SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
Commission file number 0-1469
CHURCHILL DOWNS INCORPORATED
(Exact name of registrant as specified in its charter)
Kentucky 61-0156015
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
700 Central Avenue, Louisville, KY 40208 (Address of
principal executive offices)
(Zip Code)
(502) 636-4400
(Registrant's telephone number, including area code)
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No____
The number of shares outstanding of registrant's common stock at May 14, 1998
was 7,516,934 shares.
Page 1 of 31
<PAGE>
CHURCHILL DOWNS INCORPORATED
I N D E X
PAGES
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets, March 31, 1998,
December 31, 1997 and March 31, 1997 3
Condensed Consolidated Statements of Operations
for the three months ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 and 1997 5
Condensed Notes to Consolidated Financial Statements 6-8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-20
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk (Not Applicable) 21
PART II. OTHER INFORMATION AND SIGNATURES
ITEM 1. Legal Proceedings (Not applicable) 21
ITEM 2. Changes in Securities and Use of Proceeds(Not applicable)21
ITEM 3. Defaults Upon Senior Securities(Not applicable) 21
ITEM 4. Submission of Matters to a Vote of Security Holders
(Not applicable) 21
ITEM 5. Other Information (Not applicable) 21
ITEM 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibit Index 23
Exhibits 24-32
2
<PAGE>
<TABLE>
<CAPTION>
CHURCHILL DOWNS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31 December 31 March 31
ASSETS 1998 1997 1997
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $11,803,389 $9,280,233 $ 7,084,056
Accounts receivable 5,925,377 7,086,889 3,918,264
Prepaid income taxes 969,185 - 870,792
Other current assets 847,493 540,489 1,180,439
---------- ---------- ---------
Total current assets 19,545,444 16,907,611 13,053,551
Other assets 5,563,557 5,778,430 3,634,018
Plant and equipment 105,348,975 104,554,196 101,086,691
Less accumulated depreciation (42,203,103) (41,391,429) (38,158,464)
----------- ----------- -----------
63,145,872 63,162,767 62,928,227
----------- ----------- -----------
$88,254,873 $85,848,808 $79,615,796
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $9,960,311 $5,732,783 $9,392,124
Accrued expenses 5,000,182 7,937,575 4,828,996
Dividends payable - 3,658,468 -
Income taxes payable - 186,642 -
Deferred revenue 13,718,956 7,344,830 11,477,348
Long-term debt, current portion 79,805 79,805 73,893
---------- ---------- ----------
Total current liabilities 28,759,254 24,940,103 25,772,361
Long-term debt, due after one year 2,633,164 2,633,164 2,752,969
Outstanding mutuel tickets
(payable after one year) 1,767,991 1,625,846 2,011,092
Deferred compensation 893,898 880,098 830,580
Deferred income taxes 2,377,100 2,377,100 2,316,600
Stockholders' equity:
Preferred stock, no par value;
authorized, 250,000 shares;
issued, none - - -
Common stock, no par value;
authorized, 20 million shares,
issued 7,316,934 shares, March 31,
1998 and December 31, 1997 and
7,308,526 shares, March 31, 1997 3,614,567 3,614,567 3,493,042
Retained earnings 48,273,899 49,842,930 42,504,152
Note receivable for common stock (65,000) (65,000) (65,000)
----------- ----------- -----------
51,823,466 53,392,497 45,932,194
----------- ----------- -----------
$88,254,873 $85,848,808 $79,615,796
=========== =========== ===========
The accompanying notes are an integral part of the financial statements.
</TABLE>
3
<PAGE>
CHURCHILL DOWNS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSSES)
(Unaudited)
Three Months Ended March 31
1998 1997
------------ -----------
Net revenues $15,385,151 $13,278,864
Operating expenses 15,999,128 14,484,447
----------- -----------
Gross loss (613,977) (1,205,583)
Selling, general and administrative expenses 2,155,754 1,929,840
--------- ---------
Operating loss (2,769,731) (3,135,423)
Other income (expense):
Interest income 189,270 66,380
Interest expense (104,524) (80,216)
Miscellaneous income 117,054 130,573
---------- ---------
201,800 116,737
Loss before income tax benefit (2,567,931) (3,018,686)
Federal and state income tax benefit 998,900 1,170,000
----------- -----------
Net loss $(1,569,031) $(1,848,686)
=========== ===========
Basic and diluted net loss per share $ (.21) $ (.25)
Basic and diluted weighted average shares
outstanding 7,316,934 7,308,526
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
CHURCHILL DOWNS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31
1998 1997
------------ --------------
Cash flows from operating activities:
Net loss $(1,569,031) $(1,848,686)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 1,159,106 1,143,522
Deferred compensation 13,800 5,369
Increase (decrease) in cash resulting from
changes in operating assets and liabilities:
Accounts receivable 1,161,512 1,299,972
Prepaid income taxes (969,185) (870,792)
Other current assets (307,004) (501,218)
Accounts payable 4,227,528 3,989,124
Accrued expenses (2,937,393) (3,192,491)
Income taxes payable (186,642) (2,510,508)
Deferred revenue 6,374,126 4,965,446
Other assets and liabilities 335,118 25,972
--------- ---------
Net cash provided by operating
activities 7,301,935 2,505,710
--------- ---------
Cash flows from investing activities:
Additions to plant and equipment, net (1,120,311) (1,083,468)
---------- ----------
Net cash used in investing activities (1,120,311) (1,083,468)
---------- ----------
Cash flows from financing activities:
Decrease in long-term debt, net - (172,329)
Dividends paid (3,658,468) (2,375,271)
---------- ----------
Net cash used in financing activities (3,658,468) (2,547,600)
---------- ----------
Net increase (decrease) in cash and cash
equivalents 2,523,156 (1,125,358)
Cash and cash equivalents, beginning of
period 9,280,233 8,209,414
----------- -----------
Cash and cash equivalents, end of period $11,803,389 $ 7,084,056
=========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $250,000 $92,300
Income taxes $18,000 $2,190,000
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
CHURCHILL DOWNS INCORPORATED
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the three months ended March 31, 1998 and 1997
(Unaudited)
1. The accompanying condensed consolidated financial statements are
presented in accordance with the requirements of Form 10-Q and consequently do
not include all of the disclosures normally required by generally accepted
accounting principles or those normally made in Churchill Downs Incorporated's
(the "Company") annual report on Form 10-K. The year end condensed consolidated
balance sheet data was derived from audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
Accordingly, the reader of this Form 10-Q may wish to refer to the Company's
Form 10-K for the period ended December 31, 1997 for further information. The
accompanying condensed consolidated financial statements have been prepared in
accordance with the registrant's customary accounting practices and have not
been audited. In the opinion of management, all adjustments necessary for a fair
presentation of this information have been made and all such adjustments are of
a normal recurring nature.
2. Because of the seasonal nature of the Company's business, revenues and
operating results for any interim quarter are not indicative of the revenues and
operating results for the year and are not necessarily comparable with results
for the corresponding period of the previous year. The accompanying condensed
consolidated financial statements reflect a disproportionate share of annual net
earnings (loss) as the Company normally earns a substantial portion of its net
earnings in the second quarter of each year during which the Kentucky Derby and
Kentucky Oaks are run. The Kentucky Derby and Kentucky Oaks are run on the first
weekend in May.
During the three months ended March 31, 1998 and 1997, the Company
conducted simulcast receiving wagering for 367 and 360 location days,
respectively, which includes simulcast wagering at its Sports Spectrum site in
Louisville, Kentucky for 75 days in 1998 compared to 72 days in 1997. Through
its subsidiary, Hoosier Park L.P. ("Hoosier Park"), the Company conducted
simulcast wagering at its racetrack in Anderson, Indiana and at three simulcast
wagering facilities located in Merrillville, Ft. Wayne and Indianapolis, Indiana
for a total of 292 days in 1998 compared to 288 days in 1997. Additionally, the
Company conducts simulcast wagering on-track during its Churchill Downs and
Hoosier Park live race meets.
3. On March 19, 1998 the Company obtained a commitment from its
principal lender to increase its unsecured bank line of credit from $20 million
to $50 million. The interest rate is based upon LIBOR plus 50 to 100 additional
basis points which is determined by certain Company financial ratios. The line
of credit expires March 19, 2000. There were no borrowings outstanding on the
line of credit at March 31, 1998, December 31, 1997 or March 31, 1997.
4. Certain prior period financial statement amounts have been
reclassified to conform to the current period presentation.
6
<PAGE>
CHURCHILL DOWNS INCORPORATED
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the
three months ended March 31, 1998 and 1997 (continued)
(Unaudited)
5. Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). Currently, there are no amounts to be included in the computation of
comprehensive income of the Company that are required to be disclosed under the
provisions of SFAS 130. As such, total comprehensive income and net income are
the same for the three months ended March 31, 1998 and 1997, respectively.
6. In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131). The Company will adopt SFAS 131 during the fourth
quarter of 1998 as required.
7. In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and other
Post-retirement Benefits" (SFAS 132). This statement revises employers'
disclosures about pensions and other post-retirement plans without changing the
measurement or recognition of those plans. The Company will include SFAS 132
disclosures in its 1998 annual report.
8. On March 28, 1998, the Company entered into a stock purchase
agreement with TVI Corp., ("TVI") for the purchase of 100% of the stock of
Racing Corporation of America ("RCA") for a purchase price of $22.0 million in a
combination of cash and common stock of the Company. RCA owns and operates Ellis
Park Race Course in Henderson, Kentucky, and the Kentucky Horse Center, a
training facility located in Lexington, Kentucky. The sale closed on April 21,
1998 upon final approval from the Kentucky Racing Commission. As part of the
transaction, TVI received 200,000 shares of the Company's common stock. The
remaining balance of $17.15 million was paid from cash on hand and a draw on the
Company's bank line of credit. The acquisition will be accounted for by the
Company under purchase method of accounting and will be consolidated during the
second quarter of 1998. The results of operations of RCA subsequent to April 20,
1998 will be included in the Company's consolidated results of operations. The
purchase is not anticipated to have any material effect on the Company's
earnings in 1998.
7
<PAGE>
CHURCHILL DOWNS INCORPORATED
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the
three months ended March 31, 1998 and 1997 (continued)
(Unaudited)
9. The following is a reconciliation of the numerator and denominator
of the basic and diluted per share computations:
Three months ended
March 31,
1998 1997
------------ ------------
Loss (numerator) amounts used for basic
and diluted per share computations: $(1,569,031) $(1,848,686)
Basic and diluted weighted average shares
(denominator) of common stock
outstanding per share 7,316,934 7,308,526
Basic and diluted net loss per share $(.21) $(.25)
Options to purchase 130,500 and 66,500 shares at March 31, 1998 and 1997
which equate to common stock equivalents of 12,041 and 1,919, respectively, are
excluded from the computation since their effect is antidilutive because of the
net loss for the periods. In addition, options to purchase 296,032 and 290,500
shares for the quarters ended March 31, 1998 and 1997 were not included in the
computation of loss per share common share-assuming dilution because the
options' exercise prices were greater than the average market price of the
common shares.
8
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
This discussion and analysis includes a forecast of future results of
operations. Such a forecast is a "forward-looking statement" under the federal
securities laws. Actual results could differ materially from this forecast and
there can be no assurance that such forecast of future results will be achieved.
Important factors that could cause actual results to differ materially from the
presently estimated amounts include: the continued ability of the Company to
effectively compete for the country's top horses and trainers necessary to field
high-quality horse racing; the continued ability of the Company to grow its
share of the interstate simulcast market; a substantial change in allocation of
live racing days; the impact of competition from alternative gaming ( including
riverboat casinos and lotteries) and other sports and entertainment options in
those markets in which the Company operates; a decrease in riverboat admissions
revenue from the Company's Indiana operations; and the Company's success in its
pursuit of strategic initiatives designed to attract new patrons and generate
additional revenue for purses and capital investment.
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. The Company is
also majority owner and operator of Hoosier Park in Anderson, Indiana, which
conducts Thoroughbred, Quarter Horse and Standardbred horse racing. The Company
conducts simulcast wagering on horse racing year-round at its four Churchill
Downs Sports Spectrum facilities ("Sports Spectrum") in Kentucky and Indiana, as
well as its racetracks.
Because of the seasonal nature of the Company's business, revenues and
operating results for any interim quarter are not indicative of the revenues and
operating results for the year and are not necessarily comparable with results
for the corresponding period of the previous year. The Company normally earns a
substantial portion of its net income in the second quarter of each year during
which the Kentucky Derby and the Kentucky Oaks are run. The Kentucky Derby and
the Kentucky Oaks are run on the first weekend in May.
The Company's primary sources of income are commissions and fees earned
from pari-mutuel wagering on live and simulcast horse races. Other sources of
income include admissions and seating, concession commissions (primarily for the
sale of food and beverages), riverboat admission tax supplement, license, rights
and broadcast fees and sponsorship revenues.
9
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Kentucky's racetracks, including Churchill Downs and Ellis Park Race Course
("Ellis Park"), which was acquired by the Company during the second quarter of
1998, 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 are approved annually by the KRC based upon applications
submitted by the racetracks in Kentucky. Although to some extent Churchill Downs
and Ellis Park compete with other racetracks in Kentucky for the awarding of
racing dates, the KRC is required by state law to consider and seek to preserve
each racetrack's usual and customary live racing dates. Generally, there is no
substantial change from year to year in the racing dates awarded to each
racetrack. Churchill Downs conducted live racing on 77 days during the year
ended December 31, 1997. For 1998, Churchill Downs has received a license to
conduct live racing for a total of 71 racing days on approximately the same
dates as the prior year's Spring and Fall race meetings. For 1998, Ellis Park
has received a license to conduct live racing for a total of 55 racing days. The
total number of days on which Churchill Downs and Ellis Park conduct live racing
fluctuates annually according to the calendar year. A substantial change in the
allocation of live racing days at Churchill Downs or Ellis Park could impact the
Company's operations and earnings in future years. The purchase of Ellis Park is
not anticipated to have any material effect on earnings in 1998.
Churchill Downs will host Breeders' Cup Day on November 7, 1998. Breeders'
Cup Day is sponsored by Breeders' Cup Limited, a tax-exempt organization
chartered to promote Thoroughbred racing and breeding. The Breeders' Cup Day
races are held annually, featuring $12 million in purses, for the purpose of
determining Thoroughbred champions in seven different events. Racetracks across
the United States compete for the privilege of hosting the Breeders' Cup Day
races each year and the 1998 Breeders' Cup will be the Company's fourth time
hosting this event, the most of any racetrack. The Breeders' Cup Day races were
held in California in November 1997. Hosting the event in 1998 is expected to
have a positive impact on the Company's 1998 results.
In Indiana, licenses to conduct live Standardbred and Thoroughbred race
meetings, including Quarter Horse races, and to participate in simulcasting are
approved annually by the Indiana Horse Racing Commission ("IHRC"), which
consists of 5 members appointed by the governor of Indiana. Licenses are
approved annually by the IHRC based upon applications submitted by the Company.
Currently, the Company is the only facility in Indiana licensed to conduct live
Standardbred, Quarter Horse or Thoroughbred racing and to participate in
simulcasting. In 1997, the Company conducted 142 days of live racing, including
85 days of Standardbred racing and 57 days of Thoroughbred racing. Quarter Horse
races were also conducted during some Thoroughbred race days. The Company has
received a license to conduct live racing in 1998 for a total of 152 racing
days, including 94 days of Standardbred racing, and 58 days of Thoroughbred
racing (which also includes Quarter Horse races). A substantial change in the
allocation of live racing days at Hoosier Park could impact the Company's
operations and earnings in future years.
10
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The Company employs approximately 340 full-time employees. Due to the
seasonal nature of the Company's live racing business, the number of seasonal
and part-time persons employed will vary throughout the year, with peak
employment occurring Kentucky Derby week when the Company employs as many as
2,600 persons. During 1997, average employment per pay period was approximately
900 individuals.
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 sports, entertainment and
gaming options, including riverboat casinos and lotteries, for patrons for both
live racing and simulcasting. 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. Illinois had
previously authorized riverboat gaming. There are currently four riverboat
casinos operating on the Ohio River along Kentucky's border -- two in the
southeastern Indiana cities of Lawrenceburg and Rising Sun, one in southwestern
Indiana in Evansville and one at Metropolis, Illinois.
Direct competition with these riverboats has negatively impacted wagering
at Churchill Downs and other racetracks in western and northern Kentucky.
However, Churchill Downs reversed this trend in 1997 with the increase in
attendance and wagering experienced during its 1997 Spring and Fall Meets, due
primarily to an aggressive on-track marketing program, and further expansion of
interstate simulcasting.
One, and possibly two, additional riverboats are anticipated to open along
the Indiana shore of the Ohio River. In May 1996, the Indiana Gaming Commission
("IGA")awarded a preliminary license to RDI/Caesars World to operate the world's
largest riverboat casino in Harrison County, Indiana, just 10 miles from
Louisville. A construction permit was issued to RDI/Caesars World by the U.S.
Army Corps of Engineers ("Corps") in February 1998, and they have announced that
the riverboat will open in the fall of 1998. However, the U.S. Environmental
Protection Agency ("EPA") has conducted a separate review of the Corps'
decision, and issued a letter critical of some aspects of the Corps'
decision-making process. Also, the environmental groups have filed a lawsuit in
U.S. District Court for the western district of Kentucky challenging the Corps'
decision to issue a construction permit to RDI/Caesars World ("environmental
litigation"). It is not known whether the EPA's letter or the environmental
litigation will result in further delays for the project. The IGA voted in May
1998 to consider in September 1998 whether to grant a license to open a fifth
Indiana riverboat along the Ohio River in either Crawford County or Switzerland
County, within 30 or 70 miles, respectively, of Louisville. Prior to the vote in
May, the IGA had voted to postpone indefinitely the granting of a fifth license.
11
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The full impact of riverboat casinos on Kentucky racing cannot be
accurately determined until all riverboats are open and the markets are fully
matured. Studies project that Churchill Downs could experience a material
adverse impact on its wagering and attendance in the Louisville market when the
RDI/Caesars World riverboat is open and mature. These same studies projected
similar declines in western and northern Kentucky but recent experience at Ellis
Park and Turfway Park indicates the impact may not be as severe as these studies
projected.
In addition to those riverboats operating along the Ohio River, five
riverboat casinos have opened along the Indiana shore of Lake Michigan near the
Company's Sports Spectrum in Merrillville, Indiana. The Company's pari-mutuel
wagering activities at the Merrillville facility have been adversely impacted by
the opening of these Lake Michigan riverboats.
Additionally, the Potawatomi Indian Tribe has expressed an interest in
establishing a land-based casino in northeastern Indiana and they are attempting
to negotiate a compact with the state of Indiana. At this time, proposed changes
to the Indian Gaming Regulatory Act could have an impact on compact negotiations
between the Potawatomi Tribe and the state of Indiana. The Company continues to
anticipate that development of such an Indian casino will negatively impact
pari-mutuel wagering activities at its Indiana facilities. However, 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 potential casino sites.
The Company continues to pursue legislation to allow video lottery
terminals at its racetrack facilities in Kentucky and Indiana. The integration
of alternative gaming products is one of four core business strategies developed
by the Company to position itself to compete in this changing environment.
Implementing these strategies, the Company has successfully grown its live
racing product by strengthening its flagship operations, increasing its share of
the interstate simulcast market, and geographically expanding its racing
operations in Kentucky and into Indiana. Alternative gaming in the form of video
lottery terminals and slot machines should enable the Company to more
effectively compete with Indiana riverboat casinos, and provide new revenue for
purse money and capital investment. Currently, the Company is working with
members of the Kentucky horse industry to establish a consensus for a plan to
operate video lottery terminals exclusively at Kentucky's racetracks.
The horse industry in Indiana presently receives $.65 per $3 admission to
riverboats in the state to compensate for the effect of riverboat competition.
Riverboat admissions revenue from the Company's Indiana operations increased
$1.6 million as a result of the opening of additional riverboats along Lake
Michigan since March 31, 1997. The net increase in riverboat admissions revenue,
after required purse and marketing expense increases of approximately $1.0
million, is $.6 million. Legislation challenging the allocation of the $.65
subsidy was introduced to the Senate Finance Committee in the recent session of
the Indiana General Assembly, but the bill did not pass out of the committee. A
change in Hoosier Park's share of the tax would significantly impact funding for
operating expenditures and would in all likelihood reemphasize the need for the
integration of alternative gaming products at the racetrack in order for it to
effectively compete with riverboat casinos.
12
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The Company owned and operated two live racing facilities and four
simulcast wagering facilities during the three month period ended March 31,
1998. There was no live racing conducted during the three month periods ended
March 31, 1998 and 1997. The chart below summarizes the results of these
operations.
<TABLE>
<CAPTION>
KENTUCKY INDIANA
---------------------------------------- ------------------------------------
Three Months Three Months Three Months Three Months
Ended Ended Ended Ended
March 31 March 31 Increase March 31 March 31 Increase
1998 1997 (Decrease) 1998 1997 (Decrease)
------------ ------------ -------- ----------- ------------ ---------
Intrastate Simulcast Receiving
<S> <C> <C> <C> <C> <C> <C>
Number of Race Days 58 55 3 - - -
Handle $12,269,151 $12,713,530 -3% - - -
Average Daily
Handle $211,537 $231,155 -8% - - -
Interstate Simulcast Receiving*
Number of Race Days 75 72 3 292 288 4
Handle $33,967,297 $30,535,383 11% $33,536,353 $32,189,879 4%
Average Daily
Handle $452,897 $424,103 7% $114,851 $111,770 3%
Total handle $46,236,448 $43,248,913 7% $33,536,353 $32,189,879 4%
Total average daily handle $347,642 $340,543 2% $114,851 $111,770 3%
<FN>
* The Company's Indiana operations include four separate simulcast wagering
facilities.
</FN>
</TABLE>
Total handle in Kentucky and Indiana increased $3.0 million (7%) and
$1.3 million (4%), respectively, primarily as a result of conducting 3 and 4
additional days, respectively, of interstate simulcast receiving wagering at the
Louisville and Indiana Sports Spectrums during the quarter ended March 31, 1998.
13
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1998 TO 1997
REVENUES
Net revenues during the three months ended March 31, 1998 increased
approximately $2.1 million (16%).
Pari-mutuel revenues increased $.5 million primarily as a result of
increased interstate receiving revenues generated from the 3 and 4 additional
days of wagering conducted at the Louisville and Indiana Sports Spectrums,
respectively, during the first quarter of 1998 versus 1997.
The net increase in riverboat admissions revenue from the Company's
Indiana operations was $.6 million as a result of the opening of two additional
riverboats along Lake Michigan since March 31, 1997. The riverboat admissions
revenue increase of $1.6 million was partially offset by increases of $1.0
million of required purse and marketing expenses associated with the riverboat
admission subsidy which are recorded as operating expenses by the Company.
Following is a summary of Net Revenues:
<TABLE>
<CAPTION>
NET REVENUE SUMMARY
----------------------------------------------------------------------
Three Months % to Three Months % to 1998 vs 1997
Ended Total Ended Total $ %
March 31, 1998 Revenue March 31, 1997 Revenue Change Change
-------------- ------- --------------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Pari-Mutuel Revenue
Intrastate Receiving $1,134,465 7% $1,168,309 9% $(33,844) -3%
Interstate Receiving 9,319,267 61 8,795,980 66 523,287 6
$10,453,732 68% $9,964,289 75% $489,443 5%
Riverboat Admission, Promotion
& Purse Revenue 3,810,250 25% 2,181,925 17% 1,628,325 75%
Admission & Seat Revenue 178,594 1 259,375 2 (80,781) -31
License, Rights, Broadcast
& Sponsorship Fees 120,408 1 50,733 - 69,675 137
Concession Commission 122,950 1 159,686 1 (36,736) -23
Program Revenue 478,888 3 485,262 4 (6,374) -1
Other 220,329 1 177,594 1 42,735 24
------- - ------- - ------ --
$15,385,151 100% $13,278,864 100% $2,106,287 16%
=========== === =========== === ========== ==
</TABLE>
14
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
OPERATING EXPENSES
Total operating expenses increased $1.5 million (10%) during the quarter
ended March 31, 1998. The gross loss decreased $.6 million (49%) during the same
period.
Purse expense increased $.9 million (21%) with riverboat purses
contributing $.8 million (65%) to the total increase. In Kentucky and Indiana,
all other 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. Accordingly, intrastate and interstate
simulcast purses reflect changes in direct proportion to changes in pari-mutuel
revenues for the same categories. The increase in interstate simulcast receiving
of $162,000 is directly related to the increase in net revenue for the same
category.
Wages and contract labor expenses increased $106,000 (3%). Salary increases
resulting from increased business activity and general cost of living increases
account for a significant portion of the variance.
Simulcast host fees increased $116,000 as a result of the increase in
handle on interstate simulcast receiving wagering at the Louisville and Indiana
Sports Spectrums.
Insurance, taxes and license fees increased $256,000 in 1998 due primarily
to higher property taxes and use taxes.
Maintenance expenses decreased by $125,000, due primarily to the scheduling
of fewer maintenance projects in the first quarter of 1998 versus the first
quarter of 1997.
15
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Following is a summary of Operating Expenses:
<TABLE>
<CAPTION>
OPERATING EXPENSE SUMMARY
Three Months % to Three Months % to 1998 vs 1997
Ended Total Ended Total $ %
March 31, 1998 Expenses March 31, 1997 Expense Change Change
-------------- -------- -------------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Purses:
Intrastate Receiving $481,877 3% $499,079 4% $(17,202) -3%
Interstate Receiving 2,877,808 18 2,715,544 19 162,264 6
Riverboat 2,014,141 13 1,220,257 8 793,884 65
$5,373,826 34% $4,434,880 31% $938,946 21%
Wages and Contract Labor 3,196,809 20 3,090,920 21 105,889 3
Simulcast Host Fee 2,193,352 14 2,077,515 14 115,837 6
Advertising, Marketing
& Publicity 673,164 4 658,092 5 15,072 2
Racing Relations & Services 63,090 - 73,383 1 (10,293) -14
Totalisator Expense 301,016 2 356,390 2 (55,374) -16
Audio/Video & Signal
Distribution Expense 407,207 2 333,301 2 73,906 22
Program Expense 416,293 2 338,967 2 77,326 23
Depreciation &
Amortization 1,159,106 7 1,143,522 8 15,584 1
Insurance, Taxes &
License Fees 780,159 5 524,526 4 255,633 49
Maintenance 262,383 2 387,854 3 (125,471) -32
Utilities 577,406 4 524,666 4 52,740 10
Facility/Land Rent 189,084 1 187,041 1 2,043 1
Other Meeting Expense 406,233 3 353,390 2 52,843 15
----------- ---- ----------- ---- ---------- ---
$15,999,128 100% $14,484,447 100% $1,514,681 10%
=========== === =========== === ========== ==
</TABLE>
16
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
Selling, general and administrative expenses increased by $226,000
(12%) during the three month period ended March 31, 1998 primarily as a result
of increased business activity and general cost of living salary increases for
the Company's employees.
Interest income of $189,000 in 1998 increased by $123,000 as the
result of the additional earnings generated by the Company from its short-term
cash investments (cash equivalents) as well as the interest earned on notes
receivable from a minority-owned investment.
Significant Changes in the Balance Sheet December 31, 1997 to March 31, 1998
Accounts receivable at March 31, 1998 were $1.2 million lower than
at December 31, 1997 primarily due to the collection of 1997 Fall meet
simulcasting receivables and purse supplements due from the Commonwealth of
Kentucky offset partially by an increase in Indiana riverboat admissions tax
receivable.
Prepaid income taxes increased $1.0 million as a result of the
estimated income tax benefit (receivable) associated with the quarterly net
loss.
Accounts payable increased $4.2 million at March 31, 1998 primarily
due to increase in purses payable related to simulcast wagering and riverboat
admissions revenue. Purses are paid during the Company's live race meets
beginning in the second quarter.
Accrued expenses decreased $2.9 million at March 31, 1998 primarily
as a result of payments of expenses incurred during the Fall 1997 live race
meet.
Dividends payable decreased by $3.7 million at March 31, 1998 due to
the payment of dividends of $3.7 million (declared in 1997) in the first
quarter.
Deferred revenue increased by $6.4 million at March 31, 1998 due to
advance billings of season box and membership revenue for Kentucky's live race
meets and the Derby Expansion Area relating to Kentucky Derby and Oaks races.
17
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
SIGNIFICANT CHANGES IN THE BALANCE SHEET MARCH 31, 1997 TO MARCH 31, 1998
Accounts receivable at March 31, 1998 increased by $2 million due
primarily to the increase in the Indiana riverboat admissions tax receivable
resulting from two additional Indiana riverboats being open after March 31,
1997.
Other assets increased by $1.9 million due primarily to the
Company's ownership investment in and loan to BC Racing Group, LLC totaling $2.2
million partially offset by accumulated amortization of organization costs.
The cost of plant and equipment increased by approximately $4.3
million due to the construction of a new on-site simulcast facility at Churchill
Downs as well as routine capital spending throughout the Company. This was
offset by an increase of $4.0 million in accumulated depreciation.
Deferred revenue increased by $2.2 million due primarily to
increased admission and corporate sponsor event ticket prices associated with
the Kentucky Derby and Oaks days.
LIQUIDITY AND CAPITAL RESOURCES
The working capital deficiency for the three months ended March 31,
1998 decreased by $3.5 million compared to March 31, 1997 as shown below:
March 31
1998 1997
------------ -------------
Working capital deficiency $(9,213,810) $(12,718,810)
Working capital ratio .68 to 1 .51 to 1
18
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
The working capital deficiency results from the nature and
seasonality of the Company's business. Cash flows provided by operations were
$7.3 million and $2.5 million for the three months ended March 31, 1998 and
1997, respectively. The increase of $4.8 in 1998 is primarily the result of
timing of income taxes payable and deferred revenue. Management believes cash
flows from operations and borrowings during 1998 will be substantially in excess
of the Company's disbursements for the year, including capital improvements.
Cash flows used in investing activities were $1.1 million for both
the three months ended March 31, 1998 and 1997. Routine capital spending
throughout the Company accounted for the cash used in investing for both years.
Cash flows used in financing activities were $3.7 and $2.6 million
for the three months ended March 31, 1998 and 1997, respectively. The increase
of $1.2 million in 1998 in cash used for financing is primarily the result of an
increase in dividends paid of $1.3 million.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130).
Currently, there are no amounts to be included in the computation of
comprehensive income of the Company that are required to be disclosed under the
provisions of SFAS 130. As such, total comprehensive income and net income are
the same for the three months ended March 31, 1998 and 1997, respectively.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131). The Company will adopt SFAS 131 during the fourth
quarter of 1998 as required.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and other
Post-retirement Benefits" (SFAS 132). This statement revises employers'
disclosures about pensions and other post-retirement plans without changing the
measurement or recognition of those plans. The Company will include SFAS 132
disclosures in its 1998 annual report.
19
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (continued)
SUBSEQUENT EVENTS
On March 28, 1998, the Company entered into a stock purchase
agreement with TVI Corp., ("TVI") for the purchase of 100% of the stock of
Racing Corporation of America ("RCA") for a purchase price of $22.0 million in a
combination of cash and common stock of the Company. RCA owns and operates Ellis
Park Race Course in Henderson, Kentucky, and the Kentucky Horse Center, a
training facility located in Lexington, Kentucky. The sale closed on April 21,
1998 upon final approval from the Kentucky Racing Commission. As part of the
transaction, TVI received 200,000 shares of the Company's common stock. The
remaining balance of $17.15 million was paid from cash on hand and a draw on the
Company's bank line of credit. The acquisition will be accounted for by the
Company under purchase method of accounting and will be consolidated during the
second quarter of 1998. The results of operations of RCA subsequent to April 20,
1998 will be included in the Company's consolidated results of operations. The
purchase is not anticipated to have any material effect on the Company's
earnings in 1998.
20
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
Not Applicable
ITEM 2. Changes in Securities and Use of Proceeds
Not Applicable
ITEM 3. Defaults Upon Senior Securities
Not Applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not Applicable
ITEM 5. Other Information
Not Applicable
ITEM 6. Exhibits and Reports on Form 8-K.
A. Exhibits
See exhibit index.
B. Reports on Form 8-K
Churchill Downs Incorporated filed a Current Report on Form
8-K on March 20, 1998 reporting, under Item 5 Other Events,
the adoption of a rights plan by Churchill Downs Incorporated.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHURCHILL DOWNS INCORPORATED
May 14, 1998 \s\Thomas H. Meeker
----------------------
Thomas H. Meeker
President and Chief Executive Officer
(Principal Executive Officer)
May 14, 1998 \s\ Robert L. Decker
-----------------------
Robert L. Decker
Senior Vice President, Finance
(Principal Financial Officer)
May 14, 1998 \s\Vicki L. Baumgardner
-------------------------
Vicki L. Baumgardner
Vice President, Finance/Treasurer
(Principal Accounting Officer)
22
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
<S> <C> <C>
Numbers Description By Reference To
(2) (a) Stock Purchase Agreement dated Exhibit 2.1 to Current Report
as of March 28, 1998 between on Form 8-K dated April 21,
Churchill Downs Incorporated and 1998
TVI Corp.
(2) (b) Agreement and Plan of Merger dated Exhibit 2.2 to Current Report
as of April 17, 1998 by and among on Form 8-K dated April 21,
TVI Corp., Racing Corporation of 1998
America, Churchill Downs
Incorporated and RCA Acquisition Company
(3) (d) Restated Bylaws as amended Pages 67 to 76, Report on
Form 10-K for the year ended
December 31, 1997
(3) (e) Articles of Amendment to Articles of Pages 24-32
Incorporation of Churchill Downs
Incorporated
(4) Rights Agreement dated as of March Exhibit 4.1 to Current Report
19, 1998 between Churchill Downs on Form 8-K dated March 19,
Incorporated and Bank of Louisville 1998
(27) Financial Data Schedule Page 33
</TABLE>
23
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
CHURCHILL DOWNS INCORPORATED
Pursuant to the provisions of Section 271B.10-060 of the Kentucky
Business Corporation Act, the undersigned corporation adopts the following
articles of amendment to set forth the preferences, limitations and relative
rights of a series of shares of its Preferred Stock, without par value, under
Article VII of its Articles of Incorporation.
FIRST: The name of the Corporation is Churchill Downs
Incorporated.
SECOND: The text of the amendment determining the terms of
the series of shares of the Preferred Stock is as follows:
I. Designation and Number of Shares. This series of the Preferred Stock
shall be designated as "Series 1998 Preferred Stock" (the "Series 1998 Preferred
Stock"). The number of shares initially issuable as the Series 1998 Preferred
Stock shall be 8,000; provided, however, that, if more than a total of 8,000
shares of Series 1998 Preferred Stock shall be issuable upon the exercise of
Rights (the "Rights") issued pursuant to the Rights Agreement dated as of March
19, 1998, between the Corporation and Bank of Louisville, as Rights Agent (the
"Rights Agreement"), the Board of Directors of the Corporation, shall, if then
permitted by the Kentucky Business Corporation Act, direct by resolution or
resolutions that Articles of Amendment of the Articles of Incorporation of the
Corporation be properly executed and filed with the Secretary of State of
Kentucky providing for the total number of shares issuable as Series 1998
Preferred Stock to be increased (to the extent that the Articles of
Incorporation then permit) to the largest number of whole shares (rounded up to
the nearest whole number) issuable upon exercise of such Rights.
II. Dividends or Distributions.
(a) Subject to the prior and superior rights of the holders of shares of
any other series of Preferred Stock or other class of capital stock of the
Corporation ranking prior and superior to the shares of Series 1998 Preferred
Stock with respect to dividends, the holders of shares of the Series 1998
Preferred Stock shall be entitled to receive, when, as and if declared by the
Board of Directors, out of the assets of the Corporation legally available
therefor, (I) annual dividends payable in cash on January 15 of each year, or
such other dates as the Board of Directors of the Corporation shall approve
(each such date being referred to herein as an "Annual Dividend Payment Date"),
commencing on the first Annual Dividend Payment Date after the first issuance of
a share or a fraction of a share of Series 1998 Preferred Stock, in the amount
of $.01 per whole share (rounded to the nearest cent), less the amount of all
cash dividends declared on the
24
<PAGE>
Series 1998 Preferred Stock pursuant to the following clause (ii) since the
immediately preceding Annual Dividend Payment Date or, with respect to the first
Annual Dividend Payment Date, since the first issuance of any share or fraction
of a share of Series 1998 Preferred Stock (the total of which shall not, in any
event, be less than zero) and (ii) dividends payable in cash on the payment date
for each cash dividend declared on the Common Stock in an amount per whole share
(rounded to the nearest cent) equal to the Formula Number (as hereinafter
defined) then in effect times the cash dividends then to be paid on each share
of Common Stock. In addition, if the Corporation shall pay any dividend or make
any distribution on the Common Stock payable in assets, securities or other
forms of non-cash consideration (other than dividends or distributions solely in
shares of Common Stock), then, in each such case, the Corporation shall
simultaneously pay or make on each outstanding whole share of Series 1998
Preferred Stock a dividend or distribution in like kind equal to the Formula
Number then in effect times such dividend or distribution on each share of the
Common Stock. As used herein, the "Formula Number" shall be 1,000; provided,
however, that, if at any time after March 19, 1998, excluding, however, the
two-for-one stock split or stock dividend declared by the Corporation on March
19, 1998, the Corpora tion shall (x) declare or pay any dividend on the Common
Stock payable in shares of Common Stock or make any distribution on the Common
Stock in shares of Common Stock, (y) subdivide (by a stock split or otherwise)
the outstanding shares of Common Stock into a larger number of shares of Common
Stock or (z) combine (by a reverse stock split or otherwise) the outstanding
shares of Common Stock into a smaller number of shares of Common Stock, then, in
each such event, the Formula Number shall be adjusted to a number determined by
multiplying the Formula Number in effect immediately prior to such event by a
fraction, the numerator of which is the number of shares of Common Stock that
are outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that are outstanding immediately prior to such
event (and rounding the result to the nearest whole number); and provided
further, that, if at any time after March 19, 1998, the Corporation shall issue
any shares of its capital stock in a merger, share exchange, reclassification,
or change of the outstanding shares of Common Stock, then, in each such event,
the Formula Number shall be appropriately adjusted to reflect such merger, share
exchange, reclassification or change so that each share of Preferred Stock
continues to be the economic equivalent of a Formula Number of shares of Common
Stock prior to such merger, share exchange, reclassification or change.
(b) The Corporation shall declare a dividend or distribution on the Series
1998 Preferred Stock as provided in Section II(a) immediately prior to or at the
same time it declares a dividend or distribution on the Common Stock (other than
a dividend or distribution solely in shares of Common Stock); provided, however,
that, in the event no dividend or distribution (other than a dividend or
distribution in shares of Common Stock) shall have been declared on the Common
Stock during the period between any Annual Dividend Payment Date and the next
subsequent Annual Dividend Payment Date, a dividend of $.01 per share on the
Series 1998 Preferred Stock shall
25
<PAGE>
nevertheless be payable on such subsequent Annual Dividend Payment Date. The
Board of Directors may fix a record date for the determination of holders of
shares of Series 1998 Preferred Stock entitled to receive a dividend or
distribution declared thereon, which record date shall be the same as the record
date for any corresponding dividend or distribution on the Common Stock.
(c) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series 1998 Preferred Stock from and after the Annual Dividend Payment
Date next preceding the date of original issue of such shares of Series 1998
Preferred Stock; provided, however, that dividends on such shares that are
originally issued after the record date for the determination of holders of
shares of Series 1998 Preferred Stock entitled to receive an annual dividend and
on or prior to the next succeeding Annual Dividend Payment Date shall begin to
accrue and be cumulative from and after such Annual Dividend Payment Date.
Notwithstanding the foregoing, dividends on shares of Series 1998 Preferred
Stock that are originally issued prior to the record date for the determination
of holders of shares of Series 1998 Preferred Stock entitled to receive an
annual dividend on the first Annual Dividend Payment Date shall be calculated as
if cumulative from and after the last day of the fiscal quarter next preceding
the date of original issuance of such shares. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series 1998 Preferred Stock
in an amount less than the total amount of such dividends at the time accrued
and payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding and entitled to receive such
dividends.
(d) So long as any shares of the Series 1998 Preferred Stock are
outstanding, no dividends or other distributions shall be declared, paid or
distributed, or set aside for payment or distribution, on the Common Stock,
unless, in each case, the dividend required by this Section II to be declared on
the Series 1998 Preferred Stock shall have been declared and paid.
(e) The holders of the shares of Series 1998 Preferred Stock shall not be
entitled to receive any dividends or other distributions, except as provided
herein.
III. Voting Rights. The holders of shares of Series 1998 Preferred Stock
shall have the following voting rights:
(a) Each holder of Series 1998 Preferred Stock shall be entitled to a
number of votes equal to the Formula Number then in effect, for each whole share
of Series 1998 Preferred Stock held of record on each matter on which holders of
the Common Stock or shareholders generally are entitled to vote, multiplied by
the maximum number of votes per share which any holder of the Common Stock or
shareholders generally then have with respect to such matter (assuming any
holding period or other requirement to vote a greater number of shares is
satisfied).
(b) Except as otherwise provided herein or by applicable law,
26
<PAGE>
the holders of shares of Series 1998 Preferred Stock and the holders of shares
of Common Stock shall vote together as one voting group for the election of
directors of the Corporation and on all other matters submitted to a vote of
shareholders of the Corporation.
(c) If, at the time of any annual meeting of shareholders for the election
of directors, the equivalent of two annual dividends (whether or not
consecutive) payable on any share or shares of Series 1998 Preferred Stock are
in default, the number of directors constituting the Board of Directors of the
Corporation shall be increased by two. In addition to voting together with the
holders of Common Stock for the election of other directors of the Corporation,
the holders of record of the Series 1998 Preferred Stock, voting separately as a
voting group to the exclusion of the holders of Common Stock, shall be entitled
at said meeting of shareholders (and at each subsequent annual meeting of
shareholders), unless all dividends in arrears have been paid or declared and
set apart for payment prior thereto, to vote for the election of two directors
of the Corporation, the holders of any Series 1998 Preferred Stock being
entitled to cast a number of votes per whole share of Series 1998 Preferred
Stock equal to the Formula Number. Until the default in payments of all
dividends that permitted the election of said directors shall cease to exist,
any director who shall have been so elected pursuant to the next preceding
sentence may be removed at any time, either with or without cause, only by the
affirmative vote of the holders of the shares of Series 1998 Preferred Stock at
the time entitled to cast such number of votes as are required by law for the
election of any such director at a special meeting of such holders called for
that purpose, and any vacancy thereby created may be filled only by the vote of
such holders. If and when such default shall cease to exist, the holders of the
Series 1998 Preferred Stock shall be divested of the foregoing special voting
rights, subject to revesting in the event of each and every subsequent like
default in payments of dividends. Upon the termination of the foregoing special
voting rights, the terms of office of all persons who may have been elected
directors pursuant to said special voting rights shall forthwith terminate to
the extent permitted by law, and the number of directors constituting the Board
of Directors shall be reduced by two. The voting rights granted by this Section
III(C) shall be in addition to any other voting rights granted to the holders of
the Series 1998 Preferred Stock in this Section III.
(d) Except as provided herein, in Section XI or by applicable law, holders
of Series 1998 Preferred Stock shall have no special voting rights and their
consent shall not be required (except to the extent they are entitled to vote
with holders of Common Stock as set forth herein) for authorizing or taking any
corporate action.
IV. Certain Restrictions.
(a) Whenever annual dividends or other dividends or distributions payable
on the Series 1998 Preferred Stock as provided in Section II are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares
27
<PAGE>
of Series 1998 Preferred Stock outstanding shall have been paid in
full, the Corporation shall not
(i) declare or pay dividends on, make any other distributions on,
or redeem or purchase or otherwise acquire for consideration any shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series 1998 Preferred Stock;
(ii) declare or pay dividends on or make any other distribu tions on
any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series 1998 Preferred Stock,
except dividends paid ratably on the Series 1998 Preferred Stock and all such
parity stock on which dividends are payable or in arrears in proportion to the
total amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consider ation
shares of any stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series 1998 Preferred Stock;
provided that the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such parity stock in exchange for shares of any stock of
the Corporation ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series 1998 Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares of
Series 1998 Preferred Stock, or any shares of stock ranking on a parity with the
Series 1998 Preferred Stock, except in accordance with a purchase offer made in
writing or by publication (as determined by the Board of Directors) to all
holders of such shares upon such terms as the Board of Directors, after
consideration of the respective annual dividend rates and other relative rights
and preferences of the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the respective series or
classes.
(b) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (a) of this Section
IV, purchase or otherwise acquire such shares at such time and in such manner.
V. Liquidation Rights. Upon the liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, no distribution shall be made
to the holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series 1998 Preferred Stock,
unless, prior thereto, the holders of shares of Series 1998 Pre ferred Stock
shall have received an amount equal to the accrued and unpaid dividends and
distributions thereon, whether or not declared, to the date of such payment,
plus an amount equal to the greater of $.01 per whole share or an aggregate
amount per share equal to the Formula Number then in effect times the
28
<PAGE>
aggregate amount to be distributed per share to holders of Common Stock or (b)
to the holders of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series 1998 Preferred Stock,
except distributions made ratably on the Series 1998 Preferred Stock and all
other such parity stock in proportion to the total amounts to which the holders
of all such shares are entitled upon such liquidation, dissolution or winding
up.
VI. Consolidation, Merger, etc. In case the Corporation shall enter into
any consolidation, merger, share exchange, combination or other transaction in
which the shares of Common Stock are exchanged for or changed into other stock
or securities, cash or any other property, then, in any such case, the then
outstanding shares of Series 1998 Preferred Stock shall at the same time be
similarly exchanged or changed into an amount per whole share equal to the
Formula Number then in effect times the aggregate amount of stock, securities,
cash or any other property (payable in kind), as the case may be, into which or
for which each share of Common Stock is exchanged or changed. In the event both
this Section VI and Section II appear to apply to a transaction, this Section VI
will control.
VII. No Redemption; No Sinking Fund.
(a) The shares of Series 1998 Preferred Stock shall not be subject to
redemption by the Corporation or at the option of any holder of Series 1998
Preferred Stock; provided, however, that the Corporation may purchase or
otherwise acquire outstanding shares of Series 1998 Preferred Stock in the open
market or by offer to any holder or holders of shares of Series 1998 Preferred
Stock.
(b) The shares of Series 1998 Preferred Stock shall not be subject to or
entitled to the operation of a retirement or sinking fund.
VIII. Ranking. The Series 1998 Preferred Stock shall rank junior to all
other series of Preferred Stock of the Corporation, unless the Board of
Directors shall specifically determine otherwise in fixing the powers,
preferences and relative, participating, optional and other special rights of
the shares of such series and the qualifications, limitations and restrictions
thereof.
IX. Fractional Shares. The Series 1998 Preferred Stock shall be issuable
upon exercise of the Rights issued pursuant to the Rights Agreement in whole
shares or in any fraction of a share that is one-thousandth (1/1,000) of a share
or any integral multiple of such fraction which shall entitle the holder, in
proportion to such holder's fractional shares, to receive divi dends, exercise
voting rights, participate in distributions and have the benefit of all other
rights of holders of Series 1998 Preferred Stock. In lieu of fractional shares,
the Corporation, prior to the first issuance of a share or a fraction of a share
29
<PAGE>
of Series 1998 Preferred Stock, may elect (a) to make a cash payment as provided
in the Rights Agreement for fractions of a share other than one-thousandth
(1/1,000) of a share or any integral multiple thereof or (b) to issue depository
receipts evidencing such authorized fraction of a share of Series 1998 Preferred
Stock pursuant to an appropriate agreement between the Corporation and a
depository selected by the Corporation; provided that such agreement shall
provide that the holders of such depository receipts shall have all the rights,
privileges and preferences to which they are entitled as holders of the Series
1998 Preferred Stock.
X. Reacquired Shares. Any shares of Series 1998 Preferred Stock purchased
or otherwise acquired by the Corporation in any manner whatsoever shall be
retired and canceled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of Preferred
Stock, without par value, of the Corporation, undesignated as to series, and may
thereafter be reissued as part of a new series of such Preferred Stock as
permitted by law.
XI. Amendment. None of the powers, preferences and relative, participating,
optional and other special rights of the Series 1998 Preferred Stock as provided
herein or in the Articles of Incorporation shall be amended in any manner that
would alter or change the powers, preferences, rights or privileges of the
holders of Series 1998 Preferred Stock so as to affect such holders adversely
without the affirmative vote of the holders of at least 66-2/3% of the
outstanding shares of Series 1998 Preferred Stock, voting as a separate voting
group; provided, however, that no such amendment approved by the holders of at
least 66-2/3% of the outstanding shares of Series 1998 Preferred Stock shall be
deemed to apply to the powers, preferences, rights or privileges of any holder
of shares of Series 1998 Preferred Stock originally issued upon exercise of a
Right after the time of such approval without the approval of such holder.
THIRD: This amendment was duly adopted by the Board of
Directors of the Corporation without shareholder action on March 19,
1998. Shareholder action was not required.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Amendment as of this 19th day of March, 1998.
CHURCHILL DOWNS INCORPORATED
By:\s\Thomas H. Meeker
---------------------
Title: President and Chief Executive Officer
30
<PAGE>
COMMONWEALTH OF KENTUCKY )
)
COUNTY OF JEFFERSON )
The foregoing instrument was acknowledged before me this 19th day of
March, 1998, by Thomas H. Meeker, of CHURCHILL DOWNS INCORPORATED, a Kentucky
corporation, on behalf of the corporation.
-----------------------------------
Notary Public
Commission Expires:_________________
THIS INSTRUMENT PREPARED BY:
\s\Robert A. Heath
- -------------------
Robert A. Heath
WYATT, TARRANT & COMBS
2800 Citizens Plaza
Louisville, Kentucky 40202
(502) 589-5235
31
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0
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