Ellis Park facility must be replaced with
hook-up to city sewers. The cost of the hook-up is estimated by the city
of Henderson, Kentucky to be $1.2 million. Ellis Park will seek partial
reimbursement from the state of Kentucky. The project is estimated to be
completed by November 2001.
It is not anticipated that the Company will have any material liability
as a result of compliance with environmental laws with respect to any of
the Company's property. Except as discussed herein, compliance with
environmental laws has not affected the ability to develop and operate
the Company's properties and the Company is not otherwise subject to any
material compliance costs in connection with federal or state
environmental laws.
46
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
13. Earnings Per Common Share Computations
--------------------------------------
The following is a reconciliation of the numerator and denominator of
the earnings per common share computations:
2000 1999 1998
---- ---- ----
Net earnings (numerator) amounts used
for basic and diluted per share $19,164 $14,976 $10,518
======= ======= =======
Weighted average shares (denominator) of
common stock outstanding per share
computations:
Basic 10,849 8,598 7,460
Plus dilutive effect of stock options 91 120 79
------ ----- -----
Diluted 10,940 8,718 7,539
====== ===== =====
Earnings per common share:
Basic $1.77 $1.74 $1.41
Diluted $1.75 $1.72 $1.40
Options to purchase approximately 73, 47 and 41 shares for the years
ended December 31, 2000, 1999 and 1998, respectively, were not included
in the computation of earnings per common share-assuming dilution
because the options' exercise prices were greater than the average
market price of the common shares.
47
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
14. Segment Information
-------------------
The Company has adopted SFAS No. 131 "Disclosures about Segments of an
Enterprise and Related Information." The Company has determined that it
currently operates in the following seven segments: (1) Churchill Downs
racetrack and the Louisville Sports Spectrum simulcast facility (2)
Hollywood Park racetrack and its on-site simulcast facility (3) Calder
Race Course (4) Arlington Park and its OTBs (5) Ellis Park racetrack and
its on- site simulcast facility, (6) Hoosier Park racetrack and its
on-site simulcast facility and the other three Indiana simulcast
facilities and (7) Other investments, including CBT and the Company's
other various equity interests, which are not material. Eliminations
include the elimination of management fees and other intersegment
transactions. As a result of a reorganization for internal reporting
during 2000, the Company's segment disclosures are presented on a new
basis to correspond with internal reporting for corporate revenues and
expenses which, for the years ended December 31, 2000 and 1999, are now
reported separate of Churchill Downs racetrack revenues and expenses.
The Company did not track corporate revenues and expenses during 1998,
therefore, corporate revenues and expenses for 1998 are not reported
separate of Churchill Downs racetrack reveneus and expenses.
Most of the Company's revenues are generated from commissions on
pari-mutuel wagering at the Company's racetracks and OTBs, plus
simulcast fees, Indiana riverboat admissions subsidy revenue,
admissions, concessions revenue, sponsorship revenues, licensing rights
and broadcast fees, lease income and other sources.
The accounting policies of the segments are the same as those described
in the "Summary of Significant Accounting Policies" in the Company's
annual report to stockholders for the year ended December 31, 2000.
Earnings before interest, taxes, depreciation and amortization
("EBITDA") should not be considered as an alternative to, or more
meaningful than, net income (as determined in accordance with accounting
principles generally accepted in the United States of America) as a
measure of our operating results or cash flows (as determined in
accordance with accounting principles generally accepted in the United
States of America) or as a measure of our liquidity.
48
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
14. Segment Information (cont'd)
-------------------
The table below presents information about reported segments for the years ended
December 31, 2000, 1999 and 1998:
December 31,
------------
2000 1999 1998
---- ---- ----
Net revenues:
Churchill Downs $ 89,547 $ 82,429 $ 80,925
Hollywood Park 105,628 30,494 -
Calder Race Course 77,552 72,418 -
Arlington Park 14,781 - -
Hoosier Park 51,250 51,280 47,744
Ellis Park 16,119 19,653 17,386
Other investments 13,069 6,151 2,497
-------- --------- ---------
367,946 262,425 148,552
Corporate revenues 778 - -
Eliminations (6,708) (3,998) (1,252)
--------- --------- ---------
$362,016 $258,427 $147,300
========= ========= =========
EBITDA:
Churchill Downs $21,715 $17,789 $14,416
Hollywood Park 18,898 3,842 -
Calder Race Course 16,718 17,946 -
Arlington Park (427) - -
Hoosier Park 5,920 6,423 5,599
Ellis Park 936 2,071 2,305
Other investments 7,815 1,314 909
-------- -------- -------
71,575 49,385 23,229
Corporate expenses (8,486) (5,679) -
-------- -------- -------
$63,089 $43,706 $23,229
======== ======== =======
Operating income (loss):
Churchill Downs $17,857 $14,240 $10,700
Hollywood Park 14,407 2,574 -
Calder Race Course 13,397 15,564 -
Arlington Park (1,133) - -
Hoosier Park 4,538 5,246 4,499
Ellis Park (481) 721 1,422
Other investments 6,252 (153) 522
-------- -------- -------
54,837 38,192 17,143
Corporate expenses (8,259) (5,679) -
-------- -------- -------
$46,578 $32,513 $17,143
======== ======== =======
49
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(in thousands, except per share data)
14. Segment Information (cont'd)
-------------------
As of December 31,
-----------------
2000 1999 1998
---- ---- ----
Total Assets:
Churchill Downs $358,081 $345,909 $ 89,427
Hollywood Park 174,232 153,126 -
Calder Race Course 127,666 114,396 -
Arlington Park 74,554 - -
Hoosier Park 32,718 32,559 31,732
Ellis Park 21,381 25,015 23,038
Other investments 45,390 312,272 71,109
--------- --------- ---------
834,022 983,277 215,306
Eliminations (364,018) (585,231) (100,655)
--------- --------- ---------
$470,004 $398,046 $114,651
========= ========= =========
Following is a reconciliation of total EBITDA to income before provision for
income taxes:
December 31,
-----------
2000 1999 1998
---- ---- ----
Total EBITDA $63,089 $43,706 $23,229
Depreciation and amortization (16,677) (10,859) (5,744)
Interest income (expense), net (13,825) (6,992) (216)
-------- -------- --------
Earnings before provision
for income taxes $32,587 $25,855 $17,269
======== ======== ========
50
Supplementary Financial Information(Unaudited) Common Stock Information
(In thousands, except per share data) Per Share of Common Stock
-------------------------------------------------
Operating Net Basic Diluted
Net Income Earnings Earnings Earnings Bid Price
Revenues (Loss) (Loss) (Loss) (Loss) Dividends High Low
-------- ------- ------- ------ ------ --------- ---- ---
2000 $362,016 $46,578 $19,164 $1.77 $1.75
Fourth Quarter $100,897 $6,806 $2,286 $0.18 $0.17 $0.50 $35.69 $25.25
Third Quarter 103,536 15,824 7,303 0.69 0.68 25.88 21.69
Second Quarter 131,938 35,488 18,340 1.86 1.85 26.00 21.75
First Quarter 25,645 (11,540) (8,765) (0.89) (0.89) 26.25 21.00
- --------------------------------------------------------------------------------------------------
1999 $258,427 $32,513 $14,976 $1.74 $1.72
Fourth Quarter $93,548 $8,784 $3,128 $0.32 $0.31 $0.50 $26.00 $20.13
Third Quarter 63,076 3,635 1,192 0.13 0.12 33.63 22.50
Second Quarter 84,140 24,891 13,666 1.82 1.79 35.75 26.00
First Quarter 17,663 (4,797) (3,010) (0.40) (0.40) 38.75 26.25
- --------------------------------------------------------------------------------------------------
1998 $147,300 $17,143 $10,518 $1.41 $1.40
Fourth Quarter $31,242 $(1,291) $(780) $(0.10) $(0.10) $0.50 $36.44 $27.25
Third Quarter 33,299 (1,016) (655) (0.09) (0.09) 41.44 27.63
Second Quarter 67,374 22,220 13,522 1.81 1.79 43.25 24.00
First Quarter 15,385 (2,770) (1,569) (0.21) (0.21) 25.31 19.31
- --------------------------------------------------------------------------------------------------
The Company's Common Stock is traded on the National Association of Securities
Dealers, Inc.'s National Market("Nasdaq") under the symbol CHDN. As of March 14,
2001, there were approximately 3,420 shareholders of record.
Earnings (loss) per share and other per share amounts have been retroactively
adjusted for the 2-for-1 stock split with a record date of March 30, 1998.
On July 20, 1999 the Company issued 2.3 million shares of common stock at a
public offering price of $29 per share.
In September 2000, we issued 3.15 million shares of common stock at a price of
$16.28 related to the Arlington Park merger.
Quarterly earnings (loss) per share figures may not equal total earnings (loss)
per share for the year due in part to the fluctuation of the market price of the
stock.
The above table sets forth the high and low bid quotations (as reported by
Nasdaq) and dividend payment information for the Company's Common Stock during
its last three years.
51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required herein is incorporated by reference from
sections of the Company's Proxy Statement titled "Section 16(a)
Beneficial Ownership Reporting Compliance," "Election of
Directors," and "Executive Officers of the Company," which Proxy
Statement will be filed with the Securities and Exchange
Commission pursuant to instruction G(3) of the General
Instructions to Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from
sections of the Company's Proxy Statement titled "Election of
Directors-Compensation and Committees of the Board of Directors,"
"Compensation Committee Report on Executive Compensation,"
"Compensation Committee Interlocks and Insider Participation,"
"Performance Graph," and "Executive Compensation," which Proxy
Statement will be filed with the Securities and Exchange
Commission pursuant to instruction G(3) of the General
Instructions to Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required herein is incorporated by reference from
the sections of the Company's Proxy Statement titled "Common
Stock Owned by Certain Persons," "Election of Directors" and
"Executive Officers of the Company," which Proxy Statement will
be filed with the Securities and Exchange Commission pursuant to
instruction G(3) of the General Instructions to Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from
the section of the Company's Proxy Statement titled "Certain
Relationships and Related Transactions," which Proxy Statement
will be filed with the Securities and Exchange Commission
pursuant to instruction G(3) of the General Instructions to
Form 10-K.
52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
Pages
(a) (1) Consolidated Financial Statements
The following financial statements of Churchill
Downs Incorporated for the years ended December 31, 2000,
1999 and 1998 are included in Part II, Item 8:
Report of Independent Accountants 28
Consolidated Balance Sheets 29
Consolidated Statements of Earnings 30
Consolidated Statements of Shareholders' Equity 31
Consolidated Statements of Cash Flows 32
Notes to Consolidated Financial Statements 33-50
(2) Schedule VIII - Valuation and Qualifying Accounts 55
All other schedules are omitted because they are not
applicable, not significant or not required, or because
the required information is included in the financial
statement notes thereto.
(3) For the list of required exhibits, see exhibit index.
(b) Reports on Form 8-K:
(1) Churchill Downs Incorporated filed a Current Report on Form
8-K dated Septmeber 30, 2000, amended by Form 8-K/A filed
on November 21, 2000, reporting, under Item 2, the closing
of the transactions pursuant to the agreement and plan of
merger with Duchossois Industries, Inc., Arlington
International Racecourse, Inc., Arlington Management
Services, Inc., and Turf Club of Illinois, Inc. Pursuant to
the Form 8-K/A, financial statements were filed for Arlington
International as of December 31, 1999 and June 30,2000, and
for the periods ended June 30, 1999 and 2000 and pro foroma
financial statements were filed for the six month period
ended June 30, 2000 and for the year ended December 31, 1999.
(2) Churchill Downs Incorporated filed a Current Report on
Form 8-K on October 26, 2000, under Item 5, "Other Events",
reporting on Churchill Downs Incorporated third quarter
results for 2000.
(c) Exhibits
See exhibit index.
(d) All financial statements and schedules except those items
listed under items 14(a)(l) and (2) above are omitted
because they are not applicable, or not required, or
because the required information is included in the
financial statements or notes thereto.
53
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CHURCHILL DOWNS INCORPORATED
/s/Thomas H. Meeker
-----------------------------
Thomas H. Meeker
President and Chief Executive
Officer
March 16, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/Thomas H. Meeker /s/Robert L. Decker /s/Michael E. Miller
- --------------------------------- ---------------------------- ------------------------------
Thomas H. Meeker, President and Robert L. Decker, Michael E. Miller,
Chief Executive Officer Executive Vice President and Senior Vice President, Finance
March 16, 2001 Chief Financial Officer March 16, 2001
(Director and Principal Executive March 16, 2001 (Principal Accounting Officer)
Officer) (Principal Financial Officer)
/s/Charles W. Bidwill, Jr. /s/Craig J. Duchossois
- --------------------------------- ---------------------------- ------------------------------
William S. Farish Charles W. Bidwill, Jr. Craig J. Duchossois
March 16, 2001 March 16, 2001 March 16, 2001
(Director) (Director) (Director)
/s/Richard L. Duchossois /s/Richard L. Fealy /s/J. David Grissom
- --------------------------------- ---------------------------- ------------------------------
Richard L. Duchossois Richard L. Fealy J. David Grissom
March 16, 2001 March 16, 2001 March 16, 2001
(Director) (Director) (Director)
/s/Seth W. Hancock /s/Daniel P. Harrington /s/Frank B. Hower, Jr.
- --------------------------------- ---------------------------- ------------------------------
Seth W. Hancock Daniel P. Harrington Frank B. Hower, Jr.
March 16, 2001 March 16, 2001 March 16, 2001
(Director) (Director) (Director)
/s/G. Watts Humphrey, Jr. /s/Brad M. Kelley /s/Carl F. Pollard
- --------------------------------- ---------------------------- ------------------------------
G. Watts Humphrey, Jr. Brad M. Kelley Carl F. Pollard
March 16, 2001 March 16, 2001 March 16, 2001
(Director) (Director) (Director)
/s/Darrell R. Wells
- --------------------------------- ----------------------------
Dennis D. Swanson Darrell R. Wells
March 16, 2001 March 16, 2001
(Director) (Director)
54
CHURCHILL DOWNS INCORPORATED
SCHEDULE VIII. - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Balance, Charged Balance,
Beginning to End
Description of Period Expenses Deductions of Period
- ----------- --------- -------- ---------- ---------
Year ended December 31, 2000:
Allowance for doubtful
account and notes receivable $253 $312 $(25) $540
==== ==== ===== ====
Year ended December 31, 1999:
Allowance for doubtful
account and notes receivable $121 $272 $(140) $253
==== ==== ====== ====
Year ended December 31, 1998:
Allowance for doubtful
account and notes receivable $176 $ 1 $ (56) $121
Valuation allowance for
deferred tax asset * 173 - (173) -
---- ---- ------ ----
$349 $ 1 $(229) $121
==== ==== ====== ====
* Adjustments taken to income represent reversals of valuation allowance
previously established for state net operating loss carryforwards.
55
EXHIBIT INDEX
Numbers Description By Reference To
------- ----------- ---------------
(2)(a) Stock Purchase Agreement and Joint Escrow Exhibit 2.1 to Report
Instructions dated as of January 21, 1999 by on Form 8-K dated
and among Churchill Downs Incorporated and KE April 23, 1999
Acquisition Corp.
(b) First Amendment to Stock Purchase Agreement Exhibit 2.2 to Report
dated as of April 19, 1999 by and between on Form 8-K dated
Churchill Downs Incorporated, Churchill Downs April 23, 1999
Management Company and KE Acquisition Corp.
(c) Agreement and Plan of Merger and Amendment to Exhibit 2.3 to Report
Stock Purchase Agreement dated as of April on Form 8-K dated
22, 1999 by and among Churchill Downs April 23, 1999
Incorporated, Churchill Downs Management
Company, CR Acquisition Corp., TP Acquisition
Corp., Calder Race Course, Inc., Tropical Park,
Inc. and KE Acquisition Corp.
(d) Asset Purchase Agreement dated May 5, 1999 Exhibit 2.1 to
between Hollywood Park, Inc., a Delaware Registration
Corporation, and Churchill Downs Incorporated. Statement on Form S-3
filed May 21, 1999
(No.333-79031)
(e) Amendment No. 1 to Asset Purchase Agreement Exhibit 2.2 to Report
dated as of August 31, 1999 by and among on Form 8-K dated
Churchill Downs Incorporated, Churchill Downs September 10, 1999
California Company and Hollywood Park, Inc.
(f) Stock Purchase Agreement dated as of March 28, Exhibit 2.1 to
1998 between Churchill Downs Incorporated and Current Report on
TVI Corp. Form 8-K dated April
21, 1998
(g) Agreement and Plan of Merger dated as of Exhibit 2.2 to
April 17,1998 by and among TVI Corp., Racing Current Report on
Corporation of America, Churchill Downs Form 8-K dated
Incorporated and RCA Acquisition Company April 21, 1998
(h) Partnership Interest Purchase Agreement dated Exhibit (2)(h) to
as of February 16, 2000 by and among Anderson Report on Form 10-K
Park, Inc., Churchill Downs Management for the year ended
Company and Centaur, Inc. December 31, 1999
56
(i) Amended and Restated Agreement and Plan of Annex A of the Proxy
Merger dated as of June 23, 2000, as amended Statement for a
as of July 14, 2000, by and among Churchill Special Meeting of
Downs Incorporated, Duchossois Industries, Shareholders of
Inc., A. Acquisition Corp., A. Management Churchill Downs
AcquisitionCorp., T. Club Acquisition Corp., Incorporated held
Arlington International Racecourse, Inc., September 8, 2000
Arlington Management Services, Inc., and Turf
Club of Illinois, Inc.
(3)(a) Amended and Restated Articles of Exhibit (3)(a) to
Incorporation of Churchill Downs Incorporated Report on Form 10-K
for the year ended
December 31, 1999
(b) Restated Bylaws of Churchill Downs Exhibit (3) to Report
Incorporated as amended on Form 10-Q for the
fiscal quarter ended
September 30, 2000
(4)(a) Rights Agreement dated as of March 19, 1998 Exhibit 4.1 to
between Churchill Downs, Inc. and Bank of Current Report on
Louisville Form 8-K dated March
19, 1998
(b) Amendment No. 2 to Rights Agreement dated as Exhibit 4.1 to the
of June 23, 2000, between Churchill Downs Registrant's
Incorporated and Fifth Third Bank, as Rights Registration
Agent Statement on Form
8-A/A dated June 30,
2000
(c) Amendment No. 3 to Rights Agreement dated as Exhibit 4.1 to the
of September 8, 2000, between Churchill Downs Registrant's
Incorporated and Fifth Third Bank, as Rights Registration
Agent Statement on Form
8-A/A dated September
13, 2000
(10)(a) $250,000,000 Revolving Credit Facility Credit Exhibit (10)(a) to
Agreement between Churchill Downs Report on Form 10-Q
Incorporated, and the guarantors party for the fiscal
thereto, and the Banks party thereto and PNC quarter ended March
Bank, National Association, as Agent, and 31, 1999
CIBC Oppenheimer Corp., as Syndication Agent,
and Bank One, Kentucky, N.A., as Documentation
Agent, dated as of April 23, 1999
(b) First Amendment to $250,000,000 Revolving Exhibit (10)(b) to
Credit Facility Credit Agreement dated Report on Form 10-Q
April 30, 1999 for the fiscal
quarter ended March
31, 1999
(c) Second Amendment to $250,000,000 Revolving Exhibit (10)(c) to
Report on Credit Facility Credit Agreement Form 10-Q for the
dated June 14, 1999 fiscal quarter ended
June 30, 1999
57
(d) Third Amendment, Waiver and Consent to Exhibit (10)(d) to
$250,000,000 Revolving Credit Facility Credit Report on Form 10-K
Agreement dated February 23, 2000 for the year ended
December 31, 1999
(e) Fourth Amendment to $250,000,000 Revolving Exhibit (10)(a) to
Credit Facility Credit Agreement dated Report on Form 10-Q
May 12, 2000 for the fiscal
quarter ended
June 30, 2000
(f) Fifth Amendment to $250,000,000 Revolving Exhibit (10)(b) to
Credit Facility Credit Agreement dated Report on Form 10-Q
June 19, 2000 for the fiscal
quarter ended
June 30, 2000
(g) Sixth Amendment to $250,000,000 Revolving Page 60, Report on
Credit Facility Credit Agreement dated Form 10-K for the
March 15, 2001 year ended
December 31, 2000
(h) Underwriting agreement for 2,000,000 shares Exhibit 1.1 to
of Churchill Downs Incorporated common stock Registration
between Churchill Downs Incorporated and CIBC Statement on Form
World Markets Corporation, Lehman Brothers, S-3/A filed
Inc.,JC Bradford & Co., J.J.B. Hilliard, W.L. July 15, 1999
Lyons, Inc.on behalf of several underwriters (No. 333-79031)
(i) Casino Lease Agreement dated as of September Exhibit 10.1 to
10, 1999 by and between Churchill Downs Report on Form 8-K
California Company and Hollywood Park, Inc. dated September
10, 1999
(j) Churchill Downs Incorporated Amended and Exhibit (10)(a) to
Restated Supplemental Benefit Plan dated Report on Form 10-K
December 1, 1998 * for the year ended
December 31, 1998
(k) Employment Agreement dated as of October 1, Exhibit (19)(a) to
1984, with Thomas H. Meeker, President * Report on Form 10-Q
for fiscal quarter
ended
October 31, 1984
(l) Churchill Downs Incorporated Amended and Exhibit (10) to
Restated Incentive Compensation Plan (1997) * Report on Form 10-Q
for the fiscal
quarter ended
September 30, 2000
(m) Churchill Downs Incorporated 1993 Stock Exhibit (10)(h) to
Option Plan * Report on Form 10-K
for the eleven months
ended
December 31, 1993
(n) Amendment No. 1 to Churchill Downs Exhibit (10)(g) to
Incorporated 1993 Stock Option Plan * Report on Form 10-K
for the year ended
December 31, 1994
(o) Amendment No. 2 to Churchill Downs Exhibit (10)(m) to
Incorporated 1993 Stock Option Plan * Report on Form 10-K
for the year ended
December 31, 1997
58
(p) Amendment of Employment Agreement with Report on Form 10-K
Thomas H. Meeker, President, dated for the fiscal year
October 1, 1984 * ended January 31,
1986; Report on Form
10-K for the fiscal
year ended January
31, 1987; 1988, 1990,
1991, 1992 and 1993
(q) Amended and Restated Lease Agreement dated Exhibit (10)(i) to
January 31, 1996 Report on Form 10-K
for the year ended
December 31, 1995
(r) Partnership Interest Purchase Agreement dated Exhibit (10)(k) to
December 20, 1995 among Anderson Park, Inc., Report on Form 10-K
Conseco HPLP, LLC, Pegasus Group, Inc. and for the year ended
Hoosier Park, L.P. December 31, 1995
(s) Employment Agreement between Churchill Downs Exhibit (10)(l) to
Incorporated and Robert L. Decker * Report on Form 10-Q
for the fiscal
quarter ended
March 31, 1997
(t) Churchill Downs Incorporated, Amended and Exhibit (10)(n) to
Restated Deferred Compensation Plan for Report on Form 10-K
Employees and Directors * for the year ended
December 31, 1998
(u) Amended and Restated Churchill Downs Exhibit (99) to
Incorporated 1997 Stock Option Plan * Registrants'
Registration
Statement on Form S-8
dated
August 10, 2000
(v) Form of Stockholder's Agreement dated Annex C of the Proxy
September 8, 2000 among Churchill Downs Statement for a
Incorporated and Duchossois Industries, Inc. Special Meeting of
Shareholders of
Churchill Downs
Incorporated held
September 8, 2000
(21) Subsidiaries of the registrant Page 74, Report on
Form 10-K for the
year ended
December 31, 2000
(23) Consent of PricewaterhouseCoopers, LLP Page 75, Report on
Independent Accountants Form 10-K for the
year ended
December 31, 2000
*Management contract or compensatory plan or arrangement.
59
WAIVER AND SIXTH AMENDMENT
to
$250,000,000 REVOLVING CREDIT FACILITY
CREDIT AGREEMENT
by and among
CHURCHILL DOWNS INCORPORATED, as the Borrower,
and
THE GUARANTORS PARTY HERETO
and
THE BANKS PARTY HERETO
and
PNC BANK, NATIONAL ASSOCIATION, As Agent,
and
CIBC OPPENHEIMER CORP., As Syndication Agent.
and
BANK ONE, KENTUCKY, N.A., As Documentation Agent
Dated as of March 15, 2001
60
THIS WAIVER AND SIXTH AMENDMENT TO $250,000,000 REVOLVING CREDIT
FACILITY CREDIT AGREEMENT (the "Sixth Amendment") dated as of March 15, 2001, by
and among CHURCHILL DOWNS INCORPORATED, as the Borrower (the "Borrower"), the
GUARANTORS party to the Credit Agreement (as hereinafter defined), the BANKS
party to the Credit Agreement (as hereinafter defined) and PNC BANK, NATIONAL
ASSOCIATION, as the Agent (the "Agent"), and CIBC OPPENHEIMER CORP., as
Syndication Agent and BANK ONE, KENTUCKY, N.A., as Documentation Agent.
WHEREAS, reference is made to the Credit Agreement dated April 23, 1999
as amended prior to the date hereof (the "Credit Agreement") described above;
WHEREAS, capitalized terms used herein and not otherwise defined herein
shall have the meanings assigned to such terms in the Credit Agreement;
WHEREAS, the Borrower and the other Loan Parties have granted to the
Agent for the benefit of the Banks a security interest in all trademarks and
other intellectual property owned by them pursuant to Patent, Trademark and
Copyright Security Agreements between the Agent as Assignee and the following
Assignors and dated as follows (the "Intellectual Property Security
Agreements"):
1. Churchill Downs Incorporated, Churchill Downs April 23, 1999
Management Company, Churchill Downs Investment
Company, Racing Corporation of America and Ellis
Park Race Course, Inc.
2. Calder Race Course, Inc. and Tropical Park, Inc. April 23, 1999
3. Churchill Downs California Company, Churchill September 10, 1999
Downs California Fall Operating Company and
Churchill Downs California Food Services Company
4. Arlington International Racecourse, Inc. September 8, 2000
Arlington Management Services, Inc., Turf Club
of Illinois, Inc., Arlington Global Services,
Inc., Arlington OTB Corp., KFI Corporation and
Quad City Downs, Inc.
WHEREAS, the Borrower has caused the following new direct and indirect
Subsidiaries to be formed (the "New Subsidiaries Formation"):
1. CDIP Holdings, LLC ("CDIP Holdings"), a Kentucky limited liability
company owned 99% by Borrower and 1% by Churchill Downs Management
Company; and
2. CDIP, LLC ("CDIP"), a Kentucky limited liability company owned 100%
by CDIP Holdings;
61
WHEREAS, for various business reasons, the Borrower and the other Loan
Parties desire to abandon the trademarks set forth on Schedule A attached hereto
(the "Trademark Abandonment") and to transfer certain of their remaining
trademarks set forth on Schedule B attached hereto to CDIP Holdings which will
in turn transfer such property to CDIP (the "Intellectual Property Transfer");
WHEREAS, CDIP will own the intellectual property transferred to it (the
"Transferred Intellectual Property") and will license its use to those Loan
Parties which need to use it (the "Intellectual Property Licensing");
WHEREAS, the Borrower and the other Loan Parties desire that CDIP
Holdings and CDIP each join the Credit Agreement and the other Loan Documents to
which the Guarantors are parties as a Guarantor pursuant to Sections 7.2.5 and
10.18 and in compliance with all other provisions of the Credit Agreement and
the other Loan Documents (the "Joinder") and in connection therewith have
requested that: (i) the Banks consent to the New Subsidiaries Formation and the
Joinder; (ii) the Agent on behalf of the Banks consent to the Trademark
Abandonment, the Intellectual Property Transfer and the Intellectual Property
Licensing pursuant to Paragraphs 4, 6, 7 and 11 of the Intellectual Property
Security Agreements and waive any prior violations thereof; (iii) the Banks
waive the application of Sections 7.2.6 and 7.2.7 of the Credit Agreement,
including any prior violations, thereof, and also waive any prior violations of
Sections 5.1.14, 5.1.15, 5.1.17, 7.2.4, 7.2.5, 7.2.8 and 10.18 to the extent
necessary to permit the New Subsidiaries Formation, the Joinder, the Trademark
Abandonment, the Intellectual Property Transfer and the Intellectual Property
Licensing, and (iv) Section 7.2.6 of the Credit Agreement be amended; and the
Agent and the Banks are willing to do so on the terms and conditions more fully
provided herein.
NOW, THEREFORE, the parties hereto, in consideration of their mutual
covenants and agreements hereinafter set forth and intending to be legally bound
hereby, covenant and agree as follows:
1. Waivers and Consents Under Credit Agreement and Intellectual Property
Security Agreements
Subject to the conditions contained in this Sixth Amendment:
A. The Banks hereby consent to the New Subsidiaries Formation and
the Joinder;
B. The Agent on behalf of the Banks hereby consents to the
Trademark Abandonment, the Intellectual Property Transfer and the Intellectual
Property Licensing pursuant to Paragraphs 4, 6, 7 and 11 of the Intellectual
Property Security Agreements and waives any prior violations thereof; and
C. The Banks hereby waive the application of Sections 7.2.6 and
7.2.7 of the Credit Agreement, including any prior violations thereof, and also
waive any prior violations of Sections 5.1.14, 5.1.15, 5.1.17, 7.2.4, 7.2.5,
7.2.8 and 10.18 to the extent necessary to permit the New Subsidiaries
62
Formation, the Joinder, the Trademark Abandonment, the Intellectual Property
Transfer and the Intellectual Property Licensing.
2. Amendment of Section 7.2.6 of Credit Agreement
Section 7.2.6 (Dispositions of Assets or Subsidiaries) is hereby
amended and restated to read as follows:
Each of the Loan Parties shall not, and shall not permit
any of its Subsidiaries (other than Excluded Subsidiaries) to, sell,
convey, assign, lease, abandon or otherwise transfer or dispose of,
voluntarily or involuntarily, any of its properties or assets, tangible or
intangible (including sale, assignment, discount or other disposition of
accounts, contract rights, chattel paper, equipment or general
intangibles with or without recourse or of capital stock, shares of
beneficial interest, partnership interests or limited liability company
interests of a Subsidiary of such Loan Party), except:
(i) any sale, transfer or lease of assets in the
ordinary course of business which are no longer necessary or required in
the conduct of such Loan Party's or such Subsidiary's business;
(ii) transactions involving the sale or use for a
fee of simulcast signals or other assets or rights in the ordinary course
of business;
(iii) any sale, transfer or lease of assets,
excluding real estate, by any Loan Party or wholly owned Subsidiary of
such Loan Party to another Loan Party provided that the Loan Parties
comply with the warranties relating to perfection of the Liens of the
Agent in the Collateral contained in Sections 5.1.14, 5.1.15 and 5.1.17
and deliver any documentation required to perfect the Liens in such assets
at least five (5) Business Days before such sale, transfer or lease; and
(iv) any lease of real estate having an area not in
excess of ten thousand (10,000) square feet.
3. Warranties
The Loan Parties, jointly and severally, represent and warrant as
follows:
A. Recitals.
The recitals hereto are true and correct in all material
respects.
B. Incorporation into Credit Agreement.
63
The representations and warranties in this Section 3 are
incorporated in Section 5 of the Credit Agreement and any breach of such
representations or warranties is a breach under Section 5 of the
Credit Agreement.
C. Other Warranties Under the Credit Agreement.
The other representations and warranties of Loan Parties
contained in the Credit Agreement, after giving effect to the amendments thereto
on the date hereof, are true and correct on and as of the date hereof with the
same force and effect as though made by the Loan Parties on such date, except to
the extent that any such representation or warranty expressly relates solely to
a previous date. The Loan Parties are in compliance with all terms, conditions,
provisions, and covenants contained in the Credit Agreement.
D. No Event of Default.
No event has occurred and is continuing and no condition
exists or will exist after giving effect to this Sixth Amendment and the
transactions contemplated herein which constitutes an Event of Default or
Potential Default.
4. Conditions to Effectiveness.
This Sixth Amendment shall become effective provided that each of
the following conditions is satisfied as of the date set forth in such
condition:
A. Representations and Warranties.
Each of the representations and warranties of the Loan
Parties under Section 3 hereof shall be true and correct on the Sixth Amendment
Effective date, as that term is defined herein.
B. Opinion of Counsel.
On or before the Sixth Amendment Effective Date, there shall
be delivered to the Agent for the benefit of each Bank written opinions of
Wyatt, Tarrant & Combs, LLP and Rebecca C. Reed, counsel for the Loan Parties,
in each case dated the Sixth Amendment Effective Date as to the warranties
listed in Exhibit 4(B) hereto as such warranties relate to this Sixth Amendment
and the documents executed in connection herewith and the consents required for
this Sixth Amendment and such other documents.
C. Execution by Required Banks, Agent and Loan Parties.
On or before the Sixth Amendment Effective Date, this
Sixth Amendment shall have been executed by the Required Banks, the Agent and
the Loan Parties.
D. Delivery of Documents.
64
On or before the Sixth Amendment Effective Date, there shall
have been delivered to the Agent for the benefit of each Bank:
(1) A Guarantor Joinder and Assumption Agreement in
substantially the form attached as Exhibit 1.1
(G)(1) to the Credit Agreement executed by CDIP
Holdings and CDIP pursuant to which CDIP Holdings
and CDIP each join the Credit Agreement and the
other Loan Documents to which the Guarantors are
parties as a Guarantor;
(2) A Patent, Trademark and Copyright Security
Agreement in substantially the form attached as
Exhibit 1.1(P(1) to the Credit Agreement executed by
CDIP Holdings and CDIP covering the Transferred
Intellectual Property and other Collateral described
therein;
(3) Executed financing statements and other documents in
form and substance satisfactory to the Agent and its
counsel necessary to grant and perfect Prior
Security Interests to the Agent for the benefit of
the Banks in all Collateral held by CDIP Holdings
and CDIP and in the ownership interests in CDIP
Holdings and CDIP.
(4) A certificate signed by the Secretary or other
appropriate officer of CDIP Holdings and CDIP
certifying for each entity: (a) as to all limited
liability company action taken by such entity in
connection with the execution and delivery of the
Guarantor Joinder and Assumption Agreement, the
Patent, Trademark and Copyright Security
Agreement and the other documents required
hereunder; (b) the names of the officers authorized
to sign the Guarantor Joinder and Assumption
Agreement, the Patent, Trademark and Copyright
Security Agreement and the other documents required
hereunder and the true signatures of such officers,
and (c) copies of its organizational documents,
including its Articles of Organization and Operating
Agreement in effect on the date hereof certified by
the appropriate state official where such documents
are filed in a state office together with a
certificate from the appropriate state official
as to its continued existence and good standing in
each state where organized or qualified to do
business.
(5) Evidence in form and substance satisfactory to the
Agent and its counsel that all necessary consents
65
of regulatory boards or commissions to the
transactions contemplated hereunder have been
obtained.
(6) Copies of all agreements pertaining to the
transactions contemplated hereunder and such other
information pertaining thereto as the Agent may
reasonably require.
5. References to Credit Agreement, Loan Documents.
Any reference to the Credit Agreement or other Loan Documents in
any document, instrument, or agreement shall hereafter mean and include the
Credit Agreement or such Loan Document, including such schedules and exhibits,
as amended hereby. In the event of irreconcilable inconsistency between the
terms or provisions hereof and the terms or provisions of the Credit Agreement
or such Loan Document, including such schedules and exhibits, the terms and
provisions hereof shall control.
6. Force and Effect.
Each Loan Party reconfirms, restates, and ratifies the Credit
Agreement and all other documents executed in connection therewith except to the
extent any such documents are expressly modified by this Sixth Amendment and
each Loan Party confirms that all such documents have remained in full force and
effect since the date of their execution.
7. Governing Law.
This Sixth Amendment shall be deemed to be a contract under the
laws of the Commonwealth of Kentucky and for all purposes shall be governed by
and construed and enforced in accordance with the internal laws of the
Commonwealth of Kentucky without regard to its conflict of laws principles.
8. Counterparts; Effective Date.
This Sixth Amendment may be signed in any number of counterparts
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument. This Sixth Amendment shall become
effective when it has been executed by the Agent, the Loan Parties and the
Required Banks and each of the other conditions set forth in Section 4 of this
Sixth Amendment has been satisfied (the "Sixth Amendment Effective Date").
[SIGNATURE PAGES TO FOLLOW]
66
[SIGNATURE PAGE 1 OF 6 TO WAIVER AND SIXTH AMENDMENT]
IN WITNESS WHEREOF, the parties hereto, by their officers thereunto duly
authorized, have executed this Sixth Amendment as of the day and year above
written.
BORROWER:
CHURCHILL DOWNS INCORPORATED
By:
--------------------------------
Title:
--------------------------------
GUARANTORS:
CHURCHILL DOWNS MANAGEMENT
COMPANY
By:
--------------------------------
Title:
--------------------------------
CHURCHILL DOWNS INVESTMENT
COMPANY
By:
--------------------------------
Title:
--------------------------------
RACING CORPORATION OF AMERICA
By:
--------------------------------
Title:
--------------------------------
ELLIS PARK RACE COURSE, INC.
By:
--------------------------------
Title:
--------------------------------
67
[SIGNATURE PAGE 2 OF 6 TO WAIVER AND SIXTH AMENDMENT]
CALDER RACE COURSE, INC.
By:
--------------------------------
Title:
--------------------------------
TROPICAL PARK, INC.
By:
--------------------------------
Title:
--------------------------------
CHURCHILL DOWNS CALIFORNIA
COMPANY
By:
--------------------------------
Title:
--------------------------------
CHURCHILL DOWNS CALIFORNIA FALL
OPERATING COMPANY
By:
--------------------------------
Title:
--------------------------------
CHURCHILL DOWNS CALIFORNIA FOOD
SERVICES COMPANY
By:
--------------------------------
Title:
--------------------------------
68
[SIGNATURE PAGE 3 OF 6 TO WAIVER AND SIXTH AMENDMENT]
ARLINGTON INTERNATIONAL
RACECOURSE, INC.
By:
--------------------------------
Title:
--------------------------------
ARLINGTON MANAGEMENT SERVICES,
INC.
By:
--------------------------------
Title:
--------------------------------
TURF CLUB OF ILLINOIS, INC.
By:
--------------------------------
Title:
--------------------------------
ARLINGTON GLOBAL SERVICES, INC.
By:
--------------------------------
Title:
--------------------------------
ARLINGTON OTB CORP.
By:
--------------------------------
Title:
--------------------------------
69
[SIGNATURE PAGE 4 OF 6 TO WAIVER AND SIXTH AMENDMENT]
KFI CORPORATION
By:
--------------------------------
Title:
--------------------------------
QUAD CITY DOWNS, INC.
By:
--------------------------------
Title:
--------------------------------
70
[SIGNATURE PAGE 5 OF 6 TO WAIVER AND SIXTH AMENDMENT]
BANKS AND AGENT
PNC BANK, NATIONAL ASSOCIATION,
individually and as Agent
By:
--------------------------------
Title:
--------------------------------
BANK ONE, KENTUCKY, NA
By:
--------------------------------
Title:
--------------------------------
CIBC INC.
By:
--------------------------------
Title:
--------------------------------
COMERICA BANK
By:
--------------------------------
Title:
--------------------------------
FIFTH THIRD BANK
By:
--------------------------------
Title:
--------------------------------
71
[SIGNATURE PAGE 6 OF 6 TO WAIVER AND SIXTH AMENDMENT]
NATIONAL CITY BANK OF KENTUCKY
By:
--------------------------------
Title:
--------------------------------
FIRSTAR BANK, N.A.
By:
--------------------------------
Title:
--------------------------------
BANK OF LOUISVILLE
By:
--------------------------------
Title:
--------------------------------
FIFTH THIRD BANK INDIANA
By:
--------------------------------
Title:
--------------------------------
WELLS FARGO BANK
By:
--------------------------------
Title:
--------------------------------
72
EXHIBIT 4(B)
OPINION OF COUNSEL
The opinion of Rebecca C. Reed shall confirm that the recitals
hereto are true and correct in all material respects and that the other matters
contained in the warranties in Section 3(C) hereto are true and the opinion of
Wyatt, Tarrant & Combs, LLP shall confirm that the following representations and
warranties in the Credit Agreement are true and correct as such warranties
relate to this Sixth Amendment and the Credit Agreement as amended by this Sixth
Amendment:
Credit Agreement
----------------
Section Warranty
------- --------
5.1.1 Organization and Qualification
5.1.2 Capitalization and Ownership
5.1.4 Power and Authority
5.1.5 Validity and Binding Effect
5.1.6 No Conflict
5.1.12 Consents and Approvals
73
State/Jurisdiction of
Subsidiary Incorporation/Organization
- ---------- --------------------------
Churchill Downs Management Company Kentucky
Calder Race Course, Inc. Florida
Tropical Park, Inc Florida
Churchill Downs California Company d/b/a
Hollywood Park California
Churchill Downs California Fall Operating
Company d/b/a Hollywood Park California
Arlington International Racecourse, Inc. d/b/a
Arlington Park Illinois
Hoosier Park, L.P. (limited partnership) Indiana
Ellis Park Race Course, Inc. Kentucky
Racing Corporation of America Delaware
74
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Nos. 33-85012, 333-62013, 33-61111, 333-41376,
and 333-43486) of Churchill Downs Incorporated and its subsidiaries of our
report dated February 27, 2001 relating to the financial statements and
financial statement schedule, which appears in this Form 10-K.
\s\ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Louisville, Kentucky
March 16, 2001
75