SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For Year
Ended December 31, 1996 Commission File No.0-1469
CHURCHILL DOWNS INCORPORATED
Exact name of registrant as specified in its charter
KENTUCKY 61-0156015
- ---------------------- -------------------
State of Incorporation I.R.S Employer
Identification No.
700 CENTRAL AVENUE, LOUISVILLE, KENTUCKY 40208
- ---------------------------------------- -----
Address of Principal Executive Offices Zip Code
Registrant's Telephone Number, Including Area Code 502-636-4400
Securities registered pursuant to Section 12(b) of the Act:
NONE NONE
- ------------------- ---------------------
Title of Each Class 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 27, 1997, 3,654,264 shares of the Registrant's Common Stock were
outstanding, and the aggregate market value of the shares held by nonaffiliates
of the Registrant was $90,000,000.
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on June 19, 1997 are incorporated by reference herein in
response to Items 10, 11, 12 and 13 of Part III of Form 10-K.
The exhibit index is located on pages 53 to 54.
1 of 81
<PAGE>
PART I
ITEM 1. BUSINESS
A. INTRODUCTION
Churchill Downs Incorporated (the "Company") primarily conducts
pari-mutuel wagering on Thoroughbred and Standardbred horse racing at its
facilities in Kentucky and Indiana. The Company owns and operates Churchill
Downs racetrack in Louisville, Kentucky ("Churchill Downs"). Churchill Downs has
conducted Thoroughbred racing continuously since 1875, and is internationally
known as home of the Kentucky Derby. Through its subsidiary, Hoosier Park, L.P.,
the Company is majority owner and operator of Hoosier Park in Anderson, Indiana
("Hoosier Park"), which conducts both Thoroughbred and Standardbred racing. The
Company conducts simulcast wagering on horse racing year-round at its four
Churchill Downs Sports Spectrum facilities ("Sports Spectrum"), as well as its
racetracks, in Kentucky and Indiana.
The Company was organized as a Kentucky corporation in 1928. Its
principal executive offices are located at Churchill Downs, 700 Central Avenue,
Louisville, Kentucky 40208.
B. KENTUCKY OPERATIONS
In Kentucky, the Company conducts Thoroughbred horse racing,
accepts pari-mutuel wagering on such races, and conducts related business
operations at Churchill Downs. The Company also owns and operates the Churchill
Downs Sports Spectrum, its flagship simulcast wagering facility. Both facilities
are located in Louisville, Kentucky.
CHURCHILL DOWNS
RACING
The Company owns and operates Churchill Downs, a legendary sports venue
and one of the premier racetracks in the world. The racetrack was
founded by Col. M. Lewis Clark as the Louisville Jockey Club in 1874,
and began conducting Thoroughbred racing the following year. Churchill
Downs rose to prominence during the first half of this century as the
Kentucky Derby became an internationally renowned classic. Churchill
Downs has also hosted the Breeders' Cup Championship an unprecedented
three times, in 1988, 1991 and 1994. Discussions are currently under way
for the Company to be the host site of the 1998 Breeders' Cup
Championship Day.
The Kentucky Derby and Kentucky Oaks, both annually run the first
weekend in May, continue to be the Company's outstanding events. In
1996, the Company increased the purse for the Kentucky Derby to $1
million, and raised the Kentucky Oaks purse to $500,000,
2
<PAGE>
making the Kentucky Oaks the country's richest three-year-old filly
race. Kentucky Derby weekend accounted for approximately 30% of total
on-track pari-mutuel wagering and 34% of total on-track attendance for
the 1996 Spring Meet.
Record wagering was recorded on 1996 Kentucky Oaks Day, when more than
90,000 fans -- the largest racing crowd ever in North America outside of
Kentucky Derby Day -- were at Churchill Downs. More than 142,000 people
attended the 1996 Derby, and contributed to the record $75 million
wagered on Derby Day races at Churchill Downs and almost 1,000 domestic
and international simulcast sites.
The Company annually holds two live Thoroughbred race meetings at
Churchill Downs, a Spring Meet (late April through June) and a Fall Meet
(late October to late November). The Company conducted live racing on 78
days during the year ended December 31, 1996. For 1997, the Company has
received a license to conduct live racing for a total of 77 racing days
on approximately the same dates as the prior year's Spring and Fall race
meetings.
Based on average daily purse levels and average number of starters per
race, Churchill Downs' 1996 Spring and Fall race meets ranked among the
most competitive racing programs in the country. The Company believes
that a quality live racing product will enable it to continue the growth
in sales of Churchill Downs' race signal to out-of-state simulcast
markets.
RACETRACK FACILITY
The Company owns its racetrack site and improvements located at or
adjacent to 700 Central Avenue, Louisville, Kentucky (the "racetrack
facility"). The racetrack facility consists of approximately 157 acres
of land with a one-mile oval dirt track, a seven-eighths (7/8) mile turf
track, permanent grandstands and a 1,400-stall stable area. The physical
plant includes clubhouse and grandstand seating for approximately 48,500
persons, a general admission area, and food and beverage facilities
ranging from fast food to full service restaurants. The site also has a
saddling paddock, infield accommodations for groups and special events,
parking areas for the public, and the Company's office facilities. The
backside stable area has sprinkled barns sufficient to accommodate
approximately 1,400 horses, and other facilities for backstretch
personnel.
The Company has made numerous capital improvements to the racetrack
facility during the past ten years in order to better serve its horsemen
and patrons. The dirt and turf tracks provide excellent venues for live
Thoroughbred racing. The Company's ability to provide stabling
facilities and a training track for horses at the racetrack facility is
limited, but additional facilities have been developed, as discussed
below. The Company's physical plant, including grandstands, restaurant
facilities, parking, etc., is fully utilized only on Kentucky Derby
weekend or when it hosts the Breeders' Cup Day races.
3
<PAGE>
CHURCHILL DOWNS SPORTS SPECTRUM
The Company also owns the real property and improvements known as the
Churchill Downs Sports Spectrum (the "Louisville Sports Spectrum"),
located at 4520 Poplar Level Road, Louisville, Kentucky. Formerly a
Standardbred racetrack, this property was acquired by the Company in
1992, and converted into a simulcast wagering facility and Thoroughbred
training annex. The Louisville Sports Spectrum is located on
approximately 90 acres of land, about seven miles from the Company's
racetrack facility.
The grandstand/clubhouse was renovated and converted for use as a
simulcast and pari- mutuel wagering facility. Seven separate areas were
created within the structure to accommodate the needs of a variety of
patrons, from the seasoned player to the novice handicapper. The
Louisville Sports Spectrum provides state-of-the art audio/visual
technology, seating for approximately 3,000 persons, parking, offices
and related facilities. While the Company still has the option to
conduct simulcasting at its racetrack facility, the Company plans to
conduct most of its Louisville simulcast operations at the Louisville
Sports Spectrum.
The Company has renovated the racetrack portion of the property for use
as a Thoroughbred stabling and training annex. As part of the renovation
of the facility, the Company converted the former Standardbred track
into a three-quarter (3/4) mile dirt track which is used for training
Thoroughbreds. The existing barns on the property were demolished, and
the Company constructed enough new barns to accommodate approximately
500 horses. The additional stalls and training track provide a
year-round base of operation for many horsemen, and have enabled the
Company to accommodate new horsemen who desire to race at Churchill
Downs.
The Company does not intend to conduct live horse racing at the
Louisville Sports Spectrum at this time. The Louisville Sports Spectrum
also was used as the site of the Company's Thoroughbred "horses in
training" sale in 1996 and 1995.
LICENSING
Kentucky's racetracks, including the Company, are subject to the
licensing and regulation of the Kentucky Racing Commission ("KRC"),
which consists of 11 members appointed by the governor of Kentucky.
Licenses to conduct live Thoroughbred race meetings and to participate
in simulcasting (discussed below) are approved annually by the KRC based
upon applications submitted by the racetracks in Kentucky, including the
Company. Although to some extent the Company competes 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 track's
usual and customary live racing dates. Generally, there is no
substantial change from year to
4
<PAGE>
year in the racing dates awarded to each track. A substantial change in
the allocation of live racing days could impact the Company's operations
and earnings.
PARI-MUTUEL WAGERING
GENERAL
Total wagering (also referred to as "handle") on Churchill Downs' racing
product increased from $351.7 million in 1995 to $489.1 million in 1996.
The most significant growth was experienced in the exportation of its
live race signal to out-of-state simulcast markets. The Company believes
that both simulcast sending and receiving will continue to be a revenue
growth area for Churchill Downs in 1997.
INTERTRACK SIMULCASTING
In November 1988, the Company began sending its televised live races
("intertrack simulcasting"), to other locations in Kentucky. Patrons
wagering at these locations participate in the same pari-mutuel pool
payouts as patrons at Churchill Downs. Since fiscal year 1991, Churchill
Downs has conducted intertrack simulcasting in Kentucky as a host track
for all of its live racing days except Kentucky Derby Day. Churchill
Downs offered the simulcast of its Kentucky Derby Day races to
racetracks within the State beginning in 1995.
In 1989, the Company began receiving intertrack simulcast signals from
other Kentucky tracks. During the year ended December 31, 1996,
Churchill Downs conducted intertrack simulcasting as a receiving track
in Kentucky for a total of 200 days. In 1997, Churchill Downs has been
licensed as a receiving track for any and all possible dates from
January 1, 1997 through December 31, 1997.
INTERSTATE SIMULCASTING
The Company participates in interstate simulcasting by sending its
Churchill Downs live race signal to racetracks and off-track betting
facilities located in other states and in foreign countries. Depending
upon the format permitted at each facility, patrons may either
participate in the same pari-mutuel pool payouts as those patrons at
Churchill Downs, known as a commingled pool, or participate in a
separate pari-mutuel pool generated by wagering on Churchill Downs races
at the respective facility.
Interstate simulcasting operations increased by 62 percent in Kentucky
in 1996, and now represents approximately 60 percent of the Company's
pari-mutuel revenue base in Kentucky. Churchill Downs plans to increase
the interstate and international exportation of its live race signal in
fiscal year 1997.
5
<PAGE>
WHOLECARD SIMULCASTING
Churchill Downs also receives simulcasts of live race signals from
tracks outside Kentucky and accepts pari-mutuel wagers on such races
(referred to as "wholecard simulcasting"). In July 1994, Kentucky
authorized licensed racetracks and simulcast wagering facilities located
in the state to conduct wholecard simulcasting. Wholecard simulcasting
allows the Company to conduct interstate wagering daily on multiple race
programs from around the country, permitting maximum use of the
Louisville Sports Spectrum asset. In 1996, wholecard simulcasting was
conducted for 200 days at the Louisville Sports Spectrum, and on a
limited basis during Churchill Downs' live race meets, generating
approximately $127 million in total wagering. Wholecard simulcasting
also helps Churchill Downs access new markets for exporting its
simulcast race signal by enabling the Company to reciprocate by
importing out-of-state simulcast signals.
IN-HOME WAGERING
Churchill Downs, in conjunction with On Demand Services and TKR Cable of
Greater Louisville, continues to develop its in-home interactive
television wagering system, the first such system in the country.
Testing of the nation's first in-home system began in July 1995, and has
expanded to 675 homes in Jefferson County, Kentucky as of December 31,
1996. The Company believes development of such in-home technology can be
used as a tool to attract new segments of the market to the racetrack.
KENTUCKY OFF-TRACK BETTING, INC.
As a result of changes made to Kentucky law in 1992, the Company and
three other Kentucky Thoroughbred racetracks formed Kentucky Off-Track
Betting, Inc. ("KOTB"). The Company is a 25% shareholder in 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 ("simulcast facilities"). A simulcast facility 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
simulcast facility must first be approved by the KRC. Once approved, the
simulcast facility may then be established unless the local government
where the facility is to be located votes to disapprove its
establishment. KOTB currently owns and operates simulcast facilities in
Corbin, Maysville and Jamestown, Kentucky, all of which were opened in
1993, and a simulcast facility in Pineville, Kentucky, which opened in
September 1995.
The Company anticipates that simulcast facilities developed by KOTB will
provide additional markets for intertrack simulcasting of the Company's
live races. By statute, of the amount retained by KOTB on wagers (net of
taxes) placed at a simulcast facility on the Company's races, 30% is
paid to the Company, 30% is set aside for the Company's horsemen, 6% is
6
<PAGE>
retained by KOTB to cover its operating expenses and 34% is paid to a
Breeders Award Fund administered by the KRC. Any KOTB expenses not
covered by its 6% are funded by the Company during the period of time
KOTB takes the Company's races. In addition, the Company funds its share
of annual administrative expenses and may also receive dividends from
KOTB. KOTB is not expected to have a significant impact on operations of
the Company.
C. INDIANA OPERATIONS
GENERAL
In Indiana, the Company conducts both Thoroughbred and Standardbred
horse races, accepts pari-mutuel wagering on such races and conducts
related business operations at Hoosier Park in Anderson, Indiana
("Hoosier Park"). The Company conducts simulcasting operations at
Hoosier Park and also at its Churchill Downs Sports Spectrum ("Indiana
Sports Spectrums") facilities in Merrillville, Fort Wayne and
Indianapolis, Indiana.
OWNERSHIP
Hoosier Park is owned by Hoosier Park, L.P. ("HPLP"), an Indiana limited
partnership formed in 1994. The Company currently owns a 77% interest in
HPLP through Anderson Park, Inc. ("Anderson"). Anderson is a
wholly-owned subsidiary of Churchill Downs Management Company ("CDMC").
CDMC is a wholly-owned subsidiary of the Company. The remaining 23% of
HPLP is held by unrelated third parties, Pegasus Group, Inc.
("Pegasus"), and Conseco HPLP, L.L.C. ("Conseco"). Anderson is HPLP's
sole general partner. CDMC has entered into a management agreement with
HPLP pursuant to which CDMC has operational control of the day-to-day
affairs of Hoosier Park and its related simulcast operations. The
Company, through CDMC, has loaned, and committed to advance, up to 90%
of $28.7 million in loans and capital contributions to HPLP for the
development of the racetrack and related satellite wagering facilities.
Conseco assumed 10% of the obligation for loans and capital
contributions to HPLP upon purchase of their 10% partnership interest.
As of December 31, 1996, HPLP has a total loan balance of approximately
$26.0 million. The loan requires interest of prime plus 2% (10.25% at
December 31, 1996).
On December 20, 1995, the Company entered into a Partnership Interest
Purchase Agreement with Conseco for the sale of 10% of the Company's
partnership interest in HPLP to Conseco. This sale was closed on May 31,
1996. The purchase price for the 10% partnership interest was $218,390
and the transaction also included a payment of $2,603,514 for a 10%
interest in the debt owed by HPLP to CDMC at face value of debt at the
date of the closing. Conseco and Pegasus are limited partners of HPLP
and Anderson continues to be the sole general partner of HPLP.
7
<PAGE>
From May 31, 1996 through December 31, 1998, Conseco has an option to
purchase from Anderson an additional 47% partnership interest in HPLP
and an additional 47% interest in the debt owed by HPLP to CDMC. The
purchase price of the additional partnership interest will be
approximately $6,222,000 and the purchase price of the additional debt
will be approximately $15,934,000. This purchase would be subject to the
approval of the Indiana Horse Racing Commission. If this transaction
occurs, Conseco will be the sole general partner of HPLP, and Anderson
and Pegasus will be limited partners of HPLP with partnership interests
of 30% and 13%, respectively. CDMC would continue to have a long-term
management agreement with HPLP pursuant to which CDMC would have
operational control of the day-to-day affairs of HPLP and its related
simulcast facilities.
HOOSIER PARK
RACING
Through its subsidiary, Anderson, the Company is majority owner of
Indiana's only pari-mutuel racetrack, Hoosier Park in Anderson, Indiana.
Hoosier Park conducts both live Standardbred racing (late April to late
August) and Thoroughbred racing (mid-September to late November). The
Company began live Standardbred racing at Hoosier Park on September 1,
1994, and conducted Indiana's inaugural Thoroughbred meet in the Fall of
1995. In 1996, the Company conducted 132 days of live racing, including
80 days of Standardbred racing and 52 days of Thoroughbred racing. The
Company has received a license to conduct live racing in 1997 for a
total of 143 racing days, including 85 days of Standardbred racing, and
58 days of Thoroughbred racing.
RACETRACK FACILITY
Hoosier Park is located in Anderson, Indiana, about 40 miles northeast
of Indianapolis. The Company leases the site under a long-term lease
with the city of Anderson and owns the improvements located at or
adjacent to 4500 Dan Patch Circle in Anderson, Indiana. The racetrack
facility consists of approximately 110 acres of leased land with a
seven-eighths (7/8th) mile oval dirt track, permanent grandstands, and a
780-stall stable area. The racetrack surface accommodates both
Thoroughbred racing and Standardbred racing. The physical plant includes
seating for approximately 2,400 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, parking areas for the
public, and office facilities. The stable area has barns sufficient to
accommodate 780 horses, and other facilities for backstretch personnel.
8
<PAGE>
CHURCHILL DOWNS SPORTS SPECTRUMS
Through its subsidiary, Anderson, the Company is majority owner of three
simulcast wagering facilities in Indiana which are branded with the
Churchill Downs Sports Spectrum name. These simulcast wagering
facilities provide a statewide distribution system for Hoosier Park's
racing signal, and additional simulcast markets for Churchill Downs'
product. The Sports Spectrum at Merrillville, located about 30 miles
southeast of Chicago, consists of approximately 27,300 square feet of
space. The Sports Spectrum at Fort Wayne consists of approximately
15,750 square feet of space. Hoosier Park also leases approximately
17,800 square feet of space in the Claypool Courts Building in downtown
Indianapolis where it operates the Sports Spectrum at Indianapolis. All
three Sports Spectrum facilities were opened in 1995. The license for
the fourth Sports Spectrum facility in Jeffersonville, Indiana was
surrendered in July 1995 because ownership of the tentative site was in
question and resolution was not expected in the near future. The Company
is continuing to evaluate sites for the location of a fourth Sports
Spectrum facility.
The State of Indiana has enacted legislation which requires a county
fiscal body to adopt an ordinance permitting simulcast wagering
facilities before such a facility can be located in that county. The
county fiscal body may require in the ordinance that the voters of the
county must approve the operation of a simulcast wagering facility in
that county. This legislation may affect the Company's ability to locate
a facility in certain counties.
LICENSING
In Indiana, licenses to conduct live Standardbred and Thoroughbred race
meetings and to participate in simulcasting are approved annually by the
Indiana Horse Racing Commission ("IHRC") based upon applications
submitted by the Company. Currently, the Company is the only facility in
Indiana licensed to conduct live Standardbred or Thoroughbred race
meetings and to participate in simulcasting.
PARI-MUTUEL WAGERING
GENERAL
In 1996, total wagering at Hoosier Park and the three Sports Spectrum
facilities totaled approximately $176.4 million, an increase of 34
percent over 1995.
INTERSTATE SIMULCASTING
Hoosier Park participates in interstate simulcasting sending its live
race signal to racetracks and off-track betting facilities located in
other states and foreign countries. Depending upon the format permitted
at each facility, patrons may either participate in the same pari-mutuel
9
<PAGE>
pool payouts as those patrons at Hoosier Park, known as a commingled
pool, or participate in a separate pari-mutuel pool generated by
wagering on Hoosier Park races at the respective facility.
In 1996, approximately $27.2 million was wagered on Hoosier Park's race
signal at out-of-state locations. Interstate wagering on Hoosier Park's
Thoroughbred race meet experienced the most significant growth in 1996.
The Company believes that interstate simulcasting will continue to be a
revenue growth area for Hoosier Park in 1997.
WHOLECARD SIMULCASTING
In Indiana, the Company participates in wholecard simulcasting at
Hoosier Park and its Sports Spectrum facilities. Indiana law provides
that as long as Hoosier Park conducts live racing for a total of not
less than 120 days per year, wholecard simulcasting can be conducted
year round at Hoosier Park and each of the Sports Spectrum facilities.
D. SOURCES OF INCOME
The Company's principal sources of income are commissions from
on-track pari-mutuel wagers, commissions from intertrack and fees from
interstate simulcast wagers, admissions and seating, concession commissions
(primarily for sale of food and beverages), and license, rights, broadcast and
sponsorship fees.
The Company's primary source of income is pari-mutuel wagering
which accounts for 70% of revenue. The Company retains the following average
amounts on specific revenue streams as a percentage of handle:
KENTUCKY INDIANA
On-track pari-mutuel wagers 15% 19%
Intertrack host 9% --
Interstate/simulcast host 5% 3%
Intertrack/simulcast receiving 7% 18%
The Company's next major source of income is admission and
seating revenue, which was 12% of net revenues for the year ended December 31,
1996. Average daily on-track attendance at Churchill Downs has declined since
1989; however, during the same period increases in intertrack and interstate
simulcast revenues in Kentucky have substantially offset the related decline in
admission and seating revenue. In addition, declines in daily average attendance
do not impact upon Churchill Downs' admission and seating revenue
proportionately since Churchill Downs receives approximately 50% of its
admission and seating revenue from the Kentucky Derby weekend.
10
<PAGE>
The Company holds federal servicemark registrations on the names
"Kentucky Derby", "Churchill Downs", "Churchill Downs Sports Spectrum",
"Kentucky Oaks" and the Twin Spires design in various categories including
entertainment business, apparel, paper goods, printed matter and housewares and
glass. The Company licenses the use of the servicemarks and derives revenue from
such license agreements; during the year ended December 31, 1996, gross revenue
derived from such licensing was less than 6% of total revenues. Hoosier Park has
applied for federal servicemark registration of the name "Indiana Derby."
The Company hosted a Thoroughbred "horses in training" sale in
1996 and 1995. These sales did not contribute significantly to operations and a
sale is not scheduled in 1997.
E. OTHER FACTORS AFFECTING THE COMPANY'S BUSINESS
From 1986 through 1996, the Thoroughbred industry as a whole has
seen depressed prices for the sale of Thoroughbreds at all stages of their
career. Although prices continue to be significantly below peak prices of the
mid-eighties, 1993-1996 sales have shown improvement. There have also been
numerous bankruptcies or other financial failures of Thoroughbred farms since
the mid-eighties. As a result, the number of Thoroughbred foals born has
decreased each year until 1995 which showed a 1.4% increase. This long-term
trend has lead to an industry-wide decline in the number of Thoroughbreds
available to run in races. Racetracks may be competing for horses to participate
in live racing and some racetracks now offering live racing may be forced to
curtail or eliminate live events and rely more heavily or exclusively on
simulcast receiving for revenue. The Company believes that because of the
significant Thoroughbred industry infrastructure in the Commonwealth of
Kentucky, the Company's live racing product will not be as heavily impacted by
the decline in Thoroughbreds. Moreover, the Company is well positioned to
provide live racing products to the emerging simulcast market in other states
and internationally.
The Company generally does not directly compete with other
racetracks or simulcast facilities for patrons due to geographic separation of
such facilities. However, the Company competes with other entertainment options
for patrons for both live racing and simulcasting. The Company also competes
with other sports and other entertainment and wagering options available to
consumers including riverboat gaming and lotteries. The Company attempts to
attract patrons by providing the highest quality racing products in attractive
entertainment facilities with well-priced, appealing concession services. The
Company is the premier racetrack in Kentucky for both live racing and
simulcasting, based upon total handle and attendance, and the only facility in
Indiana providing live and simulcast racing.
The development of riverboat gaming facilities began in Indiana
pursuant to authorizing legislation passed by the State of Indiana in 1993. In
1996, there were three riverboats in operation along the Ohio River. By 1998, as
many as five Indiana riverboats may be operating along the Ohio River, with one
of the nation's largest complexes proposed to be located 10 miles from
Louisville in Harrison County, Indiana. Direct competition with three newly
opened riverboats have negatively impacted wagering at racetracks in Western and
Northern Kentucky. Decreases in intertrack wagering, and to some extent on-track
wagering, during Churchill Downs' 1996 Fall Meet was a result of riverboat
competition in these
11
<PAGE>
markets. The Company believes that competition from Indiana riverboat gaming
facilities will have a negative impact on the Company's operations, which could
be material.
In response to the riverboat threat, the Company's Board of
Directors passed a resolution at its June 13, 1996 meeting instructing the
Company's management to aggressively pursue the operation of video lottery
machines through the Kentucky Lottery at its racetrack facilities in Louisville.
The integration of such alternative gaming products at the racetrack is one of
four core business strategies developed by the Company to grow its live racing
program. Management has been positioning the Company to compete in the changing
business environment for the past several years by strengthening its flagship
operations, increasing its share of the interstate simulcast market, and
geographically expanding its racing operations. The Company is currently working
to build a consensus within Kentucky's horse industry for a plan to offer
alternative gaming products exclusively at state racetracks.
In addition, licenses to conduct riverboat casinos on Lake
Michigan near the Company's Merrillville, Indiana, Sports Spectrum facility have
been granted by the Indiana Gaming Commission. Indiana law allows up to five
riverboat casino licenses to be issued on Lake Michigan. The Potawatomi Indian
Tribe has expressed an interest in establishing a land-based casino operation in
southwestern Michigan and northeastern Indiana, while the Miami Indian Tribe has
expressed an interest in establishing a land-based casino near the Company's
Merrillville Sports Spectrum. The Company anticipates that the commencement of
such operations will have a negative impact upon the Company's wagering
activities, although the extent of the impact is unknown at this time due in
part, to the uncertain geographic distances between the Company's operations and
the number of potential casino sites.
The Company is pursuing legislative initiatives in both Kentucky
and Indiana which would allow alternative gaming operations at its racetrack
facilities. Alternative gaming in the form of video lottery and slot machines
would enable Churchill Downs and Hoosier Park to effectively compete with
Indiana riverboat casinos, and provide new revenue for capital investment and
purse money.
In Kentucky, the Company is working to build a consensus within
the Commonwealth's horse industry for a plan to operate video lottery terminals
exclusively at racetracks in conjunction with the Kentucky Lottery Corporation.
Legislation may be included by the Governor in a special session of the Kentucky
General Assembly in May 1997, or introduced during the legislature's regular
session in 1998.
Indiana House Bill 1799, which would allow for installation of
slot machines at Hoosier Park, was introduced during the current legislative
session. This bill did not make it out of committee.
The horse industry in Indiana presently receives $.65 per $3
admission to riverboats in the state. From the money generated by this tax in
1996, $1.8 million went directly to Hoosier Park operating expenses, $2.5
million funded purse increases at the track, and over $1 million went to
breeders' incentives. House Bill 1135, which has already passed the Indiana
House of Representatives, seeks to reduce the $.65 admission tax of which
Hoosier Park receives $.195. Hoosier Park's share of the tax would be reduced to
$.10 from $.195 per admission. Such a reduction in revenue would significantly
impact funding for operating
12
<PAGE>
expenditures and cause the Company to reevaluate its investment in Indiana's
pari-mutuel industry. The Company is prohibited from selling its interest in
Hoosier Park, L.P., prior to 1998 without the consent of Conseco.
F. ENVIRONMENTAL MATTERS
On January 22, 1992, the Company acquired certain assets of
Louisville Downs, Incorporated for $5,000,000 including the site of the
Louisville Sports Spectrum. In conjunction with this purchase, the Company
withheld $1,000,000 from the amount due to the sellers to offset certain costs
related to the remediation of environmental contamination associated with
underground storage tanks at the site. All of the $1,000,000 hold back had been
utilized as of December 31, 1995. It is not anticipated that the Company will
have any liability as a result of compliance with environmental laws with
respect to any of the Company's property.
In January 1995, Hoosier Park opened the Churchill Downs Sports
Spectrum in Merrillville, Indiana. The 27,300 square foot facility is designed
exclusively for the simulcast of horse races and the conducting of pari-mutuel
wagering. The Merrillville, Indiana facility is also subject to contamination
related to prior business operations adjacent to the property. The contamination
on the property is being remediated under the State of Indiana's voluntary
remediation program. The State of Indiana approved the remediation plan in May
of 1995. The Company has obtained an indemnity concerning the cost of
remediation from the prior owner of the property. The cost of remediation could
be up to $50,000. Except as discussed herein and with respect to the Louisville
Sports Spectrum, 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.
G. EMPLOYEES
Because the Company's live racing business is seasonal, the
number of persons employed will vary throughout the year. As of December 31,
1996, approximately 600 individuals are employed on a permanent year-round
basis. During the live racing meetings, as many as 2,600 persons are employed.
ITEM 2. PROPERTIES
Information concerning property owned by Churchill Downs
Incorporated required by this Item is incorporated by reference to the
information contained in Item 1. "Business" of this Report.
The Kentucky Derby Museum is operated on property adjacent to the
Company's racetrack facility. 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.
13
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than
ordinary routine litigation incidental to the business of the Company, to which
it is a party or of which any of its 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 the Company's stockholders
during the fourth quarter of the fiscal year covered by this Report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter
market. As of March 29, 1993, the Company's common stock was listed on the
National Association of Securities Dealers, Inc.'s Small Cap Market automated
quotation system ("NASDAQ"). As of March 27, 1997, there were approximately
3,100 stockholders of record.
The following 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 two years:
<TABLE>
<CAPTION>
1996 - BY QUARTER 1995 - BY QUARTER
----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
------ ------ ------ ------ ------ ------ ------ ------
High Bid $40.00 $44.00 $37.50 $36.50 $47.00 $46.00 $43.25 $38.50
Low Bid $32.00 $36.00 $34.00 $34.00 42.50 41.00 35.50 31.00
Dividend per share:
Annual $.50 $.50
Special $.15 --
</TABLE>
Quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions, and may not necessarily reflect actual transactions.
The Company presently expects that comparable annual cash
dividends (adjusted for any stock splits or other similar transactions) will
continue to be paid in the future.
14
<PAGE>
<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
Eleven Months Fiscal Year
Year Ended Year Ended Year Ended Ended Ended
December 31, December 31, December 31, December 31, January 31
1996 1995 1994 1993 1993
------------ ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Operations:
Net revenues $107,858,818 $92,434,216 $66,419,460 $55,809,889 $51,847,747
Operating income $12,314,897 $10,305,210 $ 9,861,086 $ 8,959,220 $ 7,427,241
Net earnings $8,071,526 $6,203,135 $ 6,166,353 $ 5,906,034 $ 5,212,610
Net earnings per share $2.17 $1.64 $1.63 $1.56 $1.38
Dividend paid per share
Annual $.50 $.50 $.50 $.50 $.50
Special $.15 - - - -
At Period End:
Total assets $80,728,966 $77,486,482 $70,175,840 $56,819,959 $49,058,319
Working capital
(deficiency) $(10,742,606) $(10,433,929) $(10,131,254) $ (776,756) $(5,290,858)
Long-term debt $2,999,191 $6,421,176 $ 8,683,314 $ 583,090 $ 594,227
Stockholders' equity $47,780,880 $46,653,157 $42,003,147 $36,995,853 $32,976,784
Stockholders' equity
per share $13.08 $12.33 $11.10 $9.80 $8.74
Additions to racing
plant and equipment $2,570,795 $8,589,535 $23,310,204 $1,409,888 $6,741,158
</TABLE>
In 1993, the Company changed to a calendar year from a fiscal year ending
January 31. The change of fiscal year resulted in a transition period of eleven
months which began February 1, 1993 and ended December 31, 1993.
15
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL INFORMATION
This discussion and analysis contains both historical and
forward-looking information. The forward-looking statements are made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. Forward-looking statements may be significantly impacted by certain risks
and uncertainties described herein, and in the Company's annual report on Form
10-K for the year ended December 31, 1996.
The Company's principal business is conducting pari-mutuel
wagering on Thoroughbred and Standardbred horse races. For many years, the
Company has conducted live Spring and Fall race meetings for Thoroughbred horses
in Kentucky. In 1988, the Company began in-state simulcasting ("intertrack") of
its live races, except those run on Kentucky Derby Day, by sending its video
signal to other locations in Kentucky for purposes of pari-mutuel wagering into
the Company's mutuel pool. In 1989, the Company commenced operations as a
receiving track for intertrack simulcasting. During November 1991, the Company
began interstate simulcasting for all of the live races with the receiving
locations participating in the Company's mutuel pool. The Kentucky Derby and
Kentucky Oaks, which are run on the first weekend in May of each year, continue
to be the Company's outstanding attractions. In 1995, for the first time,
Churchill Downs offered the simulcast of its races on Kentucky Derby Day to
racetracks within Kentucky and continued the practice in 1996. In 1996, Derby
weekend accounted for approximately 30% of total on-track pari-mutuel wagering
and 35% of total on-track attendance for the 1996 Spring Meet at Churchill
Downs. In July 1994, the Company began whole card simulcasting whereby the
Company imports a full program or race card from host tracks located outside the
state for pari-mutuel wagering purposes. Whole card simulcasting has created a
major new wagering opportunity for patrons of the Company in both Kentucky and
Indiana.
The Company, through its subsidiary, HPLP, is majority owner and
operator of Indiana's only pari-mutuel racetrack, Hoosier Park at Anderson.
Hoosier Park conducted two Harness race meets, as well as simulcast wagering,
during its first 16 months of operation. During 1995 improvements were made to
Hoosier Park for the track's inaugural Thoroughbred meet. From January 1995
through October 1995, the Company opened off-track wagering facilities in
Merrillville, Fort Wayne and downtown Indianapolis, Indiana. The license for the
fourth facility in Jeffersonville, Indiana was surrendered in July 1995 because
ownership of the tentative site was in question and resolution was not expected
in the near future. The Company is continuing to evaluate sites for the location
of a fourth satellite wagering facility.
16
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The Company's principal sources of income are commissions from
on-track pari-mutuel wagers, commissions from intertrack and fees from
interstate simulcast wagers, admissions and seating, concession commissions
(primarily for the sale of food and beverages), and license, rights, broadcast
and sponsorship fees. The Company's primary source of income is pari-mutuel
wagering.
In Kentucky, licenses to conduct Thoroughbred race meetings and
to participate in simulcasting are approved annually by the Kentucky Racing
Commission based upon applications submitted by the racetracks in Kentucky,
including the Company. Based on gross figures for on-track pari-mutuel wagering
and attendance, the Company is the leading Thoroughbred racetrack in Kentucky.
In Kentucky, the Company conducted racing during the period from April 27, 1996,
through June 30, 1996, and from October 27, 1996, through November 30, 1996, for
a total of 78 racing days. For 1997, the Company has been granted a license to
conduct live racing during the period from April 26 through June 29, 1997, and
from October 26 through November 29, 1997 for a total of 77 racing days.
In Indiana, licenses to conduct live Standardbred and
Thoroughbred race meetings and to participate in simulcasting are approved
annually by the Indiana Horse Racing Commission based upon applications
submitted by the Company. Currently, the Company is the only facility in Indiana
licensed to conduct live Standardbred or Thoroughbred race meetings and to
participate in simulcasting. In Indiana, the Company conducted live racing for a
total of 132 racing days, including 80 days of Standardbred racing from April
25, 1996 through September 2, 1996, and 52 days of Thoroughbred racing from
September 20, 1996 through November 30, 1996. The Company has been granted a
license to conduct live racing in 1997 for a total of 140 racing days, including
85 days of Standardbred racing from April 24 through August 24, 1997, and 55
days of Thoroughbred racing from September 12 through November 29, 1997.
17
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The Company operated two live racing facilities and conducted
simulcast wagering at four other locations during the year ended December 31,
1996. The Company began its operations in Indiana on September 1, 1994. The
chart below summarizes the results of these operations.
<TABLE>
KENTUCKY INDIANA
Year Ended Year Ended Year Ended Year Ended
December 31, December 31, Increase/ December 31, December 31, Increase/
1996 1995 Decrease 1996 1995 Decrease
------------ ------------- --------- ------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
ON-TRACK
Number of Race Days 78 74 4 132 146 (14)
Attendance 903,132 927,581 (3)% 168,849 242,139 (30)%
Handle $119,897,810 $123,751,130 (3)% $17,530,325 $24,768,351 (29)%
Average daily
attendance 11,579 12,535 (8)% 1,279 1,658 (23)%
Average daily handle $1,537,151 $1,672,313 (8)% $132,805 $169,646 (22)%
Per capita handle $132.76 $133.41 (0)% $103.82 $102.29 1%
INTERTRACK/INTERSTATE HOST (SENDING)*
Number of Race Days 78 74 4 132 146 (14)
Handle $369,245,673 $227,998,154 62% $27,193,841 $13,727,916 98%
Average daily handle $4,733,919 $3,081,056 54% $ 206,014 $94,027 119%
INTERTRACK/SIMULCAST RECEIVING
Number of Receiving
Days 200 209 (9) 1,192 821** 371
Attendance 451,708 489,093 (8)% *** 328,509 ***
Handle $127,047,623 $119,571,023 6% $131,715,597 $92,745,040 42%
Average daily
attendance 2,259 2,340 (3)% *** 400 ***
Average daily handle $635,238 $572,110 11% $110,500 $112,966 (2)%
Per capita handle $281.26 $244.48 15% *** $282.32 ***
Total handle $616,191,106 $471,320,307 31% $176,439,763 $131,241,307 34%
</TABLE>
* Includes common/commingle pools only.
** The Company's Indiana operations include four separate wagering
facilities.
*** Attendance figures are not kept for the separate wagering facilities in
Indiana.
18
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
With the advent of whole card simulcasting, the Company conducts
interstate simulcasting virtually year-round on multiple racing programs each
day from around the nation. The number of receiving days has increased in 1996
when compared to 1995 because of the Indiana off-track wagering facilities being
open throughout 1996. During 1995, simulcast wagering was being conducted at
Hoosier Park in Anderson, Indiana and beginning January 25, 1995 at
Merrillville, Indiana. Two additional simulcast facilities were opened during
1995, one in Ft. Wayne, Indiana on April 25, 1995, and the other in
Indianapolis, Indiana in October 25, 1995. Simulcast wagering was conducted at
all four facilities throughout the year ended December 31, 1996. For 1997, the
Company has been granted a license to operate simulcast receiving locations in
Kentucky and Indiana for any and all possible dates from January 1 through
December 31 and intends to receive simulcasting on all possible days. Hoosier
Park may ultimately be supported by a fourth whole card simulcasting facility.
An increase in the number of days or facilities would be expected to enhance
operating results.
Because the business of the Company is seasonal, the number of
persons employed will vary throughout the year. Approximately 600 individuals
are employed on a permanent year-round basis. During the live race meetings, as
many as 2,600 persons are employed.
In 1996, there were four riverboats in operation along the Ohio
River, three in Indiana and one at Metropolis, Illinois. By 1998, as many as
five Indiana riverboats may be operating along the Ohio River, with one of the
nation's largest complexes proposed to be located 10 miles from Louisville in
Harrison County, Indiana. Direct competition with three newly opened riverboats
has negatively impacted wagering at racetracks in Western and Northern Kentucky.
Decreases in intertrack wagering, and to some extent on-track wagering, during
Churchill Downs' 1996 Fall Meet were the result of riverboat competition in
these markets. The Company believes that competition from Indiana riverboat
gaming facilities will have a negative impact on the Company's operations, which
could be material.
In addition, licenses allowing up to five riverboat casinos on
Lake Michigan near the Company's Merrillville, Indiana, Sports Spectrum facility
have been granted by the Indiana Gaming Commission. The Potawatomi Indian Tribe
has expressed an interest in establishing a land-based casino operation in
southwestern Michigan and northeastern Indiana, while the Miami Indian Tribe has
expressed an interest in establishing a land-based casino near the Company's
Merrillville Sports Spectrum. The Company anticipates that the commencement of
such operations will have a negative impact upon the Company's wagering
activities. The extent of the impact is unknown at this time due, in part, to
the uncertain geographic distances between the Company's operations and the
number of potential casino sites.
19
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Studies project that direct competition with these boats could
result in as much as a 30% decline in on-track wagering at Churchill Downs and a
20% decline in Sports Spectrum business. In response, the Company's Board of
Directors passed a resolution at its June 13, 1996 meeting instructing the
Company's management to aggressively pursue alternative forms of gaming at its
racetrack facilities in Louisville. The integration of alternative gaming
products at the racetrack is one of four core business strategies developed by
the Company to grow its live racing program. Management has been positioning the
Company to compete in this changing environment for the past several years by
strengthening its flagship operations, increasing its share of the interstate
simulcast market, and geographically expanding its racing operations into
Indiana.
The Company is pursuing legislative initiatives in both Kentucky
and Indiana which would allow alternative gaming operations at its racetrack
facilities. Alternative gaming in the form of video lottery and slot machines
would enable Churchill Downs and Hoosier Park to effectively compete with
Indiana riverboat casinos, and provide new revenue for capital investment and
purse money.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO 1995
REVENUES
Net revenue during the year ended December 31, 1996 increased
$15.4 million to $107.9 million. Kentucky operations contributed 37%, or $5.7
million to the total increase, with Interstate-Host showing the largest increase
at $3.1 million. Interstate-Host represents revenues generated by transmitting
the Company's live races at Churchill Downs outside the state of Kentucky to
outlets across the nation. The number of outlets receiving Churchill Downs' live
race signal increased from 844 in 1995 to 996 in 1996.
Indiana operations contributed $9.7 million, or 63%, to the
revenue increase. All of the Indiana wagering facilities were fully operational
in 1996 which led to a $6.8 million increase in Simulcast Receiving revenues. In
1995, not all of the off-track facilities were open for the full reporting
period. On-track revenue decreased at Hoosier Park by $2.0 million when compared
to 1995 due to the Standardbred live racing meet starting three weeks later and
having one less race day per week in 1996. The Thoroughbred race meet started
one month later in 1996 but gained 10 racing days. The net effect of the date
changes caused a loss of 14 on track racing days. Net revenue also increased by
$4.8 million in 1996 due to riverboat admissions taxes from Indiana riverboat
gaming. In accordance with riverboat casino legislation, a riverboat admissions
tax is assessed at three dollars per person, of which 65 cents is utilized to
supplement the horse racing industry in Indiana. As determined by the Indiana
Horse Racing Commission, 20%, or 13 cents, of the 65 cent supplement goes
directly to Breed Development Funds and does not directly impact the
Partnership. The remaining balance of the supplement (52 cents) is distributed,
30%, or 19.5 cents to the
20
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Partnership, 40% or 26 cents, is restricted for use as additional racing purses
and 10%, or 6.5 cents, is restricted for promotional expenses.
House Bill 1135, which has already passed the Indiana House of
Representatives, seeks to reduce the $.65 admission tax of which Hoosier Park
receives $.25. Hoosier Park's share of the tax would be reduced to $.10 from
$.25 per admission. Such a reduction in revenue would significantly impact
funding for capital improvements and operating expenditures and cause the
Company to reevaluate its investment in Indiana's pari-mutuel industry. The
Company is prohibited from selling its interest in Hoosier Park, L.P., prior to
1998 without the consent of Conseco.
Following is a summary of Revenues:
<TABLE>
<CAPTION>
NET REVENUE SUMMARY
Year Ended % To Year Ended % To 1996 VS. 1995
December 31, Total December 31, Total $ %
1996 Revenue 1995 Revenue Change Change
------------ ------- ------------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Pari-Mutuel Revenue
On-track 19,240,040 18% 21,438,916 23% (2,198,876) (10)%
Intertrack-Host 6,875,000 6% 6,451,715 7% 423,285 7%
Simulcast Receiving 37,806,475 35% 29,527,957 32% 8,278,518 28%
Interstate-Host 11,794,254 11% 8,283,602 9% 3,510,652 42%
----------- ---- ------------ ------ ----------- -----
$75,715,769 70% $65,702,190 71% $10,013,579 15%
Admission, Seat and
Parking Revenue 12,905,298 12% 12,883,829 14% 21,469 -
License, Rights, Broadcast
& Sponsorship Fees 5,921,797 6% 5,642,092 6% 279,705 5%
Concession Commission 2,559,734 2% 2,610,658 3% (50,924) (2)%
Program Revenue 3,128,491 3% 2,931,315 3% 197,176 7%
Riverboat Admissions
Revenue 4,809,483 4% - - 4,809,483 100%
Derby Expansion Area 1,128,270 1% 987,440 1% 140,830 14%
Other 1,689,976 2% 1,676,692 2% 13,284 1%
------------- ---- ----------- ---- ----------- ----
$107,858,818 100% $92,434,216 100% $15,424,602 17%
============ ==== =========== ==== =========== ====
</TABLE>
21
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
OPERATING EXPENSES
Operating expenses increased $13.0 million during the twelve
month period. Gross profit remained relatively flat, decreasing from 20.2% to
19.5% through December 31, 1996. Changes in specific expense categories follow.
Purse expense increased $6.8 million in 1996 when compared to
1995. In Kentucky and Indiana, purse expense varies directly with pari-mutuel
revenues and is calculated as a percentage of the related revenue and may change
from year to year pursuant to contract or statute. Simulcast Receiving in
Indiana produced a $2.0 million increase in purse expense as a result of the
increased number receiving locations in operation. Both Kentucky and Indiana
handle increases in Simulcast Host led to a combined $2.0 million increase in
purse expense. Riverboat Admissions Revenues in Indiana designated to purses
contributed $2.5 million to the increase.
Wages and Contract Labor decreased from 22% of total operating
expenses in 1995 to 20% in 1996 despite increases of $1.3 million primarily due
to staff expansion in Kentucky and meet related payroll increases. Churchill
Downs conducted four extra racing days in 1996 and the Churchill Downs Sports
Spectrum was open on Kentucky Derby weekend, which in the past had been closed
on both days.
The increase of approximately $800,000 in Advertising, Marketing
and Publicity is due largely to the marketing of the satellite wagering
facilities in Indiana. Approximately $150,000 was spent in each of the Ft. Wayne
and Anderson, Indiana areas as part of an intensive marketing campaign in
Indiana. In Kentucky, new marketing programs such as Twin Spires Club and
Winners Circle Sponsorship, along with expenses incurred in conjunction with
ESPN's Derby Week coverage, caused increases during the twelve month period.
Totalisator and Simulcast Host Fee expenses increased
approximately $410,000 and $1.7 million respectively. Totalisator expenses are
based on total wagers taken at the facilities while Simulcast Host Fees are paid
to the track whose live races are being simulcast at the facilities. As total
wagers increase, these expenses, along with purses, increase accordingly.
Program expenses increased approximately $430,000 in 1996. This
is attributed to higher paper costs in Kentucky, the addition of the third
Indiana satellite wagering facility.
Increases in Depreciation and Amortization are related to the
Thoroughbred improvements at Hoosier Park and depreciation on the Ft. Wayne
property for a full year. Insurance, Taxes and License Fees decreased
approximately $300,000 as a new property insurance carrier was selected and
general liability rates declined.
22
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Facility rent increased approximately $840,000 due to lease
expense on the Indianapolis, Indiana off-track wagering facility operating for a
full year in 1996.
Other Expense decreased slightly in 1996. Manure Removal is the
largest component of this category with expenses of approximately $620,000.
Expenses related to the Kentucky Off-Track Betting facilities were approximately
$580,000.
Following is a summary of Operating Expenses:
<TABLE>
OPERATING EXPENSE SUMMARY
Year Ended % To Year Ended % To 1996 VS. 1995
December 31, Total December 31, Total $ %
1996 Expense 1995 Expense Change Change
------------ ------- ------------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Purses
On-track $10,524,969 12% $11,570,597 16% $(1,045,628) (9)%
Intertrack-Host 3,191,279 4% 2,882,097 4% 309,182 11%
Simulcast-Receiving 11,925,265 14% 8,992,067 12% 2,933,198 33%
Interstate-Host 6,280,418 7% 4,206,721 6% 2,073,697 49 %
Riverboat 2,517,212 3% - - 2,517,212 100%
------------ ---- ----------- ---- ---------- ----
$34,439,143 40% $27,651,482 38% $6,787,661 25%
Wages and Contract Labor 17,161,141 20% 15,897,434 22% 1,263,707 8%
Advertising, Marketing & Publicity 3,969,087 5% 3,166,951 4% 802,136 25%
Racing Relations & Services 1,803,256 2% 1,623,518 2% 179,738 11%
Totalisator Expense 1,506,146 2% 1,092,718 1% 413,428 38%
Simulcast Host Fee 7,286,133 8% 5,561,467 7% 1,724,666 31%
Audio, Video and Signal
Distribution Expense 1,725,585 2% 1,505,310 2% 220,275 15%
Program Expense 2,463,441 3% 2,035,447 3% 427,994 21%
Depreciation & Amortization 4,814,113 5% 4,427,492 6% 386,621 9%
Insurance, Taxes & License Fees 2,620,902 3% 2,918,327 4% (297,425) (10)%
Maintenance 1,875,191 2% 1,882,997 3% (7,806) -
Utilities 2,840,312 3% 2,511,310 3% 329,002 13%
Derby Expansion Area 436,323 1% 404,478 1% 31,845 8%
Facility Rent 842,930 1% - - 842,930 100%
Other 3,011,515 3% 3,089,551 4% (78,036) (3)%
----------- ---- ----------- ---- ----------- ----
$86,795,218 100% $73,768,482 100% $13,026,736 18%
=========== ==== =========== ==== =========== ====
</TABLE>
23
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, General and Administrative Expenses totaled $8.7 million
in 1996 which represents an increase of $388,000, or 4.6%, over 1995. Higher
equipment lease expenses and development costs related to legislative
initiatives were partially offset by reduced spending on other development
projects.
OTHER INCOME AND EXPENSE
Interest expense was reduced approximately $235,000 as positive
cash flow from operations has allowed the Company to pay down its line of
credit. Interest income increased $160,000 in 1996 as additional cash was
available for short-term investing.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO 1994
REVENUES
Pari-mutuel revenue during the twelve months ended December 31,
1995 increased $23,674,752. The Company's subsidiary Hoosier Park generated 74
percent, or $17,321,012, of the increase in pari-mutuel revenue which when
combined with admissions, concessions, programs, and other revenue totaled
$18,783,355 in revenues. This revenue increase is due largely to the 821
operating days of whole card simulcasting offered beginning January 1, 1995 at
Hoosier Park, January 25 in Merrillville, Indiana, April 26 in Ft. Wayne,
Indiana and October 25 in Indianapolis, Indiana. Simulcasting has been well
received in Indiana with an average daily handle of $112,966.
The advent of whole card simulcasting helped increase simulcast
receiving revenue by $2,881,470 in the Commonwealth of Kentucky, with Simulcast
Host revenue increasing by $1,860,632 due largely to marketing of the Churchill
Downs live racing product to a record number of interstate simulcast outlets.
Whole card simulcasting was also largely responsible for the increase in program
revenue due to two or more programs and racing forms being sold per day. License
and rights revenues were up 12% or $610,000 primarily due to increased race
sponsorships and souvenir licensing at Churchill Downs. Revenues from the Derby
Expansion Area, referred to as Marquee Village, were up 19% largely due to the
addition of a covered seating area near the racetrack's first turn. The backside
of the Churchill Downs racetrack facility was closed during the first quarter of
1994 for maintenance and repair for the first time in several years which
reduced other revenue. Other revenue was higher in 1994 primarily due to hosting
the Breeders' Cup Day Event.
Following is a summary of Revenues:
24
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
<TABLE>
<CAPTION>
NET REVENUE SUMMARY
Year Ended % To Year Ended % To 1995 VS. 1994
December 31, Total December 31, Total $ %
1995 Revenue 1994 Revenue Change Change
------------ ------- ------------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Pari-Mutuel Revenue
On-track 21,438,916 23% $21,200,811 32% $ 238,105 1%
Intertrack-Host 6,451,715 7% 5,449,807 8% 1,001,908 18%
Simulcast Receiving 29,527,957 32% 8,953,850 13% 20,574,107 230%
Interstate-Host 8,283,602 9% 6,422,970 10% 1,860,632 29%
----------- --- ----------- --- ----------- ----
$65,702,190 71% $42,027,438 63% $23,674,752 56%
Admission & Seat Revenue 12,243,245 13% 11,889,845 18% 353,400 3%
License, Rights, Broadcast
& Sponsorship Fees 5,642,092 6% 5,032,565 8% 609,527 12%
Concession Commission 2,610,658 3% 2,172,914 3% 437,744 20%
Program Revenue 2,931,315 3% 1,755,546 3% 1,175,769 67%
Derby Expansion Area 987,440 1% 832,050 1% 155,390 19%
Other 2,317,276 3% 2,709,102 4% ( 391,826) (14)%
----------- ---- ----------- ---- ----------- -----
$92,434,216 100% $66,419,460 100% $26,014,756 39%
=========== ==== =========== ==== =========== =====
</TABLE>
25
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
OPERATING EXPENSES
Operating expenses increased $24,431,384 during the twelve month
period. This increase is primarily due to the live and simulcasting operations
at Hoosier Park combined with the opening of the Indiana off-track wagering
facilities. The largest single increase in meet expenses are the higher purses
which are a direct result of increased handle from whole card simulcasting in
Kentucky and Indiana. Purse expense varies directly with pari-mutuel revenues
and is calculated as a percentage of the related handle revenue and may change
from year to year pursuant to contract or statute. Whole card simulcasting and
Hoosier Park operations were also primarily responsible for increased wages,
advertising and marketing, audio, video, totalisator, program expenses and
other. Wages and contract labor increased due to additional days and hours of
operation related to whole card simulcasting at Sports Spectrum and Hoosier
Park. The simulcast host fee is the amount paid to the host track in exchange
for receiving the tracks' races. This expense is based on handle, and is
directly related to the $18 million increase in simulcasting revenue.
Depreciation and amortization increases are attributed to the
addition of the Indiana facilities of which 77%, or $921,909 of the total
expense is related to Hoosier Park. Indiana operations contributed 84%, or
$782,200 to the total increase in utilities and 55%, or $537,225 to insurance,
taxes and license fees.
Following is a summary of Operating Expenses:
26
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
<TABLE>
<CAPTION>
OPERATING EXPENSE SUMMARY
Year Ended % To Year Ended % To 1995 VS. 1994
December 31, Total December 31, Total $ %
1995 Expense 1994 Expense Change Change
------------ ------- ------------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Purses
On-track 11,570,597 16% $11,138,607 22% $431,990 4%
Intertrack-Host 2,882,097 4% 2,430,083 5% 452,014 19%
Simulcast-Receiving 8,992,067 12% 3,914,124 8% 5,077,943 130%
Interstate-Host 4,206,721 6% 2,939,360 6% 1,267,361 43%
----------- --- ----------- --- ---------- ----
$27,651,482 38% 20,422,174 41% $7,229,308 35%
Wages and Contract Labor 15,897,434 22% 10,777,468 22% 5,119,966 48%
Advertising, Marketing &
Publicity 3,166,951 4% 2,114,020 4% 1,052,931 50%
Racing Relations & Services 1,623,518 2% 1,325,424 3% 298,094 22%
Totalisator Expense 1,092,718 1% 577,101 1% 515,617 89%
Simulcast Host Fee 5,561,467 7% 509,811 1% 5,051,656 991%
Audio/Video Expense 1,505,310 2% 1,261,894 3% 243,416 19%
Program Expense 2,035,447 3% 998,074 2% 1,037,373 104%
Depreciation &
Amortization 4,427,492 6% 3,230,432 7% 1,197,060 37%
Insurance, Taxes &
License Fees 2,918,327 4% 1,947,686 4% 970,641 50%
Maintenance 1,882,997 3% 1,645,094 3% 237,903 14%
Utilities 2,511,310 3% 1,580,273 3% 931,037 59%
Derby Expansion Area 404,478 1% 313,920 1% 90,558 29%
Other 3,089,551 4% 2,633,727 5% 455,824 17%
----------- ---- ----------- ---- ----------- ----
$73,768,482 100% $49,337,098 100% $24,431,384 50%
=========== ==== =========== ==== =========== ====
</TABLE>
27
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by
$1,139,248. The increase was primarily related to increases in wages and
benefits of $506,491 and professional fees of $404,083, most of which were
related to Indiana operations.
OTHER INCOME AND EXPENSE
Interest expense increased by $397,245 largely due to the
borrowings necessary to fund the construction of three satellite wagering
facilities and Thoroughbred improvements in Indiana. Interest income was lower
due to less cash available for short-term investment.
SIGNIFICANT CHANGES IN THE BALANCE SHEET DECEMBER 31, 1996 TO DECEMBER 31, 1995
The cash balances at December 31, 1996 were $2.4 million higher
than December 31, 1995 due primarily to declining cash requirements from the
Company's Indiana operations. In 1995 the Company opened satellite wagering
facilities and made improvements for the inaugural Indiana Thoroughbred horse
meet in Indiana.
Accounts receivable at December 31, 1996 were $3.1 million higher
than December 31, 1995 due primarily to the Indiana Riverboat Admission tax
which had not been received as of December 31, 1996.
The first riverboat opened in December 1995.
Plant & equipment increased by $2.5 million as a result of
routine capital spending throughout the Company, offset by $4.0 million of
depreciation expense.
Accounts payable and accrued expenses have increased by $3.5
million mostly due to increases in purses payable related to the increase in
simulcast revenue.
Income taxes payable increased $1.5 million at December 31, 1996
relate to the estimated expense due for the twelve month period, less any
estimated tax payments. The increase in earnings has resulted in a corresponding
increase in income taxes payable.
Notes payable were $3.4 million lower at December 31, 1996 as
positive cash flow has allowed the Company to eliminate its outstanding bank
debt.
Dividends payable increased by $500,000 due to the special
dividend declaration in 1996.
28
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
On May 7, 1996 the Company purchased 58,650 shares of common
stock at a total cost of $2,346,001. On August 2, 1996 the Company issued 3,909
shares of it common stock to employees under its Stock Purchase Plan for total
proceeds of $112,970. Additionally, on September 27, 1996 the Company purchased
75,600 shares of common stock at a total cost of $2,608,192. These purchases had
a positive effect on earnings per share, adding $.03 to earnings per share for
the year ended December 31, 1996.
SIGNIFICANT CHANGES IN THE BALANCE SHEET DECEMBER 31, 1995 TO DECEMBER 31, 1994
The increase in cash and cash equivalents in 1995 is the result
of declining cash requirements from the Company's Indiana operations. In 1994
the Company was preparing to open satellite wagering facilities in Merrillville
and Fort Wayne, Indiana.
Racing plant and equipment increased by $7,913,762 during 1995.
The Company's Indiana operations received $6,468,000 of these additions,
primarily in the form of three satellite wagering facilities in the state and
three million dollars in improvements at Hoosier Park that were necessary for
the Thoroughbred race meet.
Accounts payable and accrued expenses have increased by
$2,913,430 mostly due to increases in purses payable related to the increase in
simulcast revenue, and due to the normal increase in operating payables related
to three additional simulcast facilities in Indiana. The increase in income
taxes payable is due to the timing of the Company's fourth quarter payments
which were made in January for 1995, versus December in 1994.
Notes payable have decreased as the Company continues to retire
debt incurred with the acquisition and construction of its Indiana operations.
Outstanding mutuel tickets have increased in relation to the increase in
business due to whole card simulcasting in Kentucky and the opening of the three
additional simulcast wagering facilities in Indiana.
29
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of December 31, 1996, 1995 and 1994 follows:
1996 1995 1994
------------ ------------ -------------
Deficiency in working $(10,742,606) $(10,433,929) $(10,131,254)
capital
Working Capital ratio .57 to 1 .45 to 1 .35 to 1
The working capital deficiency results from the nature and
seasonality of the Company's business. Cash flows from operations were
$15,079,531, $16,540,123 and $11,399,973 for the years ended December 31, 1996,
1995 and 1994, respectively. Management believes cash flows from operations
during 1997 and funds available under the Company's unsecured line of credit
will be sufficient to fund dividend payments and additions and improvements to
the plant and equipment.
During 1994 cash flow from operations funded $850,000 of the
Anderson Park, Inc. stock purchase in January 1994. Similarly, cash flow from
operations and, as necessary, funds available under the unsecured line of credit
were used to fund up to $14 million for construction of the Hoosier Park racing
facility in Anderson, Indiana. In 1995, Churchill Downs also funded an
additional $6.5 million to construct three satellite wagering facilities in
Indiana and improvements which allowed for Thoroughbred racing at Hoosier Park.
The Company has a $20,000,000 unsecured line-of-credit all of
which is available at December 31, 1996 to meet working capital and other
short-term requirements. Management believes that the Company has the ability to
obtain additional long-term financing should the need arise.
30
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation". This
Statement requires that the Company's financial statements include certain
disclosures about stock-based employee compensation arrangements in accordance
with a fair value based method of accounting. The footnotes to the financial
statements contain the required disclosures.
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS 128). SFAS 128 is designed to improve the EPS information provided in
financial statements by simplifying the existing computational guidelines. SFAS
128 is effective for financial statements issued for periods ending after
December 15, 1997. The Company does not expect adoption of this standard will
have a material impact on its financial statements.
31
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Churchill Downs Incorporated
We have audited the accompanying consolidated balance sheets of Churchill Downs
Incorporated and subsidiaries as of December 31, 1996, 1995 and 1994 and the
related consolidated statements of earnings, stockholders' equity and cash
flows, and the consolidated financial statement schedule, for each of the three
years then ended as listed in Item 14 of this Form 10-K. These consolidated
financial statements and financial statement schedule are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Churchill Downs
Incorporated and subsidiaries as of December 31, 1996, 1995 and 1994 and the
results of their operations and cash flows for each of the three years then
ended in conformity with generally accepted accounting principles. In addition,
in our opinion, the consolidated financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects, the information required to be included
therein for the years ended December 31, 1996, 1995 and 1994.
/S/COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
Louisville, Kentucky
March 7, 1997
32
<PAGE>
<TABLE>
<CAPTION>
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31, December 31, December 31,
ASSETS 1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $8,209,414 $ 5,856,188 $ 2,521,033
Accounts receivable 5,218,236 2,098,901 2,277,218
Other current assets 679,221 549,820 741,560
----------- ----------- ------------
Total current assets 14,106,871 8,504,909 5,539,811
Other assets 3,739,906 4,632,044 5,058,524
Plant and equipment 100,025,412 97,451,463 89,537,701
Less accumulated depreciation (37,143,223) (33,101,934) (29,960,196)
----------- ----------- -----------
62,882,189 64,349,529 59,577,505
----------- ----------- -----------
$80,728,966 $77,486,482 $70,175,840
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $7,575,573 $6,517,508 $4,567,292
Accrued expenses 5,802,330 3,310,882 2,347,668
Dividends payable 2,375,271 1,892,302 1,891,759
Income taxes payable 2,510,508 1,049,508 -
Deferred revenue 6,511,902 6,098,541 6,142,111
Long-term debt, current portion 73,893 70,097 722,235
----------- ----------- -----------
Total current liabilities 24,849,477 18,938,838 15,671,065
Long-term debt, due after one year 2,925,298 6,351,079 7,961,079
Outstanding mutuel tickets (payable
after one year) 2,031,500 2,256,696 1,523,600
Deferred compensation 825,211 871,212 690,178
Deferred income taxes 2,316,600 2,415,500 2,248,000
Minority interest in equity of consolidated subsidiary - - 78,771
Stockholders' equity:
Preferred stock, no par value; authorized,
250,000 shares; issued, none
Common stock, no par value; authorized,
10,000,000 shares, issued 3,654,264 shares 1996,
3,784,605 shares, 1995 and 3,783,318 shares, 1994 3,493,042 3,504,388 3,437,911
Retained earnings 44,352,838 43,486,460 39,175,627
Deferred compensation costs -- (272,691) (545,391)
Note receivable for common stock (65,000) (65,000) (65,000)
----------- ----------- -----------
47,780,880 46,653,157 42,003,147
----------- ----------- -----------
$80,728,966 $77,486,482 $70,175,840
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
33
<PAGE>
<TABLE>
<CAPTION>
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Net revenues $107,858,818 $92,434,216 $66,419,460
Operating expenses:
Purses 34,439,143 27,651,482 20,422,174
Other direct expenses 52,356,075 46,117,000 28,914,924
------------ ------------ -----------
86,795,218 73,768,482 49,337,098
------------ ------------ -----------
Gross profit 21,063,600 18,665,734 17,082,362
Selling, general and administrative 8,748,703 8,360,524 7,221,276
------------ ------------ -----------
Operating income 12,314,897 10,305,210 9,861,086
------------ ------------ -----------
Other income (expense):
Interest income 390,669 233,556 292,115
Interest expense (337,438) (572,779) (175,534)
Miscellaneous income 673,398 288,148 174,386
------------ ------------ -----------
726,629 (51,075) 290,967
------------ ------------ -----------
Earnings before income taxes 13,041,526 10,254,135 10,152,053
Provision for income taxes 4,970,000 4,051,000 3,985,700
------------ ------------ -----------
Net earnings $ 8,071,526 $ 6,203,135 $ 6,166,353
============ ============ ===========
Net earnings per share (based on weighted
average shares outstanding of 3,724,557,
3,784,140 and 3,778,350, respectively) $2.17 $1.64 $1.63
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
34
<PAGE>
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Note Deferred
Common Stock Retained Receivable for Compensation
Shares Amount Earnings Common Stock Costs Total
--------- --------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances December 31, 1993 3,773,930 $2,977,911 $34,901,033 $ (65,000) $ (818,091) $36,995,853
Net earnings 6,166,353 6,166,353
Deferred compensation
amortization 272,700 272,700
Cash dividends, $.50 per share (1,891,759) (1,891,759)
Issuance of common stock at
$49.00 per share 9,388 460,000 460,000
---------- ---------- ----------- ----------- ----------- -----------
Balances December 31, 1994 3,783,318 3,437,911 39,175,627 (65,000) (545,391) 42,003,147
Net earnings 6,203,135 6,203,135
Deferred Compensation
amortization 272,700 272,700
Issuance of common stock at
$51.65 per share 1,287 66,477 66,477
Cash dividends, $.50 per share (1,892,302) (1,892,302)
---------------------------------- ----------- ----------- -----------
Balances December 31, 1995 3,784,605 3,504,388 43,486,460 (65,000) (272,691) 46,653,157
Net earnings 8,071,526 8,071,526
Deferred compensation
amortization 272,691 272,691
Issuance of common stock
at $28.90 per share 3,909 112,970 112,970
Repurchase of common stock (134,250) (124,316) (4,829,877) (4,954,193)
Cash dividends,
$.65 per share (2,375,271) (2,375,271)
---------- ---------- ----------- ----------- ----------- -----------
Balances December 31, 1996 3,654,264 $3,493,042 $44,352,838 $ (65,000) - $47,780,880
========== ========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
35
<PAGE>
<TABLE>
<CAPTION>
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $8,071,526 $6,203,135 $6,166,353
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 4,814,114 4,506,427 3,327,731
Deferred income taxes ( 461,000) 167,500 129,000
Deferred compensation 226,690 142,534 640,712
Increase (decrease) in cash resulting from
changes in operating assets and liabilities,
net of effects from acquisitions:
Accounts receivable (3,119,335) 178,317 1,438,984
Other currents assets 232,699 191,740 (44,526)
Income taxes payable 1,461,000 1,049,508 (1,492,740)
Deferred revenue 413,361 (43,570) (1,992,626)
Accounts payable, accrued expenses and other 3,440,476 4,144,532 3,227,085
--------- ---------- -----------
Net cash provided by operating activities 15,079,531 16,540,123 11,399,973
---------- ---------- -----------
Cash flows from investing activities:
Additions to plant and equipment, net (2,570,795) (8,589,535) (23,310,204)
Acquisition of Anderson Park, Inc. net of
note payable of $1,100,000 - - (850,000)
Additions to intangible assets - (461,536) (1,248,905)
----------- ---------- -----------
Net cash used in investing activities (2,570,795) (9,051,071) (25,409,109)
----------- ---------- -----------
Cash flows from financing activities:
Increase (decrease) in long-term debt, net (3,421,985) (2,262,138) 7,299,418
Dividends paid (1,892,302) (1,891,759) (1,886,965)
Common stock issued 112,970 - -
Common stock repurchased (4,954,193) - -
----------- ---------- -----------
Net cash used in financing activities (10,155,510) (4,153,897) 5,412,453
----------- ---------- -----------
Net increase (decrease) in cash and cash equivalents 2,353,226 3,335,155 (8,596,683)
Cash and cash equivalents, beginning of period 5,856,188 2,521,033 11,117,716
----------- ---------- -----------
Cash and cash equivalents, end of period $8,209,414 $5,856,188 $ 2,521,033
=========== ========== ===========
Supplemental disclosures of cash flow
information: Cash paid during the period for:
Interest $277,149 $ 485,908 $ 102,626
Income taxes $3,970,000 $ 2,790,000 $ 5,393,000
</TABLE>
Noncash investing and financing activities:
During 1994, $460,000 of notes payable was paid by the issuance of common
stock.
The accompanying notes are an integral part of the consolidated financial
statements.
36
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
Churchill Downs Incorporated (the "Company") conducts Spring and Fall
live race meetings for Thoroughbred horses and participates in
intertrack and interstate simulcast wagering as a host track and as a
receiving track in Kentucky. In Indiana, the Company, through its
subsidiary, Hoosier Park L.P. (Hoosier Park), conducts live Thoroughbred
and Standardbred race meetings and participates in simulcast wagering.
Both its Kentucky and Indiana operations are subject to regulation by
the racing commissions of the respective states.
The accompanying consolidated financial statements include the accounts
of the Company, its wholly owned subsidiaries, Churchill Downs
Management Company and Anderson Park Inc. and its majority owned
subsidiary, Hoosier Park, L.P. All significant intercompany balances and
transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FOLLOWS:
CASH EQUIVALENTS:
The Company considers investments with original maturities of three
months or less to be cash equivalents. The Company has, from time to
time, cash in the bank in excess of federally insured limits.
PLANT AND EQUIPMENT:
Plant and equipment are recorded at cost. Depreciation is provided by
accelerated and straight-line methods over the estimated useful lives of
the related assets.
DEFERRED REVENUE:
Deferred revenue includes advance sales of tickets.
37
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(cont'd)
OTHER ASSETS:
Amortization on a racing license is provided over forty years using the
straight-line method. Organizational costs and preopening costs are
amortized over 24 months. Amortization expense was $775,979, $688,916
and $264,753 for the years ended December 31, 1996, 1995 and 1994.
STOCK-BASED COMPENSATION:
The Company accounts for stock based compensation in accordance with
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued
to Employees". In accordance with Statement of Financial Accounting
Standards No. 123 (SFAS 123) "Accounting for Stock-based Compensation"
proforma disclosure of net income and earnings per share are presented
in Note 7 as if SFAS 123 had been applied.
RECLASSIFICATION:
Certain prior year accounts have been reclassified to conform to the
current year presentation.
EARNINGS PER SHARE:
Earnings per share has been computed by dividing net earnings by the
weighted average number of common shares and equivalents outstanding.
Common share equivalents included in the computation represent shares
issuable upon assumed exercise of stock options which would have a
dilutive effect on earnings. Such equivalents had no material effect on
the computation for the periods ended December 31, 1996, 1995 and 1994.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" (SFAS 128). SFAS 128 is designed to improve the EPS information
provided in financial statements by simplifying the existing
computational guidelines. SFAS 128 is effective for financial statements
issued for periods ending after December 15, 1997. The Company does not
expect adoption of this standard will have a material impact on its
financial statements.
38
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. PLANT AND EQUIPMENT:
Plant and equipment are summarized as follows:
December 31, December 31, December 31,
1996 1995 1994
------------ ------------ ------------
Land $ 5,879,994 $ 5,930,242 $ 5,864,863
Grandstands and buildings 56,154,054 55,946,326 48,749,083
Equipment 2,936,129 2,685,026 2,110,793
Furniture and fixtures 3,603,276 3,435,761 3,586,659
Tracks and other improvements 31,377,753 29,332,188 28,364,732
Construction in process 74,206 121,920 861,571
------------ ------------ -----------
$100,025,412 $97,451,463 $89,537,701
============ ============ ===========
Depreciation expense was $4,038,135, $3,817,511 and $3,062,978 for the
years ended December 31, 1996, 1995 and 1994.
3. INCOME TAXES:
Components of the provision for income taxes follow:
Income taxes:
1996 1995 1994
---- ---- ----
Currently payable $5,431,000 $3,883,500 $3,856,700
Deferred income taxes (461,000) 167,500 129,000
----------- ---------- ----------
$4,970,000 $4,051,000 $3,985,700
========== ========== ==========
The Company's income tax expense is different from the amount computed
by applying the statutory federal income tax rate to income before
taxes as follows:
1996 1995 1994
---- ---- ----
Federal statutory tax on
Earnings before income tax $4,464,000 $3,486,000 $3,452,000
State income taxes, net of
federal income tax benefit 537,000 552,400 533,700
Other (31,000) (12,600) -
---------- ---------- ----------
$4,970,000 $4,051,000 $3,985,700
========== ========== ==========
39
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. INCOME TAXES: (cont'd)
At December 31, 1996, the Company has operating loss carryforwards of
approximately $5,200,000 for Indiana State income tax purposes expiring
from 2009 through 2011. Based on the weight of evidence, both negative
and positive, including the lack of historical earnings in the state of
Indiana, the Company has provided a valuation allowance because it is
unable to assert that it is more likely than not to realize some portion
or all of the deferred tax asset attributable to the Indiana state
income tax net operating loss carryforwards.
Significant components of the Company's deferred tax assets and
liabilities at December 31 follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Deferred tax liabilities:
Excess of book over tax basis of
property & equipment $2,284,000 $2,161,000 $2,037,000
Book basis of racing license
in excess of tax basis 657,000 680,000 700,000
---------- ---------- ----------
Gross deferred tax liability 2,941,000 2,841,000 2,737,000
---------- ---------- ----------
Deferred tax assets:
Accrual for supplemental benefit plan (273,000) (252,900) (230,000)
Net operating loss carryforwards (176,000) (104,000) -
Allowance for uncollectible receivables (66,000) (54,000) (86,000)
Excess of book over tax basis of
other assets (136,000) - -
Other accruals (511,500) (118,600) (173,000)
---------- ---------- ----------
Gross deferred tax assets (1,162,500) (529,500) (489,000)
Valuation allowance for deferred
tax assets 176,000 104,000 -
---------- ---------- ----------
Net deferred tax liability $1,954,500 $2,415,500 $2,248,000
========== ========== ==========
Income taxes are classified in the balance sheet as follows:
Net non-current deferred tax liability $2,316,600 $2,415,500 $2,248,000
Net current deferred tax asset (362,100) - -
---------- ---------- ----------
$1,954,500 $2,415,500 $2,248,000
========== ========== ==========
</TABLE>
40
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. EMPLOYEE BENEFIT PLANS:
The Company has a profit-sharing plan which covers all full-time
employees with one year or more of service. The Company will match
contributions made by the employee up to 2% of the employee's annual
compensation and contribute a discretionary amount determined annually
by the Board of Directors. The cost of the plan for the years ended
December 31, 1996, 1995 and 1994 was $402,000, $280,000 and $276,000,
respectively.
The estimated present value of future payments under a supplemental
benefit plan is charged to expense over the period of active employment
of the employees covered under the plan. Supplemental benefit plan
expense for the years ended December 31, 1996, 1995 and 1994 was
$51,000, $57,000 and $49,000, respectively.
The Company is a member of a noncontributory defined benefit
multi-employer retirement plan for all members of the Pari-mutuel
Clerk's Union of Kentucky. Contributions are made in accordance with
negotiated labor contracts. Retirement plan expense for the year ended
December 31, 1996, 1995 and 1994 was $183,246, $193,774 and $190,626,
respectively. The Company's policy is to fund this expense as accrued.
5. LONG-TERM DEBT:
The Company has an unsecured $20,000,000 bank line of credit with
various options for the interest rate, none of which are greater than
the bank's prime rate. The line of credit expires January 31, 1998. The
prime rate as of December 31, 1996 was 8.25%. No borrowings were
outstanding at December 31, 1996. There was $6.0 million outstanding at
December 31, 1995 and $7.5 million outstanding at December 31, 1994.
The Company also has two non-interest bearing notes payable in the
aggregate face amount of $900,000 relating to the purchase of an
intertrack wagering license from the former owners of the Sports
Spectrum property. Interest has been imputed at 8%. The balance of these
notes net of unamortized discount was $350,000, $420,000 and $481,000 at
December 31, 1996, 1995 and 1994, respectively. The notes require
aggregate annual payments of $110,000. As described in the contingency
footnote (Note 10) any remediation costs for environmental cleanup can
be offset against any amounts due under these notes payable.
On May 31, 1996, the Company entered into a Partnership Interest
Purchase Agreement with Conseco HPLP, L.L.C. ("Conseco") for the sale of
10% of the Company's partnership interest in Hoosier Park to Conseco.
The transaction also included a loan by Conseco of approximately
$2,600,000. The loan requires interest of prime plus 2% (10.25% at
December 31, 1996) payable monthly with principal due November, 2004.
The note is collateralized by 10% of the assets of Hoosier Park.
41
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. LONG-TERM DEBT: (cont'd)
Maturities of all notes payable for the five years following December
31, 1996 follow:
PRINCIPLE AMOUNT
1997 - $ 74,000
1998 - 80,000
1999 - 86,000
2000 - 93,000
2001 - 17,000
Thereafter - 2,649,000
6. OPERATING LEASES:
The Company contracts for totalisator equipment and service. A contract
with a new vendor was entered into on November 1, 1993 and extends
through October, 1998. The contract provides for rentals based on a
percentage of pari-mutuel wagers registered by the totalisator
equipment. Hoosier Park entered into a separate contract with the same
vendor for totalisator equipment and service under an agreement which
expires in 2001 and provides for variable rentals based on the level of
activity. Rental expense for the years ended December 31 1996, 1995 and
1994 was $1,257,000, $1,093,000 and $577,000, respectively.
Hoosier Park leases land in Anderson, Indiana under an operating lease
agreement with the City of Anderson. Under the agreement, Hoosier Park
pays an annual rent of $128,520 or one-half of one percent of the total
annual handle wagered at the racetrack facility and at the three Indiana
simulcast facilities on live races at the track, whichever is greater.
The original term of the lease expires April 22, 2003. Hoosier Park has
options to renew the lease for three additional ten-year periods subject
to the same terms and conditions. Rent expense during 1996, 1995 and
1994 was $218,821, $308,037 and $100,882, respectively, which included
$90,301 and $179,517 of contingent rentals in 1996 and 1995,
respectively.
In November 1995, Hoosier Park entered into an operating lease agreement
which expires November 25, 2005 to lease property for the Indianapolis
off-track betting facility. Under this agreement, Hoosier Park pays an
annual minimum rent of $200,000, plus additional rent contingent upon
annual gross revenues. Hoosier Park has an option to renew the lease for
an additional five-year period. Under the terms of the renewal lease,
Hoosier Park pays an annual minimum rent of $300,000, plus additional
rent contingent upon annual gross revenues. Rent expense under this
agreement during 1996 and 1995 was $619,646 and $113,568, respectively.
42
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. OPERATING LEASES: (cont'd)
Hoosier Park contracts for audio/video equipment and service under an
agreement which expires on the last day of racing in the year 2001. The
agreement provides for daily fees, which vary based on the level of
programming provided. Expense under this agreement during 1996, 1995 and
1994 was $800,841, $794,351 and $99,363, respectively.
A summary of future minimum operating lease payments follows:
Year Ending Minimum Lease
December 31 Payment ($)
1997 $ 328,520
1998 328,520
1999 328,520
2000 328,520
2001 328,520
Later Years 954,693
Total minimum lease payments $2,597,293
7. STOCK-BASED COMPENSATION PLANS:
The Company sponsors the "Churchill Downs Incorporated 1993 Stock Option
Plan" (the "Plan"), a stock-based incentive compensation plan which is
described below. The Company applies APB Opinion 25 and related
interpretations in accounting for the Plan. In 1995, the FASB issued
FASB Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS
123") which, if fully adopted by the Company, would change the methods
the Company applies in recognizing the cost of the Plan. Adoption of the
cost recognition provisions of SFAS 123 is optional and the Company has
decided not to elect these provisions of SFAS 123. However, pro forma
disclosures as if the Company adopted the cost recognition provisions of
SFAS 123 in 1995 are required by SFAS 123 and are presented below.
Under the Plan, the Company is authorized to issue up to 200,000 shares
of common stock pursuant to "Awards" granted in the form of incentive
stock options (intended to qualify under Section 422 of the Internal
Revenue Code of 1986, as amended) and non-qualified stock options.
Awards may be granted to selected employees and directors of the Company
or any subsidiary.
43
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. STOCK-BASED COMPENSATION PLANS: (cont'd)
Employee Stock Options:
The Plan provides that the exercise price of any incentive stock option
may not be less than the fair market value of the common stock on the
date of grant. The exercise price of any nonqualified stock option is
not so limited by the Plan. The Company granted stock options in 1996,
1995 and 1994. The stock options granted in those years have contractual
terms of 10 years and varying vesting dates, ranging from one to three
years following the date of grant. In accordance with APB 25, the
Company has not recognized any compensation cost for these stock
options.
A summary of the status of the Company's stock options as of December
31, 1996, 1995 and 1994 and the changes during the year ended on those
dates is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------- ------------------------- ---------------------------
# of Shares Weighted # of Shares Weighted # of Shares Weighted
Underlying Average Underlying Average Underlying Average
Options Exercise Prices Options Exercise Prices Options Exercise Prices
---------- --------------- ----------- --------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of the year 124,000 $44.68 113,250 $45.93 92,700 $46.53
Granted 137,200 $37.93 10,750 $31.50 20,550 $43.22
Exercised - - - - - -
Canceled 92,700 $46.53 - - - -
Forfeited - - - - - -
Expired - - - - - -
Outstanding at end
of year 168,500 $38.16 124,000 $44.68 113,250 $45.93
Exercisable at end - - 61,800 $46.53 30,900 $46.53
of year
Weighted-average fair
value per share of
options granted
during the year $11.09 $ 8.40
</TABLE>
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1996 and 1995, respectively:
dividend yield of 2.1% in 1995 and ranging from 1.3% to 1.6% in 1996;
risk-free interest rates are different for each grant and range from
5.39% to 6.74%; and the expected lives of options are different for each
grant and range from approximately 5.5 to 6.5 years, and a volatility of
18.75% for all grants.
44
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. STOCK-BASED COMPENSATION PLANS: (cont'd)
The following table summarizes information about stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
Number Weighted Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices At 12/31/96 Contributing Life Exercise Price At 12/31/96 Exercise Price
---------------- ----------- ----------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$31.50 to $38.50 147,950 9.48 $37.46 - -
$42.50 to $44.00 20,550 7.6 $43.22 - -
TOTAL 168,500 9.25 $38.16 - -
</TABLE>
Employee Stock Purchase Plan:
Under the Company's Employee Stock Purchase Plan (the "Employee Stock
Purchase Plan"), the Company is authorized to sell, pursuant to
short-term stock options, shares of its common stock to its full-time
(or part-time for at least 20 hours per week and at least five months
per year) employees at a discount from the common stock's fair market
value through payroll deductions. The Employee Stock Purchase Plan
operates on the basis of recurring, consecutive one-year periods. Each
period commences on August 1 and ends on the next following July 31.
On the first day of each 12 month period, July 1, the Company will offer
to each eligible employee the opportunity to purchase common stock.
Employees may elect to participate for a period by electing to have a
designated percentage of their compensation withheld (after-tax) and
applied to purchase shares of common stock on the last day of the
period, July 31. The Employee Stock Purchase Plan allows withdrawals,
terminations and reductions on the amounts being deducted. The purchase
price for the common stock will be 85% of the lesser of the fair market
value of the common stock on (I) the first day of the period, or (ii)
the last day of the period. No employee may purchase common stock under
the Employee Stock Purchase Plan valued at more than $25,000 for each
calendar year.
Under the Employee Stock Purchase Plan, the Company sold 3,909 shares of
common stock to 109 employees pursuant to options granted on August 1,
1995 and exercised on July 31, 1996. Because the plan year overlaps the
company's fiscal year, the number of shares sold pursuant to options
granted on July 1, 1996 can only be estimated because the 1996 plan year
is not yet complete. The Company's estimate of options granted in 1996
under the Plan is based on the number of shares sold to employees under
the Plan for the 1995 plan year, adjusted to reflect the change in the
number of employees participating in the Plan in 1996.
In accordance with APB 25, the Company has not recognized any
compensation cost for the Employee Stock Purchase Plan for 1996 or 1995
(or any other prior year).
45
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. STOCK-BASED COMPENSATION PLANS: (cont'd)
A summary of the status of the Company's stock options under the
Employee Stock Purchase Plan as of December 31, 1996 and 1995 and the
changes during the year ended on those dates is presented below:
<TABLE>
<CAPTION>
1996 1995
---------------------------- ---------------------------
# of Shares Weighted # of Shares Weighted
Underlying Average Underlying Average
Options Exercise Prices Options Exercise Prices
----------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of the year 3,909 $28.90 - -
Granted 4,000 $34.43 3,909 $28.90
Exercised 3,909 $28.90 - -
Forfeited - - - -
Expired - - - -
Outstanding at end of the year 4,000 - 3,909 -
Exercisable at end of year - - - -
Weighted-average fair value per
share of options granted
during the year $12.78 $10.71
</TABLE>
Had the compensation cost for the Company's stock-based compensation
plans been determined consistent with SFAS 123, the Company's net income
and net income per common share for 1996 and 1995 would approximate the
pro forma amounts below:
1996 1995
---------- ----------
Net income:
As reported $8,071,526 $6,203,135
Pro-forma 7,530,000 6,153,000
Net income per common share:
As reported $2.17 $1.64
Pro-forma 2.02 1.63
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 123 does not apply to awards prior to
1995, and the Company anticipates making awards in the future under its
stock-based compensation plans.
46
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. FAIR VALUES OF FINANCIAL INSTRUMENTS:
Financial Accounting Standards Board ("FASB") Statement No. 107,
"Disclosure about Fair Value of Financial Instruments," is a part of a
continuing process by the FASB to improve information on financial
instruments. The following methods and assumptions were used by the
Company in estimating its fair value disclosures for such financial
instruments as defined by the Statement:
Cash and Cash Equivalents - The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Long-Term Debt - The carrying amounts of the Company's borrowings under
its line of credit agreements and other long-term debt approximates fair
value, based upon current interest rates.
9. ACQUISITION:
On January 26, 1994 the Company purchased Anderson Park, Inc. ("API")
for approximately $1,950,000. API owned an Indiana Standardbred racing
license and was in the process of constructing a racing facility in
Anderson, Indiana. Subsequently, the facility was completed and
contemporaneously with the commencement of operations on September 1,
1994, the net assets of API were contributed to a newly formed
partnership, Hoosier Park, L.P. in return for an 87% general partnership
interest.
10. CONTINGENCIES:
On January 22, 1992, the company acquired certain assets of Louisville
Downs, Incorporated for $5,000,000. In conjunction with this purchase,
the Company withheld $1,000,000 from the amount due to the sellers to
offset certain costs related to the remediation of environmental
contamination associated with underground storage tanks at the site.
Substantially all of the $1,000,000 hold back had been utilized as of
December 31, 1995. In addition, the Company may offset any additional
costs against additional amounts payable to the sellers for the
acquisition of the property.
It is not anticipated that the Company will have any liability as a
result of compliance with environmental laws with respect to the
property. Compliance with environmental laws has not otherwise affected
development and operation the property and the Company is not otherwise
subject to any material compliance costs in connection with federal or
state environmental laws.
47
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. SALE OF 10% OF HOOSIER PARK:
On December 20, 1995, the Company entered into a Partnership Interest
Purchase Agreement with Conseco HPLP, L.L.C. ("Conseco") for the sale of
10% of the Company's partnership interest in HPLP to Conseco. This sale
was closed on May 31, 1996. The purchase price for the 10% partnership
interest was $218,390 and the transaction also included a payment of
$2,603,514 for a 10% interest in the debt owed by HPLP to a subsidiary
of the Company. Conseco and Pegasus Group, Inc. ("Pegasus") are limited
partners of HPLP and Anderson Park, Inc. ("API"), a subsidiary of the
Company, continues to be the sole general partner of HPLP.
Through December 31, 1998, Conseco has an option to purchase from API an
additional 47% partnership interest in HPLP including payment for 47%
interest in the debt owed by HPLP to a subsidiary of the Company. The
purchase price of the additional partnership interest will be
approximately $6,222,000 and the payment for the debt will be
approximately $15,934,000. This purchase is subject to the approval of
the Indiana Horse Racing Commission. Upon exercise of the option,
Conseco would be the sole general partner of HPLP, and API and Pegasus
will be limited partners of HPLP with partnership interests of 30% and
13%, respectively. The Company will continue to have a long-term
management agreement with HPLP pursuant to which the Company has
operational control of the day-to-day affairs of HPLP and its related
simulcast facilities.
48
<PAGE>
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 "Elections 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 "Elections of Directors -
Compensation and Committees of the Board of Directors" 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.
49
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
<TABLE>
(a)(1) Consolidated Financial Statements
<S> <C>
PAGES
The following financial statements of Churchill Downs
Incorporated for the year ended December 31, 1996, the year ended
December 31, 1995 and the year ended December 31, 1994 are
included in Part II, Item 8:
Reports of Independent Accountants 32
Consolidated Balance Sheets 33
Consolidated Statements of Earnings 34
Consolidated Statements of Stockholders' Equity 35
Consolidated Statements of Cash Flows 36
Notes to Consolidated Financial Statements 37-48
Schedule VIII - Valuation and Qualifying Accounts 52
</TABLE>
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.
(b) Reports on Form 8-K:
None
(c) Exhibits
See exhibit index.
(d) All financial statements and schedules except those items listed under
items 14(a)l and (a)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.
50
<PAGE>
<TABLE>
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> <C> <C>
/S/ THOMAS H. MEEKER /S/ ROBERT L. DECKER /S/ VICKI L. BAUMGARDNER
Thomas H. Meeker Robert L. Decker Vicki L. Baumgardner
President Sr. Vice President, Finance Vice President, Finance/Treasurer
March 20, 1997 March 20, 1997 March 20, 1997
(Principal Executive Officer) (Chief Financial Officer) (Principal Accounting Officer)
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/ CHARLES W. BIDWILL, JR. /S/ CATESBY W. CLAY
Charles W. Bidwill, Jr. Catesby W. Clay William S. Farish
March 20, 1997 March 20, 1997 March 20, 1997
(Director) (Director) (Director)
/S/ FRANK B. HOWER, JR.
J. David Grissom Seth W. Hancock Frank B. Hower, Jr.
March 20, 1997 March 20, 1997 March 20, 1997
(Director) (Director) (Director)
/S/ W. BRUCE LUNSFORD
G. Watts Humphrey, Jr. W. Bruce Lunsford Arthur B. Modell
March 20, 1997 March 20, 1997 March 20, 1997
(Director) (Director) (Director)
/S/ CARL F. POLLARD /S/ DARRELL R. WELLS /S/ DENNIS D. SWANSON
Carl F. Pollard Darrell R. Wells Dennis D. Swanson
March 20, 1997 March 20, 1997 March 29, 1997
(Director) (Director) (Director)
/S/ THOMAS H. MEEKER
Thomas H. Meeker
March 20, 1997
(Director)
</TABLE>
51
<PAGE>
<TABLE>
CHURCHILL DOWNS INCORPORATED
SCHEDULE VIII. - VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
Balance,
Beginning Charged to Balance,
Description Of Period Expenses Deductions End Of Period
----------- --------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful
accounts and notes receivable $135,000 $ 30,000 - $165,000
Valuation allowance for
deferred tax asset 104,000 72,000 - 176,000
-------- -------- -------- --------
$239,000 $102,000 - $341,000
======== ======== ======== ========
Year ended December 31, 1995:
Allowance for doubtful
accounts and notes receivable $215,000 - $ 80,000 $135,000
Valuation allowance for
deferred tax asset - $104,000 - 104,000
-------- -------- -------- --------
$215,000 $104,000 $ 80,000 $239,000
======== ======== ======== ========
Year ended December 31, 1994:
Allowance for doubtful
accounts and notes receivable $215,000 $ - $ - $215,000
-------- -------- -------- --------
</TABLE>
52
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
NUMBERS DESCRIPTION BY REFERENCE TO
<S> <C> <C>
(3)(a) Restated Articles of Incorporation Exhibit A to report on Form 8-K
filed with the Securities and Exchange
Commission on July 11, 1991
(b) Restated Bylaws as amended Exhibit 3(b) to report on Form 10-K for
year ended December 31, 1994
(10)(a) Churchill Downs Restated Exhibit 10 (a) to report on Form 10-K for
Supplemental Benefit Plan dated the year ended December 31, 1994
March 1, 1995
(b) Employment Agreement dated as Exhibit 19(a) to Report on Form 10-Q
of October 1, 1984, with for fiscal quarter ended October 31, 1984
Thomas H.Meeker, President
(c) Churchill Downs Incorporated Exhibit 10 (C) to report on Form 10-K for
Amended Incentive Compensation the year ended December 31, 1994
Plan (1997)
(d) Churchill Downs Incorporated Exhibit 10(h) to Report on Form 10-K for
1993 Stock Option Plan the eleven months ended December 31, 1993
(e) Stock Purchase Agreement naming Exhibit 10(i) to Report on Form 8-K
Dominick Marotta, Frank Marotta, filed with the Securities and Exchange
Louis E. Carlo and Edward F. Commission on February 10, 1994
Draugelis
(f) Amendment of Employment Report on Form 10-K for the fiscal
Agreement with Thomas H. Meeker, year ended January 31, 1986; Report
President, dated October 1, 1984 on Form 10-K for the fiscal year ended
January 31, 1987; 1988, 1990, 1991,
1992 and 1993
(g) Amendment No. 1 to Churchill Exhibit 10 (g) to report on Form 10-K for
Downs Incorporated 1993 Stock the year ended December 31, 1994
Option Plan
</TABLE>
53
<PAGE>
<TABLE>
<S> <C> <C>
(h) Promissory Note dated May 31, Exhibit 10(1) to report on Form
1994 in the principal amount 10-Q for the fiscal quarter ended
of $20,000,000 by Churchill June 30, 1994
Downs Incorporated to PNC Bank,
Kentucky, Inc.
(i) Amended and Restated Lease Exhibit 10 (I) to report on Form 10-K
Agreement dated January 31, 1996 for the year ended December 31, 1995
(j) Amendment No. 1 to Promissory Report on Form 10-K for the year
Note dated May 31, 1994 ended December 31, 1994
(k) Partnership Interest Purchase Exhibit 10(k) to report on Form 10-K
for Agreement dated December 20, for the year ended December 31, 1995
1995 among Anderson Park, Inc.,
Conseco HPLP, L.L.C., Pegasus
Group, Inc. and Hoosier Park, L.P.
(21) Subsidiaries of the registrant Report on Form 10-K for the year ended
December 31, 1994
(23) Consent of Coopers & Lybrand, LLP Report on Form 10-K for the year ended
Independent Accountants December 31, 1996
(27) Financial Data Schedule Report on Form 10-K for the year ended
December 31, 1996
(99) Names and addresses of certain Schedule 13D filed with the Commission
shareholders of the Company who on April 25, 1995, as amended on May 31,
are parties to the Third 1995
Supplemental Stockholder Agreement
</TABLE>
54
EXHIBIT 23
We consent to the incorporation by reference in the registration
statement of Churchill Downs Incorporated on Form S-8 (File No. 33-85012) of our
report dated March 7, 1997 on our audits of the consolidated financial
statements and financial statement schedule of Churchill Downs Incorporated as
of December 31, 1996, 1995 and 1994 and for each of the three years then ended
which report is included in this Annual Report on Form 10-K.
/S/COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
Louisville, Kentucky
March 28, 1997
55
RESTATED BYLAWS OF
CHURCHILL DOWNS INCORPORATED
ARTICLE I
OFFICE AND SEAL
SECTION 1. OFFICES. The principal office of the Corporation in
the State of Kentucky shall be located at 700 Central Avenue, Louisville,
Kentucky. The Corporation may have such other offices, either within or without
the State of Kentucky, as the business of the Corporation may require from time
to time.
SECTION 2. THE CORPORATE SEAL. The Seal of the Corporation shall
be circular in form, mounted upon a metal die suitable for impressing same upon
paper, and along the upper periphery of the seal shall appear the word
"Churchill Downs" and along the lower periphery thereof the word "Kentucky". The
center of the seal shall contain the word "Incorporated".
ARTICLE II
STOCKHOLDERS MEETINGS AND RECORD DATES
SECTION 1. ANNUAL MEETING. The date of the annual meeting of the
stockholders for the purpose of electing directors and for the transaction of
such other business as may come before the meeting shall be established by the
Board of Directors, but shall not be later than 180 days following the end of
the Corporation's fiscal year. If the election of Directors shall not be held on
the day designated for any annual meeting, or at any adjournment thereof, the
Board of Directors shall cause the election to be held at a special meeting of
the stockholders to be held as soon thereafter as may be convenient.
SECTION 2. SPECIAL MEETINGS. Special meetings of the stockholders
may be called by the President, the Chairman of the Board or by holders of not
less than 33-1/3% of all the shares entitled to vote at the meeting, or by a
majority of the members of the Board of Directors.
SECTION 3. PLACE OF MEETING. The Board of Directors may designate
any place within or without the State of Kentucky as the place of meeting for
any annual meeting of stockholders, or any place either within or without the
State of Kentucky as the place of meeting for any special meeting called by the
Board of Directors.
If no designation is made, or if a special meeting be called by
other than the Board of Directors, the place of meeting shall be the principal
office of the Corporation in the State of Kentucky.
SECTION 4. NOTICE OF MEETINGS. Written notice stating the place,
day and hour of the meeting and, in case of a special meeting, the purpose or
purposes for which the meeting is called, shall be delivered not less than ten
(10) nor more than sixty (60) days before the date of the meeting, either
personally or by mail, by or at the direction of the President, or the
Secretary, or the officer or
56
<PAGE>
persons calling the meeting, to each stockholder of record entitled to vote at
such meeting. If mailed, such notice shall be deemed to be delivered when
deposited in the United States mail in a sealed envelope addressed to the
stockholder at his address as it appears on the records of the Corporation, with
first class postage thereon prepaid.
SECTION 5. RECORD DATE. The Corporation's record date shall be
fixed by the Board of Directors for the determination of stockholders entitled
to notice of or to vote at a meeting of stockholders, or stockholders entitled
to receive any distribution. When a determination of stockholders entitled to
vote at any meeting of stockholders has been made as provided herein, such
determination shall apply to any adjournment thereof.
SECTION 6. VOTING LISTS AND SHARE LEDGER. The Secretary shall
prepare a complete list of the stockholders entitled to vote at any meeting, or
any adjournment thereof, arranged in alphabetical order, with the address of and
the number of shares held by each stockholder, which list shall be produced and
kept open at the meeting and shall be subject to the inspection of any
stockholder during the meeting. The original share ledger or stock transfer
book, or a duplicate thereof kept in this State, shall be PRIMA FACIE evidence
as to the stockholders entitled to examine such list or share ledger or stock
transfer book, or the stockholders entitled to vote at any meeting of
stockholders or to receive any dividend.
SECTION 7. QUORUM. A majority of the outstanding shares entitled
to vote, represented in person or by proxy, shall constitute a quorum at any
meeting of stockholders. The stockholders present at a duly organized meeting
can continue to do business at any adjourned meeting, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum.
SECTION 8. PROXIES. At all meetings of stockholders, a
stockholder may vote by proxy. An appointment of a proxy shall be executed in
writing by the stockholder or by his duly authorized attorney-in-fact and be
filed with the Secretary of the Corporation before or at the time of the
meeting.
SECTION 9. NATURE OF BUSINESS. At any meeting of stockholders,
only such business shall be conducted as shall have been brought before the
meeting by or at the direction of the Board of Directors or by any stockholder
who complies with the procedures set forth in this Section 9.
No business may be transacted at any meeting of stockholders,
other than business that is either (a) specified in the notice of meeting (or
any supplement thereto) given by or at the direction of the Board of Directors,
(b) otherwise properly brought before such meeting of stockholders by or at the
direction of the Board of Directors, or (c) in the case of any annual meeting of
stockholders or a special meeting called for the purpose of electing directors,
otherwise properly brought before such meeting by any stockholder (i) who is a
stockholder of record on the date of the giving of the notice provided for in
this Section 9 and on the record
57
<PAGE>
date for the determination of stockholders entitled to vote at such meeting of
stockholders and (ii) who complies with the notice procedures set forth in this
Section 9.
In addition to any other applicable requirements, for business to
be properly brought before any annual meeting of stockholders by a stockholder,
or for a nomination of a person to serve as a Director, to be made by a
stockholder, such stockholder must have given timely notice thereof in proper
written form to the Secretary.
To be timely, a stockholder's notice to the Secretary must be
delivered or mailed to and be received at the principal executive offices of the
Corporation (a) in the case of the annual meeting of stockholders, not less than
ninety(90) nor more than one hundred and twenty (120) days prior to the
anniversary date of the immediately preceding annual meeting of stockholders;
PROVIDED, HOWEVER, that in the event that the annual meeting of stockholders is
called for a date that is not within thirty (30) days before or after such
anniversary date, notice by the stockholder, in order to be timely, must be so
received not later than the close of business on the tenth (10th) day following
the day on which notice of the date of the annual meeting of stockholders was
mailed or public disclosure of the date of such meeting was made, whichever
first occurs; and (b) in the case of a special meeting of stockholders called
for the purpose of electing directors, not later than the close of business on
the tenth (10th) day following the day on which notice of the date of the
special meeting of stockholders was mailed or public disclosure of the date of
such meeting was made, whichever first occurs.
To be in proper written form, a stockholder's notice to the
Secretary must set forth as to each matter (including nominations) such
stockholder proposes to bring before the meeting of stockholders (a) a brief
description of the business desired to be brought before the meeting and the
reasons for conducting the business at the meeting, (b) the name and record
address of such stockholder, (c) the class or series and number of shares of
capital stock of the Corporation which are owned beneficially or of record by
such stockholder as of the record date for the meeting (if such date shall then
have been made publicly available and shall have occurred) and as of the date of
such notice, (d) a description of all arrangements or understandings between
such stockholder and any other person or persons (including their names) in
connection with the proposal of such business by such stockholder and any
material interest of such stockholder in such business, (e) as to each person
whom the stockholder proposes to nominate for election as a director (i) the
name, age, business address and residence address of the person and (ii) the
class or series and number of shares of capital stock of the Corporation which
are owned beneficially or of record by the person as of the record date for the
meeting (if such date shall then have been made publicly available and shall
have occurred) and as of the date of such notice, (f) any other information
which would be required to be disclosed in a proxy statement or other filings
required to be made in connection with the solicitations of proxies for the
proposal (including, if applicable, with respect to the election of directors)
pursuant to Section 14 of the Securities Exchange Act of 1934, as
58
<PAGE>
amended, and the rules and regulations promulgated thereunder if such
stockholder were engaged in such solicitation, and (g) a representation that
such stockholder intends to appear in person or by proxy at the meeting to bring
such business before the meeting. Any notice concerning the nomination of a
person for election as a director must be accompanied by a written consent of
the proposed nominee to being named as a nominee and to serve as a director if
elected.
No business shall be conducted and no person shall be eligible
for election as a Director at any annual meeting of stockholders or a special
meeting of stockholders called for the purpose of electing directors except
business or nominations brought before such meeting in accordance with the
procedures set forth in this Section 9; PROVIDED, HOWEVER, that, once business
has been properly brought before the meeting in accordance with such procedures,
nothing in this Section 9 shall be deemed to preclude discussion by any
stockholder of any such business. If the chairman of the meeting of stockholders
determines that business was not properly brought before such meeting, or a
nomination was not properly made, as the case may be, in accordance with the
foregoing procedures, the chairman shall declare to the meeting that (a) the
business was not properly brought before the meeting and such business shall not
be transacted, or, if applicable, (b) the nomination was defective and such
defective nomination shall be disregarded.
ARTICLE III
DIRECTORS
SECTION 1. GENERAL POWERS. The business and affairs of the
Corporation shall be managed by a Board of Directors.
SECTION 2. NUMBER AND TENURE. The Board of Directors shall
consist of thirteen (13) members but the number may be increased or decreased by
amendment of this Bylaw. The Directors shall be divided into three classes,
consisting of four (4) Class I Directors, five (5) Class II Directors and four
(4) Class III Directors. At the 1995 annual meeting of shareholders, one (1)
Class I director shall be elected for a term of two (2) years, five (5) Class II
directors shall be elected for a term of three (3) years, and one (1) Class III
director shall be elected for a term of one (1) year. Thereafter, each director
shall hold office for a term of three (3) years (or in the case of the Class I
director elected in 1995, a term of two (2) years; or in the case of the Class
III director elected in 1995, a term of one (1) years) or until his successor
shall have been elected and qualifies for the office, whichever period is
longer. Except for any individual who is serving as Chairman of the Board of
Directors at the time of nomination of directors, a person shall not be
qualified for election as a Director unless he shall be less than seventy-two
(72) years of age on the date of election. Each Director other than the Chairman
of the Board of Directors shall become a Director Emeritus upon expiration of
his current term following the date the Director is no longer qualified for
election as a Director due to age. Directors Emeritus may attend all regular and
special meetings of the
59
<PAGE>
Board of Directors and shall serve in an advisory capacity without a vote in
Board actions.
SECTION 3. REGULAR MEETINGS. A regular meeting of the Board of
Directors shall be held without other notice than this bylaw, immediately after,
and at the same place as, the annual meeting of stockholders. The Board of
Directors may provide, by resolution, the time and place, either within or
without the State of Kentucky, for the holding of additional regular meetings
without other notice than such resolution.
SECTION 4. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by or at the request of the President, the Chairman of
the Board or the majority of the Board of Directors. The person or persons
authorized to call special meetings of the Board of Directors may fix any place,
either within or without the State of Kentucky, as the place for holding any
special meeting of the Board of Directors.
SECTION 5. NOTICE. Notice of any special meeting of the Board of
Directors shall be given by notice delivered personally, by mail, by telegraph
or by telephone. If mailed, such notice shall be given at least five (5) days
prior thereto and such mailed notice shall be deemed to have been delivered upon
the earlier of receipt or five (5) days after it is deposited in the United
States mail in a sealed envelope so addressed, with first class postage thereon
prepaid. If notice is given by telegram, it shall be delivered at least
twenty-four (24) hours prior to the special meeting and such telegram notice
shall be deemed to have been delivered when the telegram is delivered to the
telegraph company. Personal notice and notice by telephone shall be given at
least twenty-four (24) hours prior to the special meeting and shall be deemed
delivered upon receipt. Any Director may waive notice of any meeting. The
attendance of a Director at any meeting shall constitute a waiver of notice of
such meeting, except when a Director attends a meeting for the express purpose
of objecting to the transaction of any business because the meeting is not
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the Board of Directors need be
specified in the notice or waiver of notice of such meeting.
SECTION 6. QUORUM. A majority of the Board of Directors shall
constitute a quorum for the transaction of business at any meeting of the Board
of Directors, provided that if less than a majority of the Directors are present
at said meeting, a majority of the Directors present may adjourn the meeting
from time to time without further notice.
SECTION 7. MANNER OF ACTING. The act of the majority of the
Directors present at a meeting at which a quorum is present shall be
the act of the Board of Directors.
SECTION 8. VACANCIES. Any vacancy occurring in the Board of
Directors may be filled by the affirmative vote of a majority of the
remaining Directors though less than a quorum of the Board of
60
<PAGE>
Directors. A Director elected to fill a vacancy shall serve until the
next annual meeting of the stockholders.
SECTION 9. INFORMAL ACTION. Any action required or permitted to
be taken of the Board of Directors or of a committee of the Board, may be taken
without a meeting if a consent, in writing, setting forth action so taken shall
be signed by all of the Directors, or all of the members of the committee, as
the case may be. Members of the Board of Directors or any committee designated
by the Board may participate in a meeting of such Board or committee by means of
conference telephone or similar communications equipment whereby all persons
participating in the meeting can hear or speak to each other at the same time.
Participation in a meeting pursuant to this section shall constitute presence in
person at the meeting.
SECTION 10. NOMINATION OF DIRECTORS. Only persons who are
nominated in accordance with the procedures set forth in Section 9 of Article II
of these Bylaws shall be eligible for election as Directors of the Corporation,
except as may be otherwise provided in the Restated Articles of Incorporation
with respect to the right of holders of preferred stock of the Corporation to
nominate and elect a specified number of Directors in certain circumstances.
ARTICLE IV
COMMITTEES OF THE BOARD
SECTION 1. COMMITTEES. The Board of Directors shall have
authority to establish such committees as it may consider necessary or
convenient for the conduct of its business. All committees so established shall
keep minutes of every meeting thereof and such minutes shall be submitted at the
next regular meeting of the Board of Directors at which a quorum is present, and
any action taken by the Board with respect thereto shall be entered in the
minutes of the Board. Each committee so established shall elect a Chairman of
the committee.
SECTION 2. THE EXECUTIVE COMMITTEE. The Board of Directors shall
appoint and establish an Executive Committee composed of the Chairman of the
Board and up to six (6) other Directors who shall be appointed by the Board
annually. The Executive Committee shall have and may exercise when the Board of
Directors is not in session, all of the authority of the Board of Directors that
may lawfully be delegated; provided, however, the Executive Committee shall not
have the power to enter into any employment agreement with an officer of the
Corporation, without the specific approval and ratification of the Board of
Directors. A majority in membership of the Executive Committee shall constitute
a quorum.
SECTION 3. THE AUDIT COMMITTEE. The Board of Directors shall
appoint and establish an Audit Committee composed of the Chairman of the Board
and up to four (4) Directors, none of whom shall be officers, who shall be
appointed by the Board annually. The Audit Committee shall make an examination
every twelve months into the affairs of the Corporation and report the results
of such examination in writing to the Board of Directors at the next regular
meeting
61
<PAGE>
thereafter. Such report shall state whether the Corporation is in sound
condition and whether adequate internal audit controls and procedures are being
maintained and shall include recommendations to the Board of Directors regarding
such changes in the manner of doing business or conducting the affairs of the
Corporation as shall be deemed advisable.
SECTION 4. THE COMPENSATION COMMITTEE. The Board of Directors
shall appoint and establish a Compensation Committee to be composed of the
Chairman of the Board and up to four (4) Directors who shall be appointed by the
Board annually. Each member of the Compensation Committee shall be a director
who is not, during the one year prior to service or during such service, granted
or awarded equity securities pursuant to any compensation plan of the Company.
It shall be the duty of the Compensation Committee to administer the
Corporation's Supplemental Benefit Plan, the Amended and Restated Incentive
Compensation Plan (1993), the 1993 Stock Option Plan and any shareholder
approved employee stock purchase or thrift plan, including without limitation,
matters relating to the amendment, administration, interpretation, employee
eligibility for and participation in, and termination of, the foregoing plans.
It shall further be the duty of the Compensation Committee to review annually
the salaries paid to all executive officers of the Corporation and make all
decisions relating to executive compensation after considering the
recommendations of the CEO (on all but CEO compensation) and to exercise any
other authorities relating to compensation that the Board may lawfully delegate
to it; provided, however, the Compensation Committee shall not have the power to
enter into any employment agreement with an officer of the Corporation without
the specific approval and ratification of the Board of Directors.
SECTION 5. THE RACING COMMITTEE. The Board of Directors shall
appoint and establish a Racing Committee to be composed of the Chairman of the
Board and up to four (4) Directors who shall be appointed by the Board annually.
The Racing Committee shall be responsible for and shall have the authority to
obligate the Corporation with respect to matters concerning the Corporation's
contracts and relations with horsemen, jockeys and others providing services
relating to the conduct of horse racing, including the authority to approve and
cause the Corporation to enter into contracts with organizations representing
horsemen and/or commit to provide benefits or services by the Corporation to
horsemen and others.
SECTION 6. NOTICE OF COMMITTEE MEETINGS. Notice of all meetings
by the committees established in this Article shall be given in accordance with
the special meeting notice section, Article III, Section 5, of these Bylaws.
ARTICLE V
OFFICERS
SECTION 1. CLASSES. The officers of the Corporation shall be
a Chairman of the Board, a President, one or more Vice Presidents, a
Secretary, a Treasurer and such other officers and agents as may be
provided by the Board and elected in accordance with the provisions of
62
<PAGE>
this Article. Any of the offices may be combined in one person in accordance
with the provisions of law. The Chairman of the Board of Directors shall be a
member of the Board but none of the other officers is required to be a member of
the Board.
SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the
Corporation shall be elected annually by the Board of Directors at the first
meeting of the Board held after each annual meeting of stockholders. If the
election of officers shall not be held at such meeting, such election shall be
held as soon thereafter as convenient. Vacancies may be filled or new offices
created and filled at any meeting of the Board of Directors. Each officer shall
hold office until his successor shall have been duly elected and shall have
qualified or until his death or until he shall resign or shall have been removed
from office in the manner hereinafter provided.
SECTION 3. REMOVAL. Any officer elected by the Board of Directors
may be removed by the President whenever in his judgment the best interest of
the Corporation would be served thereby, but such removal shall be without
prejudice to the contract rights, if any, of the person so removed and shall be
subject always to supervision and control of the Board of Directors. Election or
appointment of an officer or agent shall not of itself create contractual
rights.
SECTION 4. CHAIRMAN OF THE BOARD. The Chairman of the Board of
Directors shall call to order and preside at all stockholders' meetings and at
all meetings of the Board of Directors. He shall perform such other duties as he
may be authorized to perform by the Board of Directors.
SECTION 5. PRESIDENT. The President shall be the chief executive
officer of the Corporation and as such shall in general supervise and control
all of the business operations and affairs of the Corporation. In the absence of
the Chairman of the Board of Directors, or in the event of the death or
incapacity of the Chairman, the President shall perform the duties of the
Chairman until a successor Chairman is elected or until the incapacity of the
Chairman terminates. The President shall have full power to employ and cause to
be employed and to discharge and cause to be discharged all employees of the
Corporation, subject always to supervision and control of the Board of
Directors. When authorized so to do by the Board of Directors, he shall execute
contracts and other documents for and in behalf of the Corporation. Unless
otherwise ordered by the Board of Directors, the President shall have full power
and authority on behalf of the Corporation to attend, act and vote at any
meeting of stockholders of any corporation in which this Corporation may hold
stock. He shall perform such other duties as may be specified in the Bylaws and
such other duties as he may be authorized to perform by the Board of Directors.
SECTION 6. EXECUTIVE VICE PRESIDENT. In the case of the
death of the President or in the event of his inability to act, the
Executive Vice President designated by the Board shall perform the
duties of the President and, when so acting, shall have all the powers
of and be subject to all restrictions upon the President. The
63
<PAGE>
Executive Vice President shall perform such other duties as from time to time
may be assigned by the President or by the Board of Directors.
SECTION 7. TREASURER. The Treasurer, subject to the control of
the Board of Directors, and together with the President, shall have general
supervision of the finances of the Corporation. He shall have care and custody
of and be responsible for all moneys due and payable to the Corporation from any
source whatsoever and deposit such moneys in the name of the Corporation in such
banks, trust companies or other depositories as shall be selected in accordance
with the provisions of these Bylaws. The Treasurer shall have the care of, and
be responsible for all securities, evidences of value and corporate instruments
of the Corporation, and shall supervise the officers and other persons
authorized to bank, handle and disburse its funds, informing himself as to
whether all deposits are or have been duly made and all expenditures duly
authorized and evidenced by proper receipts and vouchers. He shall cause full
and accurate books to be kept, showing the transactions of the Corporation, its
accounts, assets, liabilities and financial condition, which shall at all times
be open to the inspection of any Director, and he shall make due reports to the
Board of Directors and the stockholders, and such statements and reports as are
required of him by law. Subject to the Board of Directors, he shall have such
other powers and duties as are incident to his office and not inconsistent with
the Bylaws, or as may be assigned to him at any time by the Board.
SECTION 8. SECRETARY. The Secretary shall attend all meetings of
the Board of Directors, make a record of the business transacted and record same
in one or more books kept for that purpose. The Secretary shall see that the
Stock Transfer Agent of the Corporation keeps proper records of all transfers,
cancellations and reissues of stock of the Corporation and shall keep a list of
the stockholders of the Corporation in alphabetical order, showing the Post
Office address and number of shares owned by each. The Secretary shall also keep
and have custody of the seal of the Corporation and when so directed and
authorized by the Board of Directors shall affix such seal to instruments
requiring same. The Secretary shall be responsible for authenticating records of
the Corporation and shall perform such other duties as may be specified in the
Bylaws or as he may be authorized to perform by the Board of Directors.
SECTION 9. VICE PRESIDENTS. There may be additional Vice
Presidents elected by the Board of Directors who shall have such
responsibilities, powers and duties as from time to time may be assigned by the
President or by the Board of Directors.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. CONTRACTS AND AGREEMENTS. The Board of Directors may
authorize any officer or officers, agent or agents, to enter into any contract
or agreement or execute and deliver any instruments in the name of and on behalf
of the Corporation, and such authority may be general or confined to specific
instances.
64
<PAGE>
SECTION 2. LOANS. No loans shall be contracted on behalf of
the Corporation, and no evidences of indebtedness shall be issued in
its name unless authorized by a resolution of the Board of Directors.
Such authority may be general or confined to specific instances.
SECTION 3. CHECKS, DRAFTS, ORDERS, ETC. All checks, drafts or
other orders for the payment of money, notes or other evidences of indebtedness
issued in the name of the Corporation shall be signed by such officer or
officers, agent or agents, of the Corporation and in such manner as shall from
time to time be determined by resolution of the Board of Directors.
SECTION 4. DEPOSITS. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies, or other depositories as the Board of Directors
may select.
ARTICLE VII
CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. CERTIFICATES FOR SHARES. Certificates representing
shares of the Corporation shall be in such form as may be determined by the
Board of Directors. Such certificates shall be signed by the President or Vice
President and by the Secretary or an assistant Secretary and may be sealed with
the seal of the Corporation of a facsimile thereof. All certificates surrendered
to the Corporation for transfer shall be canceled, and no new certificate shall
be issued until the former certificate for all like number of shares shall have
been surrendered and cancelled, except that in case of a lost, destroyed or
mutilated certificate, a new one may be issued therefor upon such terms and
indemnity to the Corporation as the Board of Directors may prescribe.
SECTION 2. TRANSFER OF SHARES. Transfer of shares of the
Corporation shall be made only on the books of the Corporation by the registered
holder thereof or by his attorney authorized by power of attorney duly executed
and filed with the Secretary of the Corporation, and on surrender for
cancellation of the certificate for such shares. The person in whose name shares
stand on the books of the Corporation shall be deemed the owner thereof for all
purposes as regards the Corporation.
ARTICLE VIII
FISCAL YEAR
The fiscal year of the Corporation shall begin on the 1st day of
January and end on the 31st day of December.
ARTICLE IX
WAIVER OF NOTICE
Whenever any notice is required to be given under the
provisions of these Bylaws, or under the provisions of the Articles of
65
<PAGE>
Incorporation, or under the provisions of the corporation laws of the State of
Kentucky, waiver thereof in writing, signed by the person, or persons, entitled
to such notice, whether before or after the time stated therein, shall be deemed
equivalent to the giving of such notice.
ARTICLE X
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Corporation shall indemnify and may advance expenses to all
Directors, officers, employees, or agents of the Corporation, and their
executors, administrators or heirs, who are, were or are threatened to be made a
defendant or respondent to any threatened, pending or completed action, suit or
proceedings (whether civil, criminal, administrative or investigative) by reason
of the fact that he is or was a Director, officer, employee or agent of the
Corporation, or while a Director, officer, employee or agent of the Corporation,
is or was serving the Corporation or any other legal entity in any capacity at
the request of the Corporation (hereafter a "Proceeding"), to the fullest extent
that is expressly permitted or required by the statutes of the Commonwealth of
Kentucky and all other applicable law.
In addition to the foregoing, the Corporation shall, by action of
the Board of Directors, have the power to indemnify and to advance expenses to
all Directors, officers, employees or agents of the Corporation who are, were or
are threatened to be made a defendant or respondent to any Proceeding, in such
amounts, on such terms and conditions, and based upon such standards of conduct
as the Board of Directors may deem to be in the best interests of the
Corporation.
ARTICLE XI
FIDELITY BONDS
The Board of Directors shall have authority to require the
execution of fidelity bonds by all or any of the officers, agents and employees
of the Corporation in such amount as the Board may determine. The cost of any
such bond shall be paid by the Corporation as an operating expense.
ARTICLE XII
AMENDMENT OF BYLAWS
The Board of Directors may alter, amend or rescind these Bylaws,
subject to the right of the stockholders to repeal or modify such actions.
66
CHURCHILL DOWNS INCORPORATED
INCENTIVE COMPENSATION PLAN (1997)
ARTICLE 1
PURPOSE
The purpose of the CHURCHILL DOWNS INCORPORATED INCENTIVE
COMPENSATION PLAN is to promote the interests of the Company and its
stockholders by providing greater incentives to officers and other key
management employees by rewarding them for services rendered with compensation
in an amount which is directly related to the success of the Company as well as
the performance of the operating units and the individual employees.
ARTICLE 2
DEFINITIONS
2.1 DEFINITIONS. The following words and phrases, when used
herein, unless their context clearly indicates otherwise, shall have the
following respective meanings:
A. BENEFICIARY. A person or persons (natural or
otherwise) designated by a Participant in accordance with the provisions
of Article 8 to receive any benefits which shall be payable under this
Plan.
B. BOARD. The Board of Directors of Churchill Downs
Incorporated.
C. BUDGET. The annual operating budget approved by
the Board for each year during the term of the Plan.
D. CEO. The Chief Executive Officer of Churchill Downs
Incorporated.
E. COMPANY. Churchill Downs Incorporated and its
subsidiaries.
F. COMPANY ACHIEVEMENT PERCENTAGE LEVELS. The
percentages established annually by the Committee to be used, as
provided in Section 6.2, in computing a part of an Annual Incentive
Compensation Award based upon achievement of a Company Performance Goal.
G. COMPANY PERFORMANCE GOALS. The goal defined in
Section 6.1.A.
H. DISABILITY. A physical or mental condition arising
after the Effective Date hereof which qualifies a Participant for
disability benefits under the Social Security Act in effect on the date
of disability.
67
<PAGE>
I. DISCRETIONARY ACHIEVEMENT PERCENTAGE LEVELS. The
percentages established annually by the Committee to be used, as
provided in Section 6.5, in computing a part of an Annual Incentive
Compensation Award, based upon achievement of a Discretionary
Performance Goal.
J. DISCRETIONARY PERFORMANCE GOALS. The goals defined
in Section 6.1.D.
K. EFFECTIVE DATE. January 1, 1997.
L. INCENTIVE COMPENSATION AWARD. The award as defined
in Article 6. An award under the Churchill Downs Incorporated Incentive
Compensation Plan (1997) during any year shall be an "Annual Incentive
Compensation Award."
M. PARTICIPANT. An employee of the Company who is
selected for participation in the Plan in accordance with the provisions
of Article 5. For purposes of Articles 7 and 8, the term Participant
shall also include a former employee who is entitled to benefits under
this Plan.
N. PARTICIPATION CLASSIFICATION. The classification
assigned to each Participant in accordance with the provisions of
Article 5.
O. PARTICIPATION PERCENTAGE. The percentages of
participation in the Plan as defined in Article 6.
P. PERFORMANCE GOALS. The performance goals as
defined in Article 6 and SCHEDULE A.
Q. PLAN. The Churchill Downs Incorporated Incentive
Compensation Plan (1997).
R. PLAN YEAR. The twelve-month period commencing on
January 1 of one calendar year and ending on December 31 of the same
calendar year, which period is also the Company's fiscal year.
S. PROFIT CENTER. The Race Profit Center, the Sales
Profit Center, and Churchill Downs Management Company, and any other
profit centers designated by the CEO.
T. PRE-TAX INCOME. The annual consolidated income of
the Company, before federal and state income taxes, after any allowance
for payments made or to be made under this Plan, and after inclusion of
all extraordinary revenues and deduction of all extraordinary expenses,
all as calculated in accordance with generally accepted accounting
principles consistently applied and confirmed by the audit report of the
Company's independent public accountants.
U. PROFIT CENTER ACHIEVEMENT PERCENTAGE LEVELS. The
percentages established annually by the Committee to be used, as
provided in Section 6.3, in
68
<PAGE>
computing a part of an Annual Incentive Compensation Award, based upon
achievement of a Profit Center Performance Goal.
V. PROFIT CENTER PERFORMANCE GOALS. The goals defined
in Section 6.1.B.
W. SALARY. The Participant's base annual salary as
set by either the Compensation Committee of the Board or the CEO.
X. SERVICE CENTER. The Finance, Development &
Technology Service Center, the Legal & Administration Service Center,
the Corporate Communications Service Center, and any other service
center designated by the CEO.
Y. SERVICE CENTER ACHIEVEMENT PERCENTAGE LEVELS. The
percentages established annually by the Committee to be used, as
provided in Section 6.4, in computing a part of an Annual Incentive
Compensation Award based upon achievement of a Service Center
Performance Goal.
Z. SERVICE CENTER PERFORMANCE GOALS. The goals
defined in Section 6.1.C.
AA. TERMINATION DATE. December 31, 2001, or such
earlier date as may be determined under Section 9.2.
2.2 CONSTRUCTION. The masculine gender, where appearing in the
Plan, shall be deemed to include the feminine gender, unless the context clearly
indicates to the contrary.
ARTICLE 3
ADMINISTRATION
3.1 COMMITTEE. The Plan shall be administered by the
Compensation Committee of the Board (hereinafter the "Committee").
3.2 COMMITTEE'S POWER AND AUTHORITY. The Committee shall have
full and complete authority and power, subject only to the direction of the
Board, to administer the Plan in accordance with its terms and carry out the
provisions of the Plan. The Committee shall interpret the Plan and shall
determine all questions, factual, legal or otherwise, arising in the
administration, interpretation and application of the Plan, including but not
limited to questions of eligibility and the status and rights of Participants,
Beneficiaries and other persons. The Committee shall have any and all power and
authority (including discretion with respect to the exercise of such power and
authority) which shall be necessary, properly advisable, desirable, or
convenient to enable it to carry out its duties under the Plan. By way of
illustration and not limitation, the Committee is empowered and authorized to
make rules and regulations in respect to the Plan not inconsistent with the
Plan; to determine, consistently therewith, all questions that may arise as to
the eligibility, benefits, status and right of any person claiming benefits
under the Plan; to determine whether a Participant was terminated for just
cause; and subject to and consistent with, any applicable laws, to make factual
determinations, to construe and interpret the Plan and correct any
69
<PAGE>
defect, supply any omissions or reconcile any inconsistencies in the Plan. Any
such determination by the Committee shall presumptively be conclusive and
binding on all persons. The regularly kept records of the Company shall be
conclusive and binding upon all persons with respect to a Participant's date and
length of employment, time and amount of salary and the manner of payment
thereof, type and length of any absence from work and all other matters
contained therein relating to employment. All rules and determinations of the
Committee shall be uniformly and consistently applied to all persons in similar
circumstances.
3.3 COMMITTEE'S ANNUAL REVIEW. The Committee shall review the
operation of the Plan to determine its effectiveness in promoting its operating
results and the shareholders' investment; further, the Committee shall report
annually to the Board on its findings and make such recommendations as the
Committee deems appropriate.
ARTICLE 4
EFFECTIVE DATE AND TERMINATION
The Plan shall be effective as of January 1, 1997. The Plan shall
terminate on December 31, 2001, except with respect to the payment of any
Incentive Compensation Awards which may become due and payable thereafter, or
unless terminated earlier by action of the Board under Section 9.2.
ARTICLE 5
ELIGIBILITY AND PARTICIPATION
5.1 ELIGIBILITY. All Company officers and other key management
employees who are employed by the Company on the date of the adoption of this
Plan and who are specifically designated by the Committee as Participants shall
be Participants in the Plan as of January 1, 1997. In addition, any officers and
other key management employees who are subsequently designated by the Committee
as participants shall become Participants in the Plan on the date established by
the Committee for such participation. Once an employee becomes a Participant, he
will remain a Participant until the earliest of: [i] termination of this Plan;
[ii] termination of his active service with the Company; or [iii] termination of
his status as a Participant by decision of the Committee; provided, however,
that a Participant will be terminated from participation in the Plan only at the
beginning of a Plan Year.
5.2 CLASSIFICATIONS OF PARTICIPANTS. Simultaneous with the
Committee's designation of an employee as a Participant, the Committee shall
designate in which of six (6) classifications of Participants the employee shall
participate. Such Participation Classifications shall be known as "Class A,"
"Class B," "Class C," "Class D," "Class E," and "Class F." The Committee may
change the Class designation of a Participant as of the beginning of any Plan
Year.
ARTICLE 6
ANNUAL INCENTIVE COMPENSATION AWARDS
70
<PAGE>
6.1 PERFORMANCE GOALS. Annual Incentive Compensation Awards
to each Participant shall be determined on the basis of the achievement of the
following Performance Goals:
A. The Company achieves certain Pre-tax Income for the
applicable year: the "Threshold Company Goal" (90% of the Pre-tax Income
target set in the applicable Budget); the "Target Company Goal" (100% of
the Pre-tax Income target set in the applicable Budget); and the Maximum
Company Goal" (115% of the Pre-tax Income target set in the applicable
Budget) (the "Company Performance Goal[s]"). The Company Performance
Goals established by the Committee for the Plan Year commencing January
1, 1997, are set forth on SCHEDULE A. The percentage of the Annual
Incentive Compensation Award to each Participant which is awarded to
each Participant based upon the Company Performance Goals is set forth
on SCHEDULE A1 (the "Company Performance Goals Percentage").
B. In the case of Class C, E and F Participants, the
Profit Center in which the Participant works achieves certain pre-tax
net income levels for the applicable year: the "Threshold Profit Center
Goal" (90% of the pre-tax net income set in the Profit Center's
applicable Budget); the "Target Profit Center Goal" (100% of the pre-tax
net income set in the Profit Center's applicable Budget); and the
"Maximum Profit Center Goal" (115% of the pre-tax net income set in the
Profit Center's applicable Budget) (the "Profit Center Performance
Goal[s]"). The percentage of the Annual Incentive Compensation Award
which is awarded to each Participant based upon the Profit Center
Performance Goals is set forth on SCHEDULE A2 (the "Profit Center
Performance Goals Percentage").
C. In the case of Class B and D Participants, the Service
Center in which the Participant works meets certain objective financial
and other criteria established by the CEO and the Senior Vice President
of that Service Center for the applicable year: the "Threshold Service
Center Goal" (90% of the Service Center's established criteria); the
"Target Service Center Goal" (100% of the Service Center's established
criteria); and the "Maximum Service Center Goal" (115% of the Service
Center's established criteria) (the "Service Center Performance
Goal[s]"). Achievement of the Service Center Performance Goals shall be
determined in the CEO's sole discretion. The percentage of the Annual
Incentive Compensation Award which is awarded to each Participant based
upon the Service Center Performance Goals is set forth on SCHEDULE A3
(the "Service Center Performance Goals Percentage").
D. The Participant achieves certain performance standards
particular to his or her position in the Company for the applicable
year: the "Threshold Discretionary Goal" (90% of the Participant's
performance standards); the "Target Discretionary Goal" (100% of the
Participant's performance standards); and the "Maximum Discretionary
Goal" (115% of the Participant's performance standards) (the
"Discretionary Performance Goal[s]"). Achievement of the Discretionary
Performance Goals shall be determined in the sole discretion of the CEO.
The percentage of the Annual Incentive Compensation Award which is
awarded based upon the Discretionary Performance Goals is set forth on
SCHEDULE A4 (the "Discretionary Performance Goals Percentage").
71
<PAGE>
6.2 COMPUTATION OF AWARD BASED UPON COMPANY PERFORMANCE GOALS.
For each Plan Year for which the Company achieves the "Threshold Company Goal",
each Participant shall be awarded an Annual Incentive Compensation Award which
shall be computed by multiplying: (i) the Participant's Salary for the Plan
Year; by (ii) the Participation Percentage, as shown on SCHEDULE B for the
Participant's Class; by (iii) the Company Performance Goals Percentage, as shown
on SCHEDULE A1 for the Participant's Class; by (iv) the applicable Company
Achievement Percentage Level as established annually by the Committee. The
Company Achievement Percentage Levels for the Plan Year commencing January 1,
1997, are set forth on SCHEDULE C.
6.3 COMPUTATION OF AWARD BASED ON PROFIT CENTER PERFORMANCE
GOALS. For each Plan Year for which the Company achieves at least the Threshold
Company Performance Goal and the Profit Center in which that Participant works
achieves at least its Threshold Profit Center Performance Goal, each Class C,
Class E and Class F Participant shall be awarded an Annual Incentive
Compensation Award which shall be computed by multiplying: (I) the Participant's
Salary for the Plan Year; by (ii) the Participation Percentage, as shown on
SCHEDULE B for the Participant's class; by (iii) the Profit Center Performance
Goals Percentage as shown on SCHEDULE A2 for the Participant's Class; (iv) by
the applicable Profit Center Achievement Percentage Level as established
annually by the Committee.
6.4 COMPUTATION OF AWARD BASED ON SERVICE CENTER PERFORMANCE
GOALS. For each Plan Year for which the Company achieves at least the Threshold
Company Performance Goal and the Service Center in which that Participant works
achieves at least its Threshold Service Center Performance Goal, each Class B
and Class D Participant shall be awarded an Annual Incentive Compensation Award
which shall be computed by multiplying: (I) the Participant's Salary for the
Plan Year; by (ii) the Participation Percentage, as shown on SCHEDULE B for the
Participant's Class; by (iii) the Service Center Performance Goals Percentage as
shown on SCHEDULE A3 for the Participant's Class; by (iv) the applicable Service
Center Achievement Percentage Level as established annually by the Committee.
6.5 COMPUTATION OF AWARD BASED ON DISCRETIONARY PERFORMANCE
GOALS. For each Plan Year for which the Company achieves at least the Threshold
Company Performance Goal and that Participant achieves at least his/her
Threshold Discretionary Performance Goal, a Participant may be awarded an Annual
Incentive Compensation Award which shall be computed by multiplying: (I) the
Participant's Salary for the Plan Year; by (ii) the Participation Percentage as
shown on SCHEDULE B; by (iii) the Discretionary Performance Goals Percentage for
the Participant's Class as set forth on SCHEDULE A4; by (iv) the applicable
Discretionary Achievement Percentage Level as established annually by the
Committee. Notwithstanding the foregoing, the Discretionary Achievement
Percentage Level for any Plan Year shall not exceed the Company Achievement
Percentage Level for that Plan Year. The CEO, in his/her sole discretion, shall
determine whether a Participant has met Discretionary Performance Goals.
6.6 ADJUSTMENTS TO ANNUAL INCENTIVE COMPENSATION AWARD. An
Annual Incentive Compensation Award shall be adjusted by any one or more of the
following adjustments:
A. In the event a Participant shall, during a Plan Year,
die, retire, go on a leave of absence with the Company's consent,
terminate employment due to Disability, or be terminated without just
cause, the Annual Incentive Compensation Award for that Participant for
such Plan Year shall be reduced, pro rata, based on the number of days
in such Plan Year during which he was not a Participant.
72
<PAGE>
B. In the event that during a Plan Year a Participant
shall be discharged for just cause or shall voluntarily resign for any
reason other than Disability, the Annual Incentive Compensation Award
for that Participant shall be reduced to zero, and no Annual Incentive
Compensation Award shall be payable to that Participant for such Plan
Year.
ARTICLE 7
PAYMENT OF BENEFITS
7.1 METHOD OF PAYMENTS. As soon as the Committee has determined
the amount of all of the Annual Incentive Compensation Awards at the end of a
Plan Year, the Committee shall instruct the Company to pay each award in cash in
one lump sum.
ARTICLE 8
DESIGNATION OF BENEFICIARIES
A Participant may file with the Committee a designation of a
Beneficiary or Beneficiaries in writing, which designation may be changed or
revoked by the Participant's sole action, provided that the change or revocation
is filed with the Committee in writing. If a Participant dies, any benefit which
the Participant is entitled to receive under the Plan shall be delivered to the
Beneficiary or Beneficiaries so designated, or if no Beneficiary has been
designated or survives the Participant, shall be delivered to the Executor or
Administrator of the Participant's estate.
ARTICLE 9
MISCELLANEOUS PROVISIONS
9.1 OTHER PLANS. Any payment made under the provisions of this
Plan shall be includable in or excludable from a Participant's compensation for
purposes of any other qualified or nonqualified benefit plan in which the
Participant may be eligible to participate by reference to the terms of such
other plan.
9.2 PLAN AMENDMENT AND TERMINATIONS. The Company, acting through
the Committee or the Board, reserves the right to amend and/or to terminate the
Plan for any reason and at any time. Any amendment or termination of this Plan
shall not affect the right of any Participant or his Beneficiary to receive an
Incentive Compensation Award after it has been earned.
9.3 RIGHT TO TRANSFER, ALIENATE AND ATTACH. Except to the extent
that a Participant may designate a Beneficiary under the provisions contained in
Article 8, the right of any Participant or any beneficiary to any benefit or to
any payment hereunder shall not be subject in any manner to attachment or other
legal process for the debts of such Participant or Beneficiary; and any such
benefit or payment shall not be subject to anticipation, alienation, sale,
transfer, assignment or encumbrance, except to the extent that the right to such
benefit is transferable by the Participant by will or the laws of descent and
distribution.
73
<PAGE>
9.4 INDEMNIFICATION. No member of the Board or of the Committee
and no officer or employee of the Company shall be liable to any person for any
action taken in connection with the administration of this Plan unless
attributable to his own fraud or willful misconduct; nor shall the Company be
liable to any person for any such action unless attributable to fraud or willful
misconduct on the part of a director, officer or employee of the Company.
9.5 NON-GUARANTEE OF EMPLOYMENT. Neither the existence of this
Plan nor any award or benefit granted pursuant to it shall create any right to
continued employment of any Participant by the Company. No Participant shall,
under any circumstances, have any interest whatsoever, vested or contingent, in
any particular property or asset of the Company by virtue of any award, unpaid
bonus or other accrued benefit under the Plan.
9.6 SOURCE OF PAYMENT. No special or separate fund shall be
established or other segregation of assets made with respect to any immediate or
deferred payment under the Plan. All payment of awards shall be made from the
general funds of the Company. To the extent that a Participant or his
Beneficiary acquires a right to receive payments under this Plan, such right
shall be no greater than that of any unsecured general creditor of the Company.
9.7 WITHHOLDING TAXES. The Company shall have the right to deduct
from all payments made to the Participant, whether pursuant to this Plan or
otherwise, amounts required by federal, state or local law to be withheld with
respect to any payments made pursuant to this Plan.
74
<PAGE>
SCHEDULE A
FISCAL YEAR 1997 ANNUAL COMPANY PERFORMANCE GOALS
ANNUAL COMPANY PERFORMANCE LEVEL PRE-TAX INCOME
Threshold 90% of Budget - $____
Target 100% Budget - $____
Maximum 115% of Budget - $____
75
<PAGE>
SCHEDULE A1
COMPANY PERFORMANCE GOALS PERCENTAGE
CLASS PERCENTAGE
A 100%
B 50%
C 25%
D 50%
E 25%
F 25%
76
<PAGE>
SCHEDULE A2
PROFIT CENTER PERFORMANCE GOALS PERCENTAGE
CLASS PERCENTAGE
A 0%
B 0%
C 50%
D 0%
E 50%
F 50%
77
<PAGE>
SCHEDULE A3
SERVICE CENTER PERFORMANCE GOALS PERCENTAGE
CLASS PERCENTAGE
A 0%
B 25%
C 0%
D 25%
E 0%
F 0%
78
<PAGE>
SCHEDULE A4
DISCRETIONARY PERFORMANCE GOALS PERCENTAGE
CLASS PERCENTAGE
A 0%
B 25%
C 25%
D 25%
E 25%
F 25%
79
<PAGE>
SCHEDULE B
PARTICIPATION PERCENTAGE
CLASS TARGET GOAL
A 45%
B 35%
C 35%
D 25%
E 25%
F 20%
80
<PAGE>
<TABLE>
SCHEDULE C
Company Achievement Percentage Levels ("CAPLs")
Calendar Year 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pre-tax $____ $____ $_____ $____ $____ $____ $____ $____ $____ $____ $____
Income
% of 90% 91% 92% 93% 94% 95% 96% 97% 98% 99% 100%
Target
CAPL 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100%
Pre-tax $____ $____ $____ $____ $____ $____ $____ $____ $____ $____ $____
Income
% of 101% 102% 103% 104% 105% 106% 107% 108% 109% 110% 111%
Target
CAPL 105% 108% 110% 115% 118% 120% 125% 128% 130% 135% 138%
Pre-tax $____ $____ $____ $____
Income 112% 113% 114% 115%
Target
CAPL 140% 145% 148% 150%
</TABLE>
81
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 8,209,414
<SECURITIES> 0
<RECEIVABLES> 5,218,236
<ALLOWANCES> 115,621
<INVENTORY> 0
<CURRENT-ASSETS> 14,106,871
<PP&E> 100,025,412
<DEPRECIATION> 37,143,223
<TOTAL-ASSETS> 80,728,966
<CURRENT-LIABILITIES> 24,849,477
<BONDS> 0
0
0
<COMMON> 3,493,042
<OTHER-SE> 44,287,838
<TOTAL-LIABILITY-AND-EQUITY> 80,728,966
<SALES> 107,858,818
<TOTAL-REVENUES> 107,858,818
<CGS> 86,795,218
<TOTAL-COSTS> 95,543,921
<OTHER-EXPENSES> 1,064,067
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 337,438
<INCOME-PRETAX> 13,041,526
<INCOME-TAX> 4,970,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,071,526
<EPS-PRIMARY> $2.17
<EPS-DILUTED> $2.17
</TABLE>
