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