UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Year Ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission File Number 0-1469
CHURCHILL DOWNS INCORPORATED
Exact name of registrant as specified in its charter
KENTUCKY 61-0156015
State or other jurisdiction of IRS Employer
Incorporation or Organization Identification No.
700 CENTRAL AVENUE, LOUISVILLE, KENTUCKY 40208
Address of Principal Executive Offices Zip Code
Registrant's Telephone Number, Including Area Code 502-636-4400
Securities registered pursuant to Section 12(b) of the Act:
None None
Title of Each Class registered Name of Each Exchange on which registered
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
Title of Class
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K. (_________)
As of March 25, 1999, 7,525,041 shares of the Registrant's Common Stock were
outstanding, and the aggregate market value of the shares held by nonaffiliates
of the Registrant was $131,000,000.
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on June 17, 1999 are incorporated by reference herein in
response to Items 10, 11, 12 and 13 of Part III of Form 10-K. The exhibit index
is located on pages 58 to 59.
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PART I
ITEM 1. BUSINESS
A. INTRODUCTION
Churchill Downs Incorporated (the "Company") is a racing company that
primarily conducts pari-mutuel wagering on live Thoroughbred and Standardbred
horse racing and simulcast video feeds of races. Additionally, we offer racing
services through our other business interests.
We own and operate our flagship operation, Churchill Downs racetrack, in
Louisville, Kentucky ("Churchill Downs"). Churchill Downs has conducted
Thoroughbred racing continuously since 1875, and is internationally known as
home of the Kentucky Derby. The Churchill Downs operation also encompasses the
Louisville Sports Spectrum, a simulcast- wagering facility.
In 1992, we formed Churchill Downs Management Company ("CDMC"), a wholly
owned subsidiary that oversees properties we actively manage. CDMC manages Ellis
Park Race Course ("Ellis Park"), a Thoroughbred track in Henderson, Kentucky,
and the Kentucky Horse Center in Lexington, Kentucky. We acquired ownership of
these two facilities in April 1998. Additionally, CDMC manages Hoosier Park in
Anderson, Indiana ("Hoosier Park"), of which we are a majority owner. Hoosier
Park conducts Thoroughbred, Quarter Horse and Standardbred horse racing. CDMC
also manages three Sports Spectrum facilities ("Sports Spectrum") owned by
Hoosier Park in Indiana. The Sports Spectrum facilities conduct simulcast
wagering on horse racing year-round. We also periodically conduct simulcast
wagering at our racetracks.
In November 1997, we formed Churchill Downs Investment Company ("CDIC"),
a wholly owned subsidiary, to oversee those investments in which we participate
as an equity investor and do not actively manage the operations. Among those
investments are NASRIN Services, LLC ("NASRIN"), a telecommunications service
provider for the pari-mutuel and simulcasting industries, and EquiSource, LLC
("EquiSource"), a procurement business that assists in the group purchasing of
supplies and services for the equine industry. We are a minority investor in
both NASRIN and EquiSource. In March 1999, CDIC and Autotote Corporation
("Autotote") formed NASRIN, which operates under the NASRIN banner and is
managed on a day-to-day basis by Autotote. Autotote owns 70 percent of
NASRIN and CDIC owns 30 percent. Currently, neither NASRIN nor Equisource are
material investments for us.
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CDIC also holds our minority investment in Kentucky Downs, LLC
("Kentucky Downs"), a Franklin, Kentucky, racetrack that conducts a limited
Thoroughbred race meet as well as year-round simulcasting. Turfway Park - a
Florence, Kentucky, racetrack - also holds a minority interest in Kentucky Downs
and manages its day-to-day operations. In March 1999, Keeneland Association,
Inc. ("Keeneland"), a Lexington, Kentucky, racetrack; Dreamport, Inc., a wholly
owned subsidiary of GTECH Corporation; and Dusty Corporation, a wholly owned
subsidiary of Harrah's Entertainment, Inc., through a jointly owned company,
acquired all of Turfway Park's racetrack-related assets. It is not believed that
this transaction will have a material effect on the management of Kentucky
Downs. Our investment in Kentucky Downs is not material to the Company's
operations at this time.
On January 11, 1999, we completed the purchase of a majority ownership
interest in Charlson Industries, Inc., a privately held company that provides
simulcast graphic software and video services to racetracks and simulcast
wagering facilities. Under the purchase agreement, the two parties formed
Charlson Broadcast Technologies, LLC ("CBT"). We control a 60% interest in the
new venture. The cost of the transaction - including the purchase price, capital
commitments and contingent payments - totaled $4.9 million. CBT now owns all the
assets formerly owned by Charlson Industries. The new venture is expected
to be strategically significant to our development of a comprehensive simulcast
product
The Company was organized as a Kentucky corporation in 1928. Its
principal executive offices are located at Churchill Downs, 700 Central Avenue,
Louisville, Kentucky 40208.
B. LIVE RACING OPERATIONS
We conduct live horse racing at Churchill Downs, Ellis Park and Hoosier
Park during each track's respective meets. Live racing produces revenues through
pari-mutuel wagering, admissions and seating, concession commissions (primarily
the sales of food and beverage items), sponsorship revenues, and license, rights
and broadcast fees.
The Kentucky Derby and the Kentucky Oaks, both held at Churchill Downs,
continue to be our premier racing events. Churchill Downs has also hosted the
Breeders' Cup Championship a record four times, in 1988, 1991, 1994 and 1998.
The Breeders' Cup races are held annually for the purpose of determining
Thoroughbred champions in eight different events. Racetracks across North
America compete for the privilege of hosting the Breeders' Cup races each year.
Hosting the Breeders' Cup event has a positive impact on marketing, publicity
and financial results.
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Churchill Downs
Churchill Downs annually conducts two live Thoroughbred race meets, a
Spring Meet (late April through late June) and a Fall Meet (late October
through late November).
We own the Churchill Downs racetrack site and improvements located at or
adjacent to 700 Central Avenue, Louisville, Kentucky (the "Churchill
facility"). The Churchill facility consists of approximately 157 acres
of land with a one-mile oval dirt track, a seven-eighths (7/8) mile turf
track, permanent grandstands and a stabling area. The physical plant
includes clubhouse and grandstand seating for approximately 48,500
persons, a general admission area, and food and beverage facilities
ranging from fast food to full-service restaurants. The Paddock
Pavilion, a state-of-the-art simulcast-wagering facility designed to
accommodate 450 patrons, opened in May 1997. The site also has a
saddling paddock, infield accommodations for groups and special events,
parking areas for the public, and our office facilities. The backside
stable area has sprinkled barns sufficient to accommodate approximately
1,400 horses, and other facilities for backstretch personnel. In
September 1998, our board of directors approved the construction of a
114-room brick dormitory for backstretch personnel. This $2.4 million
project is expected to be completed during the track's 1999 Spring Meet.
We have made numerous capital improvements to the Churchill facility
during the past 10 years in order to better serve our horsemen and
patrons. The dirt and turf tracks provide excellent venues for live
Thoroughbred racing. We provide additional stabling facilities and a
training track at the Louisville Sports Spectrum, where a portion of the
property is used as a Thoroughbred stabling and training annex. We
converted a former Standardbred track into a three-quarter (3/4) mile
dirt track, which is used for training Thoroughbreds. The existing barns
on the property were demolished, and we constructed new sprinkled barns
sufficient to accommodate approximately 500 horses, providing a
year-round base of operation for many horsemen and enabling us to
attract new horsemen who desire to race at Churchill Downs.
Our physical plant at the Churchill facility is fully utilized only on
those days when live racing is conducted.
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Ellis Park Race Course
Ellis Park conducts Thoroughbred racing from late June or early July
through Labor Day.
We own the Ellis Park racetrack and improvements located at or adjacent
to 3300 U.S. Highway 41 North in Henderson, Kentucky ("Ellis Park
facility"). The Ellis Park facility consists of 230 acres of land just
north of the Ohio River with a one and one-eighths (1 1/8) mile dirt
track, a one-mile turf course, permanent grandstands and a stabling area
for 1,290 horses. The physical plant includes clubhouse and grandstand
seating for 8,000 people, a general admission area, and food and
beverage facilities ranging from fast food to full-service restaurants.
The Ellis Park facility also features a saddling paddock, parking areas
for the public and office facilities.
Hoosier Park
Hoosier Park conducts live Standardbred racing (mid-April to late
August), live Thoroughbred racing (mid-September to late November) and
live Quarter Horse racing (late October).
Hoosier Park is located in Anderson, Indiana, about 40 miles northeast
of downtown Indianapolis. Hoosier Park leases the land under a long-term
lease with the city of Anderson and owns all of the improvements on the
site located at 4500 Dan Patch Circle in Anderson, Indiana. The
racetrack facility consists of approximately 110 acres of leased land
with a seven-eighths (7/8) mile oval dirt track, permanent grandstands,
and stabling area. The physical plant includes seating for approximately
2,400 persons, a general admission area, and food and beverage
facilities ranging from fast food to a full-service restaurant. The site
also has a saddling paddock, parking areas for the public, and office
facilities. The stable area has barns sufficient to accommodate 780
horses, and other facilities for backstretch personnel.
Hoosier Park is owned by Hoosier Park, L.P. ("HPLP"), an Indiana limited
partnership formed in 1994. We currently own a 77% interest in HPLP
through Anderson Park, Inc. ("Anderson"), a wholly owned subsidiary of
CDMC. The remaining 23% of HPLP is held by unrelated third parties,
Pegasus Group, Inc. ("Pegasus"), and Conseco HPLP, LLC ("Conseco").
Conseco and Pegasus are limited partners of HPLP, and Anderson continues
to be the sole general partner of HPLP. HPLP has entered into a
management agreement with CDMC under which CDMC has operational control
of the day-to-day
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affairs of Hoosier Park and its related simulcast operations. Through
CDMC, we have loaned to HPLP $23.2 million, which includes accrued
interest, for the development of the racetrack and related simulcast
wagering facilities. CDMC is committed to loan an additional $2.6
million to HPLP, but we do not anticipate any additional investment. The
loan bears interest of prime plus 2% (9.75% at December 31, 1998).
Licensing
Kentucky's racetracks, including Churchill Downs and Ellis Park, are
subject to the licensing and regulation of the Kentucky Racing
Commission ("KRC"), which consists of 11 members appointed by the
governor of Kentucky. Licenses to conduct live Thoroughbred race meets
and to participate in simulcasting (discussed below) are approved
annually by the KRC based upon applications submitted by the racetracks
in Kentucky. Although to some extent Churchill Downs and Ellis Park
compete with other racetracks in Kentucky for the award of racing dates,
the KRC is required by state law to consider and seek to preserve each
racetrack's usual and customary live racing dates. Generally, there is
no substantial change from year to year in the racing dates awarded to
each racetrack. The KRC has awarded Churchill Downs a total of 71 live
racing dates in 1999 and Ellis Park a total of 61 days.
In Indiana, licenses to conduct live Standardbred and Thoroughbred race
meets, including Quarter Horse races, and to participate in simulcasting
are approved annually by the Indiana Horse Racing Commission ("IHRC"),
which consists of five members appointed by the governor of Indiana.
Licenses are approved annually by the IHRC based upon applications
submitted by Hoosier Park. Currently, Hoosier Park is the only facility
in Indiana licensed to conduct pari- mutuel wagering on live
Standardbred, Quarter Horse or Thoroughbred racing and to participate in
simulcasting. The IHRC has awarded Hoosier Park a total of 168 live
racing dates in 1999.
A substantial change in the allocation of live racing days at Churchill
Downs, Ellis Park or Hoosier Park could adversely impact our operations
and earnings in future years.
Service Marks
We hold federal service mark registrations on the names "Kentucky
Derby," "Churchill Downs," "Churchill Downs Sports Spectrum," "Kentucky
Oaks," "Churchill Charlie" and the Twin Spires design in various
categories including
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entertainment business, apparel, paper goods, printed matter and
housewares and glass. We license the use of these service marks and
derive revenue from such license agreements.
C. SIMULCASTING OPERATIONS
In the horse racing industry, simulcasting involves sending audio and
video signals of live races to off-track facilities, including other racetracks,
for the purpose of wagering.
We generate a significant portion of our revenues by sending our signals
to other facilities and receiving signals from other tracks. These revenues are
earned through pari-mutuel wagering on signals that we both send and receive.
During 1998, we sold the Churchill Downs, Ellis Park and Hoosier Park
signals as separate products. The Kentucky Derby signal was packaged with that
of Churchill Downs. Starting in 1999, we intend to also offer all of the signals
we own as one product.
Ellis Park and Hoosier Park act as year-round simulcast facilities,
while Churchill Downs receives signals only during its race meets. The
Louisville Sports Spectrum conducts simulcast wagering when Churchill Downs is
not operating a live race meet with the exception of Kentucky Derby Day and the
immediately following Sunday. The Indiana Sports Spectrums and the Kentucky
Off-Track Betting facilities (discussed below) conduct simulcast wagering
year-round.
Louisville Sports Spectrum
We own the real property and improvements known as the Louisville Sports
Spectrum, located at 4520 Poplar Level Road in Louisville, Kentucky. Formerly a
Standardbred racetrack, this property was acquired by us in 1992 and converted
into a simulcast wagering facility and Thoroughbred training annex. The
100,000-square-foot Louisville Sports Spectrum is located on approximately 88
acres of land, about seven miles from Churchill Downs.
The Louisville Sports Spectrum provides state-of-the art audio/visual
technology, seating for approximately 3,000 persons, parking, offices and
related facilities for simulcasting races in Kentucky and throughout the United
States. Seven separate areas were created within the structure to accommodate
the needs of a variety of patrons, from the seasoned handicapper to the novice
player. As mentioned above, the Louisville Sports Spectrum also provides a
stabling and training annex for Churchill Downs.
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Indiana Sports Spectrums
Hoosier Park owns and operates three simulcast-wagering facilities in
Indiana, which are branded with the Churchill Downs Sports Spectrum name. These
simulcast wagering facilities provide a statewide distribution system for
Hoosier Park's racing signal and additional simulcast markets for our products.
The Sports Spectrum at Merrillville, located about 30 miles southeast of
Chicago, consists of approximately 27,300 square feet of space. The Sports
Spectrum at Fort Wayne consists of approximately 15,750 square feet of space.
Hoosier Park also leases space in the Claypool Courts Building in downtown
Indianapolis where it operates the Sports Spectrum at Indianapolis. In October
1998, the IHRC approved the expansion of this facility from approximately 17,500
square feet to 24,800 square feet. This project, completed in February 1999,
increased capacity by 180 patrons to 630.
Hoosier Park is continuing to evaluate sites for the location of a
fourth Sports Spectrum facility. The State of Indiana has enacted legislation
that requires a county fiscal body to adopt an ordinance permitting simulcast
wagering facilities before such a facility can be located in that county. The
county fiscal body may require in the ordinance that the voters of the county
must approve the operation of a simulcast-wagering facility in that county. This
legislation may affect Hoosier Park's ability to locate its fourth facility in
certain counties.
Kentucky Off-Track Betting, Inc.
In 1992, the Company and three other Kentucky Thoroughbred racetracks
formed Kentucky Off-Track Betting, Inc. ("KOTB"), of which we are a 50%
shareholder. KOTB's purpose is to own and operate facilities for the
simulcasting of races and the acceptance of wagers on such races at locations
other than a racetrack. These simulcast wagering facilities may be located no
closer than 75 miles from an existing racetrack without the track's consent
and in no event closer than 50 miles to an existing track. Each simulcast
wagering facility must first be approved by the KRC. Once approved, the
simulcast wagering facility may then be established unless the local government
where the facility is to be located votes to disapprove its establishment. KOTB
currently owns or leases and operates simulcast wagering facilities in Corbin,
Maysville, Jamestown, and Pineville, Kentucky.
Simulcast wagering facilities developed by KOTB provide additional
markets for the intrastate simulcasting of Churchill Downs' and Ellis Park's
live races and interstate simulcasting on out-of-state signals. KOTB did not
contribute significantly to our operations in 1998 and is not anticipated to
have a substantial impact on operations in the future.
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In-Home Wagering
Churchill Downs, in conjunction with ODS Entertainment ("ODS") and
InterMedia, continues to operate its in-home interactive television wagering
system, the first such system in the country. Testing began in July 1995 and has
expanded to approximately 1,250 homes in Jefferson County, Kentucky. In-home
patrons can wager on Churchill Downs' live racing, as well as intrastate and
interstate race signals. We believe development of such in-home technology can
be used as an efficient delivery system that could increase revenues and attract
new segments of the market to our racetracks.
The second phase of our relationship with ODS will be the launching of
the Television Games Network ("TVG"), which is projected to begin in the fourth
quarter of 1999. This new network is anticipated to eventually offer
24-hour-a-day programming throughout the United States that will be primarily
devoted to developing new fans for racing. Once completed, this would include
interactive wagering from home.
D. OTHER SOURCES OF REVENUE
In addition to revenues from live racing and simulcasting, we
generate revenues from additional sources.
Riverboat Admissions Tax
To compensate for the adverse impact of riverboat competition, the horse
industry in Indiana presently receives $0.65 per $3 admission to riverboats in
the state. The horse industry is required to allocate 70% of any revenue
received from the subsidy directly for purse expenses, breed development and
reimbursement of approved marketing costs. The balance, or 30%, is received by
Hoosier Park as the only horse racetrack currently operating in Indiana.
Kentucky Horse Center
We own the real property and improvements known as the Kentucky Horse
Center, located at 3380 Paris Pike in Lexington, Kentucky ("KHC"). The KHC is a
Thoroughbred training and boarding facility that we acquired with Ellis Park in
April 1998. The facility, which sits on 245 acres of land, offers a one-mile
dirt track, a five-eighths (5/8) mile training track and stabling for 1,000
horses. Additionally, the KHC has facilities for meetings and larger special
events, including a 920-seat auditorium known as the Pavilion. Escorted tours of
the KHC's training facilities are offered to the public. KHC's revenues are not
material to our operations at this time.
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E. OTHER FACTORS AFFECTING THE COMPANY'S BUSINESS
North American bloodstock sales climbed again in 1998, continuing a
trend that began in 1997 when the market rebounded dramatically from its decade
long slump. According to The Blood-Horse magazine, expenditures for Thoroughbred
weanlings, yearlings, 2 year olds and broodmares totaled $816.9 million in 1998
compared to $693 million in 1997, which was the previous record. Beginning in
1995, the number of Thoroughbred foals born each year had also begun to show an
increase. These recent increases in bloodstock prices and number of foals are
indicators of a resurgence of the Thoroughbred breeding industry, reversing a
trend of declines experienced from 1986 to 1995. These recent increases
ultimately resulted in an increase in the number of Thoroughbreds available to
run in races, which enables racetracks to increase the number of horses
participating in live racing.
Churchill Downs, Ellis Park and Hoosier Park were able to effectively
compete for horses and experienced a high quality of racing in 1998. Churchill
Downs offered record average daily purses that ranked among the highest in the
nation. We believe these purses attracted many of the country's top horses and
trainers. During Churchill Downs' live race meets, average daily purses reached
$436,833. Purse increases at Hoosier Park in 1998 strengthened both its
Thoroughbred and Standardbred racing programs and created greater demand from
horsemen to race at the Indiana track. Average daily purses of $197,738 resulted
in competitive race fields for Hoosier Park's Thoroughbred meet, while average
daily purses of $141,535 during its Standardbred meet ranked Hoosier Park behind
only The Meadowlands in New Jersey in terms of purse levels. This trend was also
evident at Ellis Park, where 1998 average daily purses reached $170,916,
compared to $163,546 in 1997. Based on the competitiveness of its racing
products in Kentucky and Indiana, we believe we are well positioned to grow our
share of the interstate simulcast market.
We generally do not directly compete with other racetracks or simulcast
facilities for patrons due to geographic separation of such facilities. However,
we compete with other sports, entertainment and gaming options, including
riverboat casinos and lotteries, for patrons for both live racing and
simulcasting (For a further discussion of the Company's competitive environment,
see "Management Discussion and Analysis of Financial Condition and Results of
Operations").
We have successfully grown our live racing product and positioned
ourself to compete by strengthening our flagship operations, increasing our
share of the interstate simulcast market, and geographically expanding our
racing operations. We also continue to pursue legislation to allow
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video lottery terminals at our racetrack facilities in Kentucky as a means to
attract new patrons and generate additional revenue for purses and capital
investment.
F. ENVIRONMENTAL MATTERS
On January 22, 1992, we acquired certain assets of Louisville Downs,
Incorporated for $5,000,000 including the site of the Louisville Sports
Spectrum. In conjunction with this purchase, we withheld $1,000,000 from the
amount due to the sellers to offset certain costs related to the remediation
of environmental contamination associated with underground storage tanks at the
site. All of the $1,000,000 hold back had been utilized as of December 31,
1997 and additional costs of remediation have not yet been conclusively
determined. The sellers have now received a reimbursement from the State of
Kentucky of $995,000 for remediation costs and that amount is now being held in
an escrow account to pay further costs of remediation. Approximately $985,000
remains in the account. In addition to the hold back, we have obtained an
indemnity to cover the full cost of remediation from the prior owner of the
property.
In January 1995, Hoosier Park opened the Churchill Downs Sports Spectrum
in Merrillville, Indiana. The 27,300 square foot facility is designed
exclusively for the simulcast of horse races and the conducting of pari-mutuel
wagering. The Merrillville, Indiana, facility is also subject to contamination
related to prior business operations adjacent to the property. In conjunction
with the purchase, Hoosier Park withheld $50,000 from the amount due to the
seller to offset costs related to remediation of the contamination. The
contamination on the property is being remediated under the State of Indiana's
voluntary remediation program. The State of Indiana approved the remediation
plan in May of 1995. The cost of remediation is not expected to exceed $50,000.
In addition to the hold back, Hoosier Park has obtained an indemnity to cover
the full cost of remediation from the prior owner of the property.
It is not anticipated that we will have any material liability as a
result of compliance with environmental laws with respect to any of our
property. Compliance with environmental laws has not materially affected the
ability to develop and operate our properties and we are not otherwise subject
to any material compliance costs in connection with federal or state
environmental laws.
G. EMPLOYEES
We employ approximately 500 full-time employees. Due to the seasonal
nature of our live racing business, the number of seasonal and part-time persons
employed will vary throughout the year, with peak employment occurring Kentucky
Derby week when we employ as
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many as 2,600 persons. During 1998, average employment per pay period was
approximately 1,000 individuals.
ITEM 2. PROPERTIES
Information concerning property owned by the us required by this Item is
incorporated by reference to the information contained in Item 1. "Business" of
this Report.
Upon the closing of our proposed $250 million line of credit, our real
and personal property (but not including the property of Hoosier Park, KOTB or
Charlson) will be encumbered by liens securing our $250 million credit facility.
The shares of stock certain of our subsidiaries will also be pledged to secure
this facility.
The Kentucky Derby Museum is operated on property adjacent to Churchill
Downs. The Museum is owned and operated by the Kentucky Derby Museum
Corporation, a tax-exempt organization under Section 501(c)(3) of the Internal
Revenue Code of 1986.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to our business, to which we are a party or of
which any of our property is the subject and no such proceedings are known to be
contemplated by governmental authorities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our stockholders during the fourth
quarter of the fiscal year covered by this Report.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Our common stock is traded in the over-the-counter market. As of
March 29, 1993, our common stock was listed on the National Association of
Securities Dealers, Inc.'s Small Cap Market automated quotation system
("NASDAQ"). As of March 24, 1999, there were approximately 3,100 stockholders of
record.
The following table sets forth the high and low bid quotations (as
reported by NASDAQ) and dividend payment information for our common stock during
its last two years:
1998 - By Quarter 1997 - By Quarter
----------------- -----------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
--- --- --- --- --- --- --- ---
High Bid $25.31 $43.25 $41.44 $36.44 $18.50 $19.00 $21.00 $23.38
Low Bid $19.31 $24.00 $27.63 $27.25 $16.00 $16.50 $16.25 $20.75
Dividend per share:
Annual $.50 $.25
Special - $.25
Stock quotations and dividend per share amounts reflect retroactive
adjustments for the 2- for-1 stock split with a record date of March 30, 1998.
Quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commissions, and may not necessarily reflect actual transactions.
We presently expect that comparable annual cash dividends (adjusted
for any stock splits or other similar transactions) will continue to be paid in
the future.
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ITEM 6. CONSOLIDATED SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Operations:
<S> <C> <C> <C> <C> <C>
Net revenues $147,300,299 $118,907,367 $107,858,818 $92,434,216 $66,419,460
Operating income $17,143,410 $14,405,288 $12,314,897 $10,305,210 $9,861,086
Net earnings $10,518,548 $9,148,560 $8,071,526 $6,203,135 $6,166,353
Basic net earnings per share $1.41 $1.25 $1.08 $.82 $.82
Diluted net earnings per share $1.40 $1.25 $1.08 $.82 $.82
Dividend paid per share
Annual $.50 $.25 $.25 $.25 $.25
Special - $.25 $.08 - -
Balance Sheet Data At Period End:
Total assets $114,650,775 $85,848,808 $80,728,966 $77,486,482 $70,175,840
Working capital
(deficiency) $(7,791,319) $(8,032,492) $(10,789,190) $(10,433,929) $(10,131,254)
Long-term debt $13,664,839 $2,712,969 $2,952,607 $6,421,176 $8,683,314
Other Data:
Stockholders' equity $65,230,988 $53,392,497 $47,780,880 $46,653,157 $42,003,147
Stockholders' equity
per share $8.67 $7.30 $6.54 $6.17 $5.55
Additions to racing
plant and equipment,
exclusive of business
acquisitions $3,524,032 $4,568,494 $2,570,795 $8,589,535 $23,310,204
</TABLE>
Earnings, dividend and stockholders' equity per share amounts have been
retroactively adjusted for the 2-for-1 stock split with a record date of March
30, 1998.
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CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis includes forecasts of future results of
operations which are considered "forward-looking statements" and are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Our actual results could differ materially from these
forecasts, and there can be no assurance that these forecasts of future results
will be achieved. Important factors that could cause actual results to differ
materially from the presently estimated results include: our continued ability
to effectively compete for the country's top horses and trainers necessary to
field high-quality horse racing, our continued ability to grow our share of the
interstate simulcast market, a substantial change in allocation of live racing
days, the impact of competition from alternative gaming (including riverboat and
cruise ship casinos and lotteries) and other sports and entertainment options in
those markets in which we operate, a decrease in riverboat admissions revenue
from our Indiana operations, Year 2000 computer issues and our success in
pursuit of our strategic initiatives designed to attract new patrons and
generate additional revenues.
Overview
We conduct pari-mutuel wagering on live Thoroughbred and Standardbred
horse racing and simulcast audio and video feeds of races. Additionally, we
offer racing services through our other interests.
We own and operate Churchill Downs racetrack in Louisville, Kentucky
("Churchill facility"), which has conducted Thoroughbred racing continuously
since 1875 and is internationally known as home of the Kentucky Derby. We also
own and operate Ellis Park Race Course, a Thoroughbred racetrack, in Henderson,
Kentucky ("Ellis Park"), and the Kentucky Horse Center, a Thoroughbred training
center, in Lexington, Kentucky. Additionally, we are the majority owner and
operator of Hoosier Park in Anderson, Indiana, which conducts Thoroughbred,
Quarter Horse and Standardbred horse racing. We conduct simulcast wagering on
horse racing at our four simulcast wagering facilities in Louisville, Kentucky,
and in Merrillville, Fort Wayne and Indianapolis, Indiana, as well as at our
three racetracks.
Because of the seasonal nature of our business, revenues and operating
results for any interim quarter are not indicative of the revenues and operating
results for the year and are not necessarily comparable with results for the
corresponding period of the previous year. We normally earn a substantial
portion of our net earnings in the second quarter of each year during
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CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
which the Kentucky Derby and the Kentucky Oaks are run. The Kentucky Derby and
the Kentucky Oaks are run on the first weekend in May.
Our primary sources of income are commissions and fees earned from
pari-mutuel wagering on live and simulcast horse races. Other sources of income
include admissions and seating, riverboat admission tax subsidy, concession
commissions (primarily for the sale of food and beverages), sponsorship
revenues, and license, rights and broadcast fees.
Churchill Downs and Ellis Park, which we acquired during the second
quarter of 1998, as well as Kentucky's other racetracks are subject to the
licensing and regulation of the Kentucky Racing Commission ("KRC"). The KRC
consists of 11 members appointed by the governor of Kentucky. Licenses to
conduct live Thoroughbred race meetings and to participate in simulcasting are
approved annually by the KRC based upon applications submitted by the racetracks
in Kentucky. Although to some extent Churchill Downs and Ellis Park compete with
other racetracks in Kentucky for the awarding of racing dates, the KRC is
required by state law to consider and seek to preserve each racetrack's usual
and customary live racing dates. Generally, there is no substantial change from
year to year in the racing dates awarded to each racetrack. Churchill Downs
conducted live racing from April 25 through June 28, 1998, and from November 1
through November 28, 1998, for a total of 71 racing days compared to 77 racing
days in 1997. Ellis Park conducted live racing from June 29 through September 7,
1998, for a total of 61 racing days compared to 55 days in 1997, which was prior
to our acquisition of Ellis Park .
We received approval from the KRC to conduct live racing at Churchill
Downs from April 24 through June 27, 1999 ("Spring Meet") and from October 31
through November 27, 1999 ("Fall Meet") for a total of 71 days. Ellis Park has
been granted a total of 61 live racing days running from June 28 through
September 6, 1999. The total number of days on which Churchill Downs and Ellis
Park conduct live racing fluctuates annually according to the calendar year. A
substantial change in the allocation of live racing days at Churchill Downs or
Ellis Park could adversely impact our operations and earnings in future years.
Churchill Downs hosted Breeders' Cup Day on November 7, 1998. Breeders'
Cup Day is sponsored by Breeders' Cup Limited, a tax-exempt organization
chartered to promote Thoroughbred racing and breeding. The Breeders' Cup Day
races are held annually, featuring $13 million in purses, for the purpose of
determining Thoroughbred champions in eight different
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CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
events. Racetracks across the United States compete for the privilege of hosting
the Breeders' Cup Day races each year, and the 1998 Breeders' Cup was our fourth
time hosting this event, the most of any racetrack. Although most of the income
earned from this event was allocated to Breeder's Cup Limited, hosting the 1998
event had a positive impact on our 1998 results.
In Indiana, licenses to conduct live Standardbred and Thoroughbred race
meetings, including Quarter Horse races, and to participate in simulcasting are
approved annually by the Indiana Horse Racing Commission ("IHRC"), which
consists of five members appointed by the governor of Indiana. Licenses are
approved annually by the IHRC based upon applications submitted by Hoosier Park.
Currently, Hoosier Park is the only facility in Indiana licensed to conduct live
Standardbred, Quarter Horse or Thoroughbred racing and to participate in
simulcasting. Quarter Horse races are conducted during some Thoroughbred race
days. Hoosier Park conducted live racing from April 17, 1998 through November
28, 1998, for a total of 153 racing days, including 95 days of Standardbred
racing and 58 days of Thoroughbred racing (which also includes Quarter Horse
races). Hoosier Park received a license to conduct live racing in 1999 for a
total of 168 racing days, including 103 days of Standardbred racing and 65 days
of Thoroughbred racing. A substantial change in the allocation of live racing
days at Hoosier Park could adversely impact our operations and earnings in
future years.
We employ approximately 500 full-time employees. Due to the seasonal
nature of our live racing business, the number of seasonal and part-time persons
employed will vary throughout the year, with peak employment occurring Kentucky
Derby week when we employ as many as 2,600 persons. Through December 31, 1998,
average full-time and seasonal employment per pay period was approximately 1,000
individuals.
We generally do not directly compete with other racetracks or simulcast
wagering facilities for patrons due to geographic separation of such facilities.
However, we compete with other sports, entertainment and gaming options,
including riverboat casinos and lotteries, for patrons for both live racing and
simulcasting. We attempt to attract patrons by providing the highest quality
racing products in attractive entertainment facilities with fairly priced,
appealing concession services. Churchill Downs is the premier racetrack in
Kentucky for both live racing and simulcasting, based upon total handle and
attendance, and Hoosier Park is the only facility in Indiana providing
pari-mutuel wagering on live racing.
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CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The development of riverboat gaming facilities began in Indiana pursuant
to authorizing legislation passed by the state of Indiana in 1993. Illinois had
previously authorized riverboat gaming. There are currently five riverboat
casinos operating on the Ohio River along Kentucky's border -- including two in
the southeastern Indiana cities of Lawrenceburg and Rising Sun, one in
southwestern Indiana in Evansville and one at Metropolis, Illinois. The fifth
riverboat casino, licensed to RDI/Caesars World, opened in November 1998 in
Harrison County, Indiana, 10 miles from Louisville. Admission and handle figures
at the Churchill Downs racetrack during the RDI/Caesars World's opening week in
November 1998, were not significantly different from the same period in 1997.
However, during December 1998, when the RDI/Caesars riverboat casino and the
Louisville Sports Spectrum ("Sports Spectrum") were concurrently open, admission
and handle numbers at the Sports Spectrum decreased from those numbers for the
same period in 1997. At this time, we cannot determine the extent to which the
decrease was due to the new riverboat casino in the Louisville market. Other
factors, such as inclement weather, may also have had an impact.
The Indiana Gaming Commission voted in September 1998 to grant a license
to open a sixth Indiana riverboat along the Ohio River in Switzerland County,
about 70 miles from Louisville. The license holder, Hollywood Park-Boomtown,
Inc., plans to build a riverboat casino, hotel and resort complex near Vevay,
Indiana. Hollywood Park estimates the resort will open as early as the third
quarter of 2000.
The full impact of riverboat casinos on Kentucky racing cannot be
accurately determined until all riverboats are open and the markets are fully
matured. Studies project that Churchill Downs could experience a material
adverse impact on its wagering and attendance in the Louisville market when the
RDI/Caesars World riverboat is open to full capacity and has established itself
in the market. These same studies projected similar declines in western and
northern Kentucky, but recent experience at Ellis Park and Turfway Park
indicates the impact may not be as severe as these studies projected.
In addition to those riverboats operating along the Ohio River, five
riverboat casinos have opened along the Indiana shore of Lake Michigan near our
Sports Spectrum in Merrillville, Indiana. Our pari-mutuel wagering activities at
the Merrillville facility have been adversely impacted by the opening of these
Lake Michigan riverboats.
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CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Additionally, the Pokagon Band of the Potawatomi Indian Tribe has
expressed an interest in establishing land-based casinos in northeastern Indiana
and southwestern Michigan although Indiana Governor Frank O'Bannon has publicly
expressed his opposition at this time to any further expansion of casino gaming
in Indiana. We continue to anticipate that development of any such Indian casino
will negatively impact pari-mutuel wagering activities at Hoosier Park's Indiana
facilities. However, the extent of the impact is unknown at this time due, in
part, to the uncertain geographic distances between Hoosier Park's operations
and the potential casino sites.
The integration of alternative gaming products at our racetrack
facilities is one of our four core business strategies developed to position us
to compete in this changing environment. Implementing these strategies, we have
successfully grown our live racing product by strengthening our flagship
operations, increasing our share of the interstate simulcast market, and
geographically expanding our racing operations in Kentucky and into Indiana.
Alternative gaming in the form of video lottery terminals and slot machines
should enable us to more effectively compete with Indiana riverboat casinos and
provide new revenue for purse money and capital investment. We continue to
pursue legislation to allow video lottery terminals at our racetrack facilities
in Kentucky. Currently, we are working with members of the Kentucky horse
industry to establish a consensus for a plan to operate video lottery terminals
exclusively at Kentucky's racetracks.
The horse industry in Indiana presently receives $.65 per $3 admission
to Indiana riverboats to compensate for the effect of riverboat competition. The
horse industry is required to allocate 70% of such revenue directly for purse
expenses, breed development and reimbursement of approved marketing costs. The
balance, or 30%, is received by Hoosier Park as the only horse racetrack
currently operating in Indiana. Riverboat admissions revenue from our Indiana
operations increased $5.1 million for the year ended December 31, 1998 compared
to 1997, as a result of the opening of additional riverboats. The net increase
in riverboat admissions revenue, after required purse and marketing expense
increases of approximately $3.2 million, is $1.8 million.
Legislation which seeks to cap Hoosier Park's share of the $.65 subsidy
was introduced in the 1999 session of the Indiana General Assembly. A
significant change in Hoosier Park's share of the subsidy would impact funding
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CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
for operating expenditures, potentially reducing the number of race dates at
Hoosier Park and, in all likelihood, re-emphasize the need for the integration
of alternative gaming products at the Hoosier Park racetrack in order for it to
effectively compete with riverboat casinos.
We have partnered with ODS Technologies L.P. (ODS) in the development
and operation of an in-home interactive wagering system in Jefferson County,
Kentucky, since 1995. The second phase of our relationship with ODS is the
launching of the Television Games Network (TVG), originally projected for the
fourth quarter of 1998. In June 1998, an arbitration panel approved United Video
Satellite Group, Inc.'s proposal to acquire all of the assets of ODS. United
Video, which previously owned approximately 10% of ODS, has bought out the
majority partners and assumed control over agreements between ODS and 12
racetracks, including Churchill Downs. At this time, we cannot assess any impact
of this development on our in- home wagering operations.
RESULTS OF OPERATIONS
Wagering information, or handle, and attendance for our three live racing
facilities and four separate simulcast wagering facilities during the years
ended December 31, 1998 and 1997 are as follows:
($ in thousands, except for number of days)
Churchill Downs Hoosier Park Ellis Park*
Live Racing
1998 handle $128,250 $16,092 $20,944
1998 no.of days 70 153 61
1997 handle $132,290 $16,937 $17,215
1997 no. of days 77 142 55
Simulcast sending
1998 handle $421,200 $62,720 $116,735
1998 no. of days 70 153 61
1997 handle $424,194 $39,772 $87,799
1997 no. of days 77 142 55
Simulcast receiving
1998 handle $138,443 $133,770 $38,065
1998 no. of days 232 1,219 288
1997 handle $132,431 $130,020 $35,954
1997 no. of days 212 1,215 294
* Handle information for Ellis Park is provided for years ended December 31,
1998 and 1997. However, only revenues generated since its acquisition on April
21, 1998 have been included in the Company's results of operations.
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CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Comparison of Profit and Loss for Year Ended December 31, 1998 to 1997
Net Revenues
Net revenues increased $28.4 million (24%) from $118.9 million in 1997 to $147.3
million in 1998. Churchill Downs revenues increased $3.5 million (5%) due
primarily to increases in simulcast revenues and license, rights, broadcast
revenues and increased corporate sponsorship of the Kentucky Derby. Hoosier
Park revenues increased $6.2 million (15%) primarily due to increased
simulcasting revenues and a $5.1 million increase in the riverboat gross
admissions subsidy of which a portion was required to be spent on purses and
marketing expenses. Ellis Park contributed $17.4 million to 1998 net revenues
since its acquisition in the second quarter. Other operations, including the
Kentucky Horse Center which was also acquired in the second quarter, comprised
the remaining $1.3 million of the increase.
Operating Expenses
Operating expenses increased $23.7 million (25%) from $95.4 million in 1997 to
$119.1 million in 1998. Churchill Downs operating expenses increased $1.9
million (3%) due primarily to increased marketing, simulcast, totalisator and
video expenses. Hoosier Park operating expenses increased $5.0 million (14%)
due primarily to required increases in purses and marketing expenses of $2.8
million and $0.8 million, respectively, related to the riverboat admissions
subsidy. Ellis Park increased 1998 operating expenses by $15.4 million since
its acquisition. Other operations, including the Kentucky Horse Center,
accounted for the remaining $1.4 million of the increase in operating expenses.
Gross Profit
Gross profit increased $4.7 million (20%) from $23.5 million in 1997 to $28.2
million in 1998. Churchill Downs and Hoosier Park gross profit increased $1.5
million (9%) and $1.2 million (25%), respectively, for the reasons described
above. The Ellis Park acquisition contributed $2.0 million to 1998 gross profit.
The slight decrease in the gross profit percentage from 19.7% in 1997 to 19.2%
in 1998 was due mainly to a lower gross profit percentage at Ellis Park due to
purse increases implemented to improve the quality of racing at the track.
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CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses increased by $2.0 million
(22%) from $9.1 million in 1997 to $11.1 million in 1998. SG&A expenses at
Churchill Downs increased $1.3 million (19%) due primarily to increased
corporate staffing, compensation and business development expenses. Hoosier Park
SG&A expenses decreased by $0.2 million (9%) due primarily to declines in
professional fees and wages. The acquisition of Ellis Park contributed $0.6
million to the increase in 1998 SG&A expenses. Other operations accounted for
the remaining $0.3 million of the increase. SG&A expenses as a percentage of
net revenues decreased slightly from 7.6% in 1997 to 7.5% in 1998.
Other Income and Expense
Interest expense increased $0.6 million from $0.3 million in 1997 to $0.9
million in 1998 as a result of borrowings to finance our second quarter
acquisition of Ellis Park and the Kentucky Horse Center.
Income Tax Provision
Our income tax provision increased by $1.0 million from $5.8 million in 1997 to
$6.8 million in 1998 primarily as the result of an increase in pre-tax earnings
of $2.3 million. The effective income tax rate increased slightly from 38.9% in
1997 to 39.1% in 1998 due primarily to non-deductible amortization expense
related to the acquisition of Ellis Park and the Kentucky Horse Center and
increases in other permanent differences, partially offset by the reversal of
the valuation allowance on certain state income tax net operatin loss
carryforwards.
Comparison of Profit and Loss for Year Ended December 31, 1997 to 1996
Revenues
Net revenues increased $11.0 million (10%)from $107.9 million in 1996 to $118.9
million in 1997. Churchill Downs revenues increased $2.8 million (4%) due
primarily to increases in simulcast revenues that were generated as a result of
the new Paddock Pavilion simulcast wagering facility used during live racing.
Hoosier Park revenues increased $8.2 million (25%) primarily due to increased
simulcasting revenues and a $7.9 million increase in the riverboat
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CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
gross admissions subsidy of which a portion was required to be spent on purses
and marketing expenses.
Operating Expenses
Operating expenses increased $8.5 million (10%) from $86.9 million in 1996 to
$95.4 million in 1997. Churchill Downs operating expenses increased $3.2 million
(6%) due mainly to increased purses and wages and also increased marketing,
simulcast and video expenses. Hoosier Park operating expenses increased $5.3
million (18%) due primarily to increases in purses and marketing expenses of
$3.9 million and $1.0 million, respectively, related to the riverboat admissions
subsidy.
Gross Profit
Gross profit increased $2.5 million (12%) from $21.0 million in 1996 to $23.5
million in 1997. Churchill Downs gross profit decreased $0.4 million (2%) and
Hoosier Park gross profit increased $2.9 million (86%) for the reasons described
above. The gross profit percentage increased slightly from 19.5% in 1996 to
19.7% in 1997.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses increased by $0.4 million
(5%) from $8.7 million in 1996 to $9.1 million in 1997. SG&A expenses at
Churchill Downs increased $0.4 million (11%) due primarily to increased
corporate staffing, compensation and business development expenses. Hoosier Park
SG&A expenses decreased by $0.2 million (8%) while SG&A expenses at other
operations were up by $0.2 million.
Other Income and Expense
Interest income increased $0.2 million from $0.4 million in 1996 to $0.6 million
in 1998 as a result of the additional earnings generated by our short-term cash
investments (cash equivalents). Miscellaneous income decreased $0.4 million from
$0.7 million in 1996 to $0.3 million in 1998 as the result of the gain
recognized on Conseco's acquisition of 10% of Hoosier Park in 1996.
23
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CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income Tax Provision
Our income tax provision increased by $0.9 million from $4.9 million in 1996 to
$5.8 million in 1997 primarily as the result of an increase in pre-tax earnings
of $1.9 million. The effective income tax rate increased from 38.1% in 1996 to
38.9% in 1997 due primarily to increases in permanent differences.
Significant Changes in the Balance Sheet December 31, 1998 to December 31, 1997
The cash and cash equivalent balances at December 31, 1998 of $6.4 million were
$2.9 million lower than December 31, 1997, primarily due to aggregate payments
on our line of credit which were partially used to fund the Ellis acquisition.
Accounts receivable balances grew by $4.9 million in 1998 due to the increase of
$1.5 million in the Indiana riverboat admissions receivable, an increase of $1.1
million in receivables relating to advanced billing for the Kentucky Derby, a
$1.0 million increase in simulcast and other operating receivables relating to
Churchill Downs' Fall race meet and an increase of $0.9 million in the
receivable from the Commonwealth of Kentucky relating to purse expense
reimbursements. Additionally, Ellis Park and the Kentucky Horse Center
accounted for $0.3 million of the overall increase.
Intangible assets increased $6.5 million as a result of the acquisition of Ellis
Park and the Kentucky Horse Center.
Plant and equipment increased $25.0 million during 1998, primarily due to the
acquisition of Ellis Park and the Kentucky Horse Center ($22.0 million). Routine
capital spending at our operating units made up the remainder of the increase.
Accumulated depreciation increased $5.5 million for current year depreciation
expense.
We borrowed on our bank line of credit during 1998 primarily for the Ellis
acquisition during the second quarter. Additional borrowings on the line of
credit during the third and fourth quarters were made to fund operating
expenses.
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CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Deferred income tax liabilities increased to $6.9 million in 1998, an increase
of $4.6 million from 1997 balances, primarily as a result of the acquisition of
Ellis Park and the Kentucky Horse Center.
Significant Changes in the Balance Sheet December 31, 1997 to December 31, 1996
The cash and cash equivalent balances at December 31, 1997 of $9.3 million were
$1.1 million higher than December 31, 1996, based primarily upon our increased
earnings.
Accounts receivable at December 31, 1997, increased by $2 million due primarily
to the increase in the Indiana riverboat admissions tax receivable resulting
from the additional Indiana riverboats being open for a longer period of time in
1997 versus 1996.
Other assets at December 31, 1997, increased by $2.3 million due primarily to
our investment in Kentucky Downs, LLC.
The cost of plant and equipment increased by $4.5 million due to the
construction of a new on-site simulcast facility at Churchill Downs as well as
other routine capital spending. This was offset by approximately $4.2 million in
depreciation expense.
Income taxes payable decreased by $2.3 million in 1997 due primarily to the
timing of estimated tax payments made throughout the year.
Liquidity and Capital Resources
Working capital as of December 31, 1998, 1997 and 1996 follows:
1998 1997 1996
---- ---- ----
Deficiency in working capital $(7,791,319) $(8,032,492) $(10,789,190)
.71 to 1 .68 to 1 .45 to 1
The working capital deficiency results from the nature and seasonality of our
business. Cash flows provided by operations were $10.8, $10.5 and $15.1 million
for the years ended December 31, 1998, 1997 and 1996, respectively. The net
increase of $.3 million in 1998 resulted from a $1.4 million increase in net
earnings and $1.2 million increase in depreciation and amortization coupled with
the timing of accounts receivable, accounts payable, income taxes payable and
deferred revenue balances. Management believes cash flows from operations and
available
25
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
borrowings during 1999 will be sufficient to fund our cash requirements for the
year, including capital improvements and any acquisitions.
Cash flows used in investing activities were $20.8, $6.9 and $2.6 million for
the years ended December 31, 1998, 1997 and 1996, respectively. The $20.8
million in 1998 is primarily comprised of the cash portion of our purchase of
Ellis Park and the Kentucky Horse Center during the second quarter of 1998. The
$6.9 million in 1997 primarily represents the acquisition of 24% of Kentucky
Downs during the third quarter of 1997 and additional capital spending for the
construction of a new on-site simulcast facility in Kentucky. Routine capital
spending accounted for a portion of the cash used in investing for 1998 and
1997. The capital additions for all locations, including construction of a $2.4
million stable area dormitory at the Churchill Downs facility, are expected to
approximate $7.3 million for 1999.
Cash flows provided by (used in) financing activities were $7.0, $(2.5) and
$(10.2) million for the years ended December 31, 1998, 1997 and 1996,
respectively. We borrowed $22 million and repaid $11 million on our line of
credit during 1998 primarily to finance the purchase of Ellis Park and the
Kentucky Horse Center. Cash dividends of $3.7 million were paid to shareholders
in 1998 (declared in 1997) versus $2.4 million paid in 1997 (declared in 1996).
We have a $100 million line of credit, of which $89 million was available at
December 31, 1998, to meet working capital and other short-term requirements and
to provide funding for acquisitions scheduled to close in 1999. We are arranging
a new $250 million line of credit which will replace the $100 million line of
credit. We anticipate closing on the new line of credit during the second
quarter of 1999.
Impact of the Year 2000 Issue
The "Year 2000 Issue" is the result of computer programs that were written using
two digits rather than four to define the applicable year in date-dependent
systems. If our computer programs with date-sensitive functions are not Year
2000 compliant, they may be unable to distinguish the year 2000 from the year
1900. This could result in system failure or miscalculations leading to a
disruption of business operations.
Certain of our mission critical operations are dependent upon computer systems
and applications. These systems are either directly owned and controlled by us
or are provided under contract by
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CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
third party technology service providers. To address the Year 2000 issue, we
have categorized the Year 2000 Issue into four principal areas.
A) Systems Owned By the Company
The first area is related to systems that are owned by us. These systems include
application software and dedicated hardware that administrate our core
operations. In addition, there are numerous applications that provide
administrative support and management reporting functions. Some of these
applications have been developed internally and others have been purchased.
To address Year 2000 compliance across this broad category of systems, we have
broken each system down into its most elemental pieces in order to study the
hardware including any embedded chip technology/firmware, the operating systems
and finally, the applications themselves.
Hardware including any embedded chip technology/firmware that was not Year 2000
compliant has been identified and replaced as part of the routine turnover of
technology capital. Hardware remaining to be replaced is scheduled for upgrading
during the first half of 1999. By June 1999, all hardware and embedded chip
technology/firmware owned by the Company is expected to be Year 2000 compliant.
All operating systems supporting specific applications have been checked by
advancing the dates to determine if operating system-level functionality is
impacted by the date change. As new operating system upgrades are made available
and installed, periodic testing will continue to assure operating system-level
functionality is maintained. In addition, we have contacted the developers of
the operating systems we use and have received assurances as to their
compatibility with the Year 2000 transition.
Application software compliance with the Year 2000 has been certified through a
combination of technical consultation with the software developers and testing.
Applications developed with internal resources have been written with the Year
2000 compliance in mind using development tools that are Year 2000 compliant. We
have received assurances from third parties on Year 2000 compliance for
financial reporting, payroll, operations control and reporting and internal
communications applications. We require Year 2000 compliance on any software
upgrades.
27
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CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Based on the schedule outlined above, we expect to be Year 2000 compliant with
our owned systems prior to the year 2000. The system will be tested by advancing
dates to include a majority of the Year 2000 critical dates by the fourth
quarter of 1999. However, even though our planned modifications to internally
owned hardware and software should adequately address Year 2000 issues, there
can be no assurance that unforeseen difficulties will not arise.
B) Technology Services Provided to the Company Under Contract By Third Parties
The second area is services provided to us by third parties. Many of these
services are mission critical and could materially impact us should the systems
upon which the services are dependent be unable to function.
The totalisator services provided by United Tote are the most critical to our
operations. Totalisator services include the calculation of amounts wagered and
owed to winning ticket holders. United Tote developed a plan to bring all
systems provided to us into Year 2000 compliance during 1998. United Tote and
the Company initiated this plan during the second quarter of 1998 by undertaking
a comprehensive system hardware and software upgrade that is Year 2000
compliant. The systems were successfully installed in three phases with the last
phase having been completed in October 1998. All on-track, intertrack wagering
and hub operations are Year 2000 compliant. We will continue to work closely
with United Tote to assure that future releases and upgrades are Year 2000
compliant by including this provision as a condition of contracting for future
services.
The video services provided by an outside vendor are also important to our
operations. Video services include the capture, production and distribution of
the television signal for distribution to customers located on our premises and
to customers located at remote outlets throughout the nation. We are working
closely with the vendor to ensure the software applications that provide the
graphical enhancements and other distinguishing features to the televised signal
for Churchill Downs and Hoosier Park are Year 2000 compliant. The existing
software for the graphical enhancements to the television signal is not Year
2000 compliant. We have contacted the developer of the software package directly
and have received assurances that an upgrade to the software will be Year 2000
compliant.
We purchased certain data and statistical information from Equibase for resale
to the public. This information is an essential element of our product and is
included in printed material made
28
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
available to our customers to assist in their wagering decisions. Equibase has
implemented a Year 2000 remediation plan, which is expected to be completed by
the second quarter of 1999.
A variety of other smaller and less critical technology service providers are
involved with the Company's product. We have received assurance letters from a
majority of these suppliers and will continue to work to receive assurances from
those remaining.
Because of the nature of our business and its dependence upon key technology
services provided by third parties, we require that all new software and
technology services are Year 2000 compliant. This requirement extends to include
patches, upgrades and fixes to existing technology services.
In the event that any of our third party service providers do not successfully
and timely achieve Year 2000 compliance, and we are unable to replace them with
alternate service providers, it could result in a delay in providing our core
live racing and simulcasting products to our customers and have a material
adverse effect on our business, financial condition and results of operations.
C) Industry-wide Issues
Because a significant portion of our revenues are derived from customers at
other racing organizations that are confronted with the same technological
issues, including totalisator, video and statistical information services, we
have been actively participating in an industry-wide assessment and remedial
efforts to address the Year 2000 issue.
D) Feedback Control Systems
A variety of the newer control and regulating systems are date sensitive.
Environmental control systems, elevator/escalator systems, fire control and
security systems utilize date-sensitive software/embedded chip technology for
correct operation. We have systems that perform each of these functions, and are
identifying if any of these systems employ technology that may not be Year 2000
compliant. We will work closely with these manufacturers to develop a remedial
plan to assure year 2000 compliance if problems are identified.
29
<PAGE>
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
To date, we have incurred less than $25,000 in costs to remediate Year 2000
compliance issues. Our management believes that any future costs to remediate
Year 2000 compliance issues will not be material to our financial position or
results of operations.
We are currently evaluating our most reasonably likely worst-case Year 2000
scenario and are also developing contingency plans to be implemented as part of
our efforts to identify and correct Year 2000 issues affecting our owned systems
as well as issues involving third party service providers. We intend to complete
both its evaluation of a worst-case Year 2000 scenario and contingency planning
by June 30, 1999.
Subsequent Events
On January 13, 1999, we acquired a 60% interest in Charlson Broadcast
Technologies, LLC, ("CBT") for the purchase price of $5.4 million. CBT provides
simulcast graphic software video services to racetracks and simulcast wagering
facilities throughout the United States. The purchase agreement includes
provisions for an additional contingent purchase price to be paid by us to the
former owners of the 60% interest based upon the achievement of certin
operating targets.
On January 21, 1999, we entered into an agreement to acquire all of the
outstanding shares of Calder Race Course, Inc., and Tropical Park, Inc.
("Calder"), from KE Acquisition Corp., a private holding company. Terms of the
agreement include a purchase price of $86 million subject to certain
adjustments. Closing of the acquisition is expected in early April 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Our major market risk exposure is primarily due to possible fluctuations in
interest rates as they relate to its variable rate debt. We do not enter into
derivative financial investments for trading or speculation purposes. As a
result, we believe that our market risk exposure is not material to our
financial position, liquidity or results of operations.
30
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Churchill Downs Incorporated
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a) (1), present fairly, in all material respects, the
consolidated financial position of Churchill Downs Incorporated and its
subsidiaries as of December 31, 1998, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
In addition, in our opinion, the consolidated financial statement schedule
listed in the index appearing under Item 14 (a) (2), presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with 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.
/s/PricewaterhouseCoopers
PricewaterhouseCoopers LLP
Louisville, Kentucky
February 24, 1999
31
<PAGE>
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
ASSETS 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 6,379,686 $ 9,280,233 $ 8,209,414
Accounts receivable 11,968,114 7,086,889 5,218,236
Other current assets 1,049,084 540,489 679,221
------------ ------------ -----------
Total current assets 19,396,884 16,907,611 14,106,871
Other assets 3,796,292 3,884,080 1,574,714
Plant and equipment, net 83,088,204 63,162,767 62,882,189
Intangible assets, net 8,369,395 1,894,350 2,165,192
------------ ------------ -----------
$114,650,775 $85,848,808 $80,728,966
============ ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,530,502 $ 5,732,783 $5,403,000
Accrued expenses 8,098,228 7,937,575 8,021,487
Dividends payable 3,762,521 3,658,468 2,375,271
Income taxes payable 257,588 186,642 2,510,508
Deferred revenue 8,412,552 7,344,830 6,511,902
Long-term debt, current portion 126,812 79,805 73,893
------------ ------------ -----------
Total current liabilities 27,188,203 24,940,103 24,896,061
Long-term debt, due after one year 13,538,027 2,633,164 2,878,714
Outstanding mutuel tickets (payable after one year) 806,573 1,625,846 2,031,500
Deferred compensation 949,187 880,098 825,211
Deferred income taxes 6,937,797 2,377,100 2,316,600
Stockholders' equity:
Preferred stock, no par value;
authorized, 250,000 shares; issued, none - - -
Common stock, no par value; authorized,
20,000,000 shares, issued 7,525,041 ,
shares 1998, 7,316,934 shares, 1997
and 7,308,524 shares, 1996
8,926,975 3,614,567 3,493,042
Retained earnings 56,598,957 49,842,930 44,352,838
Deferred compensation costs (229,944) - -
Note receivable for common stock (65,000) (65,000) (65,000)
------------ ------------ -----------
65,230,988 53,392,497 47,780,880
------------ ------------ -----------
$114,650,775 $85,848,808 $80,728,966
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
32
<PAGE>
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Net revenues $147,300,299 $118,907,367 $107,858,818
------------- ------------ ------------
Operating expenses:
Purses 50,192,973 39,718,374 34,439,143
Other direct expenses 68,895,654 55,705,722 52,438,836
------------- ------------ ------------
119,088,627 95,424,096 86,877,979
------------- ------------ ------------
Gross profit 28,211,672 23,483,271 20,980,839
Selling, general and administrative 11,068,262 9,077,983 8,665,942
------------- ------------ ------------
Operating income 17,143,410 14,405,288 12,314,897
------------- ------------ ------------
Other income (expense):
Interest income 679,782 575,084 390,669
Interest expense (896,067) (332,117) (337,438)
Miscellaneous income 342,423 325,087 673,398
------------- ------------ ------------
126,138 568,054 726,629
------------- ------------ ------------
Earnings before provision for income 17,269,548 14,973,342 13,041,526
taxes
Provision for income taxes 6,751,000 5,824,782 4,970,000
------------- ----------- ------------
Net earnings $10,518,548 $9,148,560 $8,071,526
============= ============ ============
Earnings per common share data:
Basic $1.41 $1.25 $1.08
Diluted $1.40 $1.25 $1.08
Weighted average shares outstanding:
Basic 7,460,058 7,312,052 7,445,542
Diluted 7,539,482 7,320,670 7,447,706
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
33
<PAGE>
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Years Ended December 31, 1998, 1997 and 1996
Note Deferred
Common Stock Retained Receivable Compensation
Shares Amount Earnings Common Stock Costs Total
<S> <C> <C> <C> <C> <C> <C>
Balances December 31, 1995 7,569,206 $3,504,388 $43,486,460 $ (65,000) $(272,691) $46,653,157
Net earnings 8,071,526 8,071,526
Deferred compensation
amortization 272,691 272,691
Issuance of common stock
at $14.45 per share 7,818 112,970 112,970
Repurchase of common stock (268,500) (124,316) (4,829,877) (4,954,193)
Cash dividends, $.33 per share (2,375,271) (2,375,271)
--------- ---------- ----------- --------- --------- -----------
Balances December 31, 1996 7,308,524 3,493,042 44,352,838 (65,000) - 47,780,880
Net earnings 9,148,560 9,148,560
Issuance of common stock
at $14.45 per share 8,410 121,525 121,525
Cash dividends, $.50 per share (3,658,468) (3,658,468)
--------- ---------- ----------- --------- --------- -----------
Balances December 31, 1997 7,316,934 3,614,567 49,842,930 (65,000) - 53,392,497
Net earnings 10,518,548 10,518,548
Deferred compensation 344,046 (344,046) -
Deferred compensation
amortization 114,102 114,102
Issuance of common stock at
$24.25 per share in conjunction
with RCA acquisition 200,000 4,850,000 4,850,000
Issuance of common stock
at $14.60 per share 8,107 118,362 118,362
Cash dividends, $.50 per share (3,762,521) (3,762,521)
--------- ---------- ----------- --------- --------- -----------
Balances December 31, 1998 7,525,041 $8,926,975 $56,598,957 $ (65,000) $(229,944) $65,230,988
========= ========== =========== ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
34
<PAGE>
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $10,518,548 $9,148,560 $8,071,526
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 5,743,932 4,558,761 4,814,114
Deferred income taxes (121,000) 352,100 (461,000)
Deferred compensation 183,191 54,887 226,690
Increase (decrease) in cash resulting from
changes in operating assets and liabilities:
Accounts receivable (2,972,985) (2,053,211) (2,943,932)
Other current assets (292,994) (152,868) 232,699
Accounts payable (1,245,550) 329,783 (1,114,508)
Accrued expenses (579,904) (83,912) 4,710,605
Income taxes payable (refundable) 70,946 (2,323,866) 1,461,000
Deferred revenue 757,889 1,017,486 237,958
Other assets and liabilities (1,245,808) (377,523) (109,037)
------------ ----------- -----------
Net cash provided by operating activities 10,816,265 10,470,197 15,126,115
------------ ----------- -----------
Cash flows from investing activities:
Acquisition of business, net of cash
acquired of $517,151 (17,232,849) - -
Additions to plant and equipment, net (3,524,032) (4,568,494) (2,570,795)
Purchase of minority-owned investment - (2,337,500) -
----------- ----------- -----------
Net cash used in investing activities (20,756,881) (6,905,994) (2,570,795)
----------- ----------- -----------
Cash flows from financing activities:
Decrease in long-term debt, net (140,164) (239,638) (3,468,569)
Borrowings on bank line of credit 22,000,000
Repayments of bank line of credit (11,000,000)
Dividends paid (3,658,468) (2,375,271) (1,892,302)
Common stock issued 118,362 121,525 112,970
Common stock repurchased - - (4,954,193)
Loan origination costs (279,661) - -
----------- ----------- -----------
Net cash provided by (used in)
financing activities 7,040,069 (2,493,384) (10,202,094)
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (2,900,547) 1,070,819 2,353,226
Cash and cash equivalents, beginning of period 9,280,233 8,209,414 5,856,188
----------- ----------- -----------
Cash and cash equivalents, end of period $6,379,686 $9,280,233 $8,209,414
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 497,307 $151,397 $277,149
Income taxes $ 7,129,540 $7,914,974 $3,970,000
Schedule of Non-cash Activities:
Issuance of common stock related to the
acquisition of RCA $ 4,850,000 - -
Invoicing for future Kentucky Derby and Oaks $ 677,733 $ 402,328 $ 586,886
Plant & equipment additions included in accounts
payable $95,055 - -
Compensation expense $ 344,406 - -
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
35
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies:
Basis of Presentation:
Churchill Downs Incorporated (the "Company") conducts Spring, Summer and
Fall live race meetings for Thoroughbred horses and participates in
intrastate and interstate simulcast wagering at its racetracks in
Kentucky. In Indiana, the Company, through its subsidiary, Hoosier Park
L.P. (Hoosier Park), conducts live Thoroughbred, Quarter Horse and
Standardbred horse races and participates in interstate simulcast
wagering. Both its Kentucky and Indiana operations are subject to
regulation by the racing commissions of the respective states.
The accompanying consolidated financial statements include the accounts
of the Company, its wholly owned subsidiaries, Ellis Park Race Course
(Ellis Park), Churchill Downs Management Company (CDMC), Churchill Downs
Investment Company (CDIC), the Kentucky Horse Center and Anderson Park
Inc. (Anderson) and its majority-owned subsidiary, Hoosier Park. All
significant intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
A Summary of Significant Accounting Policies Follows:
Cash Equivalents:
The Company considers investments with original maturities of three
months or less to be cash equivalents. The Company has, from time to
time, cash in the bank in excess of federally insured limits.
Plant and Equipment:
Plant and equipment are recorded at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the
related assets.
36
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Basis of Presentation and Summary of Significant Accounting Policies:
(cont'd)
Intangible Assets:
Amortization of the cost of acquisition in excess of fair value of
assets acquired and the Indiana racing license is provided over 40 years
using the straight-line method. Organizational costs were amortized
using the straight-line method over 24 months to 60 months. Loan
origination costs on the Company's line of credit are being amortized
under the effective interest method over 36 months, the term of the
loan.
Long-lived Assets:
In the event that facts and circumstances indicate that the carrying
amount of tangible or intangible long-lived assets or groups of assets
may be impaired, an evaluation of recoverability would be performed. If
an evaluation is required, the estimated future undiscounted cash flows
associated with the assets would be compared to the assets' carrying
amount to determine if a write-down to market value or discounted cash
flow value is required.
Deferred Revenue:
Deferred revenue includes primarily advance sales related to the
Kentucky Derby and Oaks races in Kentucky.
Stock-Based Compensation:
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued
to Employees". In accordance with Statement of Financial Accounting
Standards (SFAS) No. 123 "Accounting for Stock-based Compensation"
proforma disclosure of net earnings and earnings per share are presented
in Note 10 as if SFAS No. 123 had been applied.
Reclassification:
Certain financial statement amounts have been reclassified in the prior
years to conform to current year presentation.
37
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Acquisitions:
On April 21, 1998, the Company acquired from TVI Corp., ("TVI") all of
the outstanding stock of Racing Corporation of America ("RCA") for a
purchase price of $22.6 million, including transaction costs. RCA owns
and operates Ellis Park Race Course in Henderson, Kentucky, and the
Kentucky Horse Center, a training facility located in Lexington,
Kentucky. The purchase price was paid as 200,000 shares of the Company's
common stock valued at $4.9 million with the remainder paid in cash. The
purchase price was allocated to the acquired assets and liabilities
based on their fair values on the acquisition date with the excess of
$6.4 being amortized over 40 years. The acquisition was accounted for by
the Company under the purchase method of accounting and, accordingly,
the results of operations of RCA subsequent to April 20, 1998, are
included in the Company's consolidated results of operations.
Pursuant to the terms of the purchase agreement between the Company and
TVI, if alternative gaming (whether full casino, slot machine or video
lottery) is legalized in the Commonwealth of Kentucky by December 31,
2015, TVI will receive royalty payments equal to 50% of annual earnings
before interest and taxes of the gaming operations at Ellis Park Race
Course and at the Kentucky Horse Center. Should gaming be legalized
before December 31, 2006, such royalties will be payable for ten years
from the date that such gaming becomes fully operational. The royalty
period will be reduced by one year for each year from 2006 through 2015
in which gaming is legalized.
Following are the unaudited pro forma results of operations as if the
April 21, 1998 transaction had occurred on January 1, 1997 (in
thousands, except per share and share amounts):
1998 1997
---- ----
Net revenues $149,272 $137,316
Net earnings $9,404 $8,845
Earnings per common share:
Basic $1.25 $1.18
Diluted $1.24 $1.18
Weighted average shares
outstanding:
Basic 7,520,332 7,512,052
Diluted 7,599,756 7,520,670
38
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Acquisitions: (cont'd)
This unaudited proforma financial information is not necessarily
indicative of the operating results that would have occurred had the
transaction been consummated as of January 1, 1997, nor is it
necessarily indicative of future operating results.
In July 1997, the Company purchased a 24% interest in the Kentucky Downs
racecourse in Franklin, Kentucky. The Company's investment of $2.2
million is accounted for under the equity method of accounting.
3. Plant and Equipment:
Plant and equipment is comprised of the following:
1998 1997 1996
---- ---- ----
Land $7,631,657 $5,999,036 $5,879,994
Grandstands and buildings 73,376,961 57,579,747 56,154,054
Equipment 4,979,383 3,416,306 2,936,129
Furniture and fixtures 5,341,119 4,327,797 3,603,276
Tracks and other improvements 37,997,696 33,118,100 31,377,753
Construction in process 249,438 113,210 74,206
------------ ------------ -------------
129,576,254 104,554,196 100,025,412
Accumulated depreciation (46,488,050) (41,391,429) (37,143,223)
------------ ------------ -------------
$83,088,204 $63,162,767 $62,882,189
============ ============ =============
Depreciation expense was $5,490,450, $4,287,916, and $4,038,135 for the
years ended December 31, 1998, 1997 and 1996.
4. Intangibles assets:
The Company's intangible assets are comprised of the following:
<TABLE>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cost of acquisition in excess of fair value
of net assets acquired $6,448,867 - -
Indiana racing license 2,085,428 $2,085,428 $2,085,428
Loan origination costs 279,661 - -
Organizational and preopening costs - - 932,738
----------- ----------- -----------
8,813,956 2,085,428 3,018,166
Accumulated amortization (444,561) (191,078) (852,974)
----------- ----------- -----------
$8,369,395 $1,894,350 $2,165,192
=========== =========== ===========
</TABLE>
39
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Intangibles assets: (cont'd)
Amortization expense was $253,482, $270,845 and $775,979 for the years
ended December 31, 1998, 1997 and 1996.
5. Income Taxes:
Components of the provision for income taxes are as follows:
1998 1997 1996
---- ---- ----
Currently payable:
Federal $6,110,000 $4,616,800 $4,538,000
State & local 762,000 856,100 893,000
----------- ----------- ------------
6,872,000 5,472,900 5,431,000
----------- ----------- ------------
Deferred:
Federal 45,500 308,100 (382,000)
State & local 6,500 44,000 (79,000)
----------- ----------- ------------
52,000 352,100 (461,000)
----------- ----------- ------------
Reversal of valuation allowance (173,000) - -
----------- ----------- ------------
$6,751,000 $5,825,000 $4,970,000
=========== =========== ============
The Company's income tax expense is different from the amount computed
by applying the statutory federal income tax rate to income before
taxes as follows:
1998 1997 1996
---- ---- ----
Federal statutory tax on
earnings before income tax $5,942,000 $5,141,000 $4,464,000
State income taxes, net of
federal income tax benefit 747,000 612,000 537,000
Permanent differences and other 235,000 72,000 (31,000)
Reversal of valuation allowance (173,000) - -
----------- ------------ -----------
$6,751,000 $5,825,000 $4,970,000
=========== ============ ===========
At December 31, 1998, the Company has net operating loss carryforwards
of approximately $3,885,000 for Indiana state income tax purposes
expiring from 2009 through 2011 and approximately $8,786,000 for
Kentucky state income tax purposes expiring from 2002 through 2011.
Management has determined that its ability to realize future benefits of
the state net operating loss carryforwards meets the "more likely than
not" criteria of SFAS No. 109, "Accounting for Income Taxes"; therefore,
no valuation allowance has been recorded at December 31, 1998.
40
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Income Taxes: (cont'd)
Components of the Company's deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Deferred tax liabilities:
Property & equipment in excess
of tax basis $7,804,600 $2,415,000 $2,284,000
Racing license in excess of tax basis 650,000 636,000 657,000
----------- ----------- -----------
Deferred tax liabilities 8,454,600 3,051,000 2,941,000
----------- ----------- -----------
Deferred tax assets:
Supplemental benefit plan 315,400 295,000 273,000
State net operating loss carryforwards 856,700 173,000 176,000
Allowance for uncollectible receivables 87,100 71,000 66,000
Other assets 191,300 250,000 136,000
Other accruals 246,100 128,400 511,500
----------- ----------- -----------
Deferred tax assets 1,696,600 917,400 1,162,500
----------- ----------- -----------
Valuation allowance for state net operating
loss carryforwards - 173,000 176,000
----------- ----------- -----------
Net deferred tax liability $6,758,000 $2,306,600 $1,954,500
=========== =========== ===========
Income taxes are classified in the balance sheet as follows:
Net non-current deferred tax liability $6,937,800 $2,377,100 $2,316,600
Net current deferred tax asset (179,800) (70,500) (362,100)
----------- ------------ -----------
$6,758,000 $2,306,600 $1,954,500
=========== ============ ===========
</TABLE>
41
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Stockholders' Equity:
On March 19, 1998, the Company's Board of Directors authorized a 2-for-1
stock split of its common stock effective March 30, 1998. All share and
per share amounts in the accompanying consolidated financial statements
have been restated to give effect to the stock split.
Additionally, the Company's Board of Directors approved a stockholder
"Rights Plan" (the "Plan") on March 19, 1998, which grants each
stockholder the right to purchase a fraction of a share of Series 1998
Preferred Stock at the rate of one right for each share of the Company's
common stock. The rights will become exercisable 10 business days (or
such later date as determined by the Board of Directors) after any
person or group acquires, obtains a right to acquire or announces a
tender offer for 15% or more of the Company's outstanding common stock.
The rights would allow the holder to purchase preferred stock of the
Company at a 50% discount. The Plan is intended to protect stockholders
from takeover tactics that may be used by an acquirer that the Board
believes are not in the best interests of the shareholders. The Plan
expires on March 19, 2008.
7. Employee Benefit Plans:
The Company has a profit-sharing plan that covers all full-time
employees with one year or more of service. The Company will match
contributions made by the employee up to 2% of the employee's annual
compensation and contribute a discretionary amount determined annually
by the Board of Directors. The Company's contribution to the plan for
the years ended December 31, 1998, 1997 and 1996 was $806,000, $535,000,
and $402,000 respectively.
The Company is a member of a noncontributory defined benefit
multi-employer retirement plan for all members of the Pari-mutuel
Clerk's Union of Kentucky. Contributions are made in accordance with
negotiated labor contracts. Retirement plan expense for the year ended
December 31, 1998, 1997 and 1996 was $258,000, $205,000, and $183,000,
respectively. The Company's policy is to fund this expense as accrued.
The estimated present value of future payments under a supplemental
benefit plan is charged to expense over the period of active employment
of the employees covered under the plan. Supplemental benefit plan
expense for the years ended December 31, 1998, 1997 and 1996 was
$55,200, $51,000, and $51,000 respectively.
42
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Long-Term Debt:
On September 15, 1998, the Company obtained a $100 million line of
credit, which expires in September 2001, through a syndicate of banks
headed by its principal lender. The new credit facility replaces a $50
million line of credit obtained during the second quarter of 1998. The
interest rate on borrowings is based upon LIBOR plus 50 to 112.5
additional basis points which is determined by certain Company financial
ratios. There was $11.0 million outstanding on the line of credit at
December 31, 1998, and no borrowings outstanding at December 31, 1997
and 1996 under previous lines of credit. Provisions contained in the
line of credit agreement require the Company to maintain specified
levels of net worth, a specific ratio of consolidated funded debt to
consolidated earnings before interest, taxes, depreciation and
amortization and a specific ratio of consolidated earnings before
interest and taxes to the sum of consolidated interest expense and
consolidated dividends.
The Company also has two non-interest bearing notes payable in the
aggregate face amount of $900,000 relating to the purchase of an
intrastate wagering license from the former owners of the Louisville
Sports Spectrum property. Interest has been imputed at 8%. The balance
of these notes net of unamortized discount was $196,000, $276,000, and
$350,000 at December 31, 1998, 1997 and 1996, respectively. The notes
require aggregate annual payments of $110,000.
On May 31, 1996, the Company entered into a Partnership Interest
Purchase Agreement with Conseco, L.L.C. ("Conseco") for the sale of 10%
of the Company's partnership interest in Hoosier Park to Conseco. The
transaction also included assumption by Conseco of a loan to the Company
of approximately $2,600,000, of which the balance is $2,395,092 at
December 31, 1998. The loan requires interest of prime plus 2% (9.75% at
December 31, 1998) payable monthly with principal due November 2004. The
note is collateralized by 10% of the assets of Hoosier Park. Conseco had
an option to purchase an additional 47% interest in Hoosier Park which
expired unexercised on December 31, 1998.
Future aggregate maturities of long-term debt are as follows:
1999- $ 127,000
2000- 126,000
2001- 11,008,000
2002- 9,000
2003- -
Thereafter - 2,395,000
-----------
$13,665,000
===========
43
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Operating Leases:
The Company has a long-term operating lease for the land in Anderson,
Indiana on which its Hoosier Park facility is located, as well as
operating leases for the Indianapolis off-track betting facility and
certain totalisator and audio/visual and other equipment and services.
The Anderson lease expires in 2003, with an option to extend the lease
for three additional ten year terms. The Indianapolis lease expires in
2009, with an option to extend the lease for two additional five year
terms. The leases include provisions for minimum lease payments as well
as contingent lease payments based on handle or revenues. Total rent
expense for all operating leases was $4,022,000, $3,803,000 and
$3,465,000 for the years ended December 31, 1998, 1997 and 1996.
Future minimum operating lease payments are as follows:
Minimum Lease
Payment
-------
1999 $ 725,604
2000 704,625
2001 556,214
2002 462,045
2003 372,840
Thereafter 1,694,301
----------
$4,515,629
==========
10. Stock-Based Compensation Plans:
The Company sponsors both the "Churchill Downs Incorporated 1997 Stock
Option Plan" (the "97 Plan") and the "Churchill Downs Incorporated 1993
Stock Option Plan" (the "93 Plan"), stock-based incentive compensation
plans, which are described below. The Company applies APB Opinion 25 and
related interpretations in accounting for both the plans. However, pro
forma disclosures as if the Company adopted the cost recognition
provisions of SFAS 123 are presented below.
The Company is authorized to issue up to 300,000 shares and 400,000
shares of common stock (as adjusted for the stock split) under the 97
Plan and 93 Plan, respectively, pursuant to "Awards" granted in the form
of incentive stock options (intended to qualify under Section 422 of the
Internal Revenue Code of 1986, as amended) and non-qualified stock
options. Awards may be granted to selected employees of the Company or
any subsidiary.
44
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Stock-Based Compensation Plans: (cont'd)
Employee Stock Options:
Both the 97 Plan and the 93 Plan provide that the exercise price of any
incentive stock option may not be less than the fair market value of the
common stock on the date of grant. The exercise price of any
nonqualified stock option is not so limited by the plans. The Company
granted stock options in 1998, 1997 and 1996. The stock options granted
in those years have contractual terms of 10 years and varying vesting
dates, ranging from one to three years following the date of grant. In
accordance with APB 25, the Company has not recognized any compensation
cost for these stock options.
A summary of the status of the Company's stock options as of December
31, 1998, 1997 and 1996 and the changes during the year ended on those
dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- -----------------------
# of Shares Weighted # of Shares Weighted # of Shares Weighted
Underlying Average Underlying Average Underlying Average
Options Exercise Options Exercise Options Exercise
Prices Prices Prices
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of the year 426,532 $19.45 337,000 $19.08 248,000 $22.34
Granted 51,766 $32.50 89,532 $20.83 274,400 $18.97
Exercised - - - - - -
Canceled - - - - 185,400 $23.27
Forfeited - - - - - -
Expired - - - - - -
Outstanding at end
of year 478,298 $20.86 426,532 $19.45 337,000 $19.08
Exercisable at
end of year 248,000 $21.02 207,400 $19.67 - -
Weighted-average fair value per
share of options granted
during the year $10.42 $6.34 $5.55
</TABLE>
The fair value of each stock option granted is estimated on the date of
grant using the Black- Scholes option-pricing model with the following
weighted-average assumptions for grants in 1998, 1997 and 1996,
respectively: dividend yields ranging from 1.20% to 1.54%; risk- free
interest rates are different for each grant and range from 5.75% to
6.63%; and the expected lives of options are different for each grant
and range from approximately 5.83 to 6.5 years,and expected volatility
rates of 24.86%, 19.38% and 18.75% for years ending December 31, 1998,
1997 and 1996.
45
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Stock-Based Compensation Plans: (cont'd)
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------- -------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/98 Contributing Life Exercise Price at 12/31/98 Exercise Price
- --------------- ----------- ----------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$15.75 to $19.25 315,900 6.05 $18.72 211,000 $20.89
$21.25 to $32.50 162,398 8.20 $25.02 37,000 $21.71
------- -------
TOTAL 478,298 6.77 $20.86 248,000 $21.02
======= =======
</TABLE>
Employee Stock Purchase Plan:
Under the Company's Employee Stock Purchase Plan (the "Employee Stock
Purchase Plan"), the Company is authorized to sell, pursuant to
short-term stock options, shares of its common stock to its full-time
(or part-time for at least 20 hours per week and at least five months
per year) employees at a discount from the common stock's fair market
value. The Employee Stock Purchase Plan operates on the basis of
recurring, consecutive one-year periods. Each period commences on August
1 and ends on the next following July 31.
On the first day of each 12-month period, August 1, the Company offers
to each eligible employee the opportunity to purchase common stock.
Employees elect to participate for each period to have a designated
percentage of their compensation withheld (after-tax) and applied to the
purchase of shares of common stock on the last day of the period, July
31. The Employee Stock Purchase Plan allows withdrawals, terminations
and reductions on the amounts being deducted. The purchase price for the
common stock is 85% of the lesser of the fair market value of the common
stock on (i) the first day of the period, or (ii) the last day of the
period. No employee may purchase common stock under the Employee Stock
Purchase Plan valued at more than $25,000 for each calendar year.
Under the Employee Stock Purchase Plan, the Company sold 8,107 shares of
common stock to 102 employees pursuant to options granted on August 1,
1997, and exercised on July 31, 1998. Because the plan year overlaps the
Company's fiscal year, the number of shares to be sold pursuant to
options granted on August 1, 1998, can only be estimated because the
1998 plan year is not yet complete. The Company's estimate of options
granted in 1998 under the Plan is based on the number of shares sold to
employees under the Plan for the 1997 plan year, adjusted to reflect the
change in the number of employees participating in the Plan in 1998.
46
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Stock-Based Compensation Plans: (cont'd)
A summary of the status of the Company's stock options under the
Employee Stock Purchase Plan as of December 31, 1998, 1997 and 1996 and
the changes during the year ended on those dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- ---------------------- ----------------------
# of Shares Weighted # of Shares Weighted # of Shares Weighted
Underlying Average Underlying Average Underlying Average
Options Exercise Options Exercise Options Exercise
Prices Prices Prices
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of the year 8,030 $14.60 8,000 $14.45 7,818 $14.45
Adjustment to prior
year estimated grants 77 $14.60 410 $14.45 - -
Granted 5,238 $31.45 8,030 $18.94 8,000 $17.22
Exercised 8,107 $14.60 8,410 $14.95 7,818 $14.45
Forfeited - - - - - -
Expired - - - - - -
Outstanding at end
of year 5,238 $31.45 8,030 $18.94 8,000 $17.22
Exercisable at end
of year - - - - - -
Weighted-average
Fair value per share
of options granted
during the year $12.16 $5.36 $5.35
</TABLE>
47
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Stock-Based Compensation Plans: (cont'd)
Had the compensation cost for the Company's stock-based compensation
plans been determined consistent with SFAS 123, the Company's net
earnings and earnings per common share for 1998, 1997 and 1996 would
approximate the pro forma amounts presented below:
1998 1997 1996
----------- ----------- ----------
Net earnings:
As reported $10,518,548 $9,148,560 $8,071,526
Pro-forma $10,086,914 $8,605,000 7,530,000
Earnings per common share:
As reported
Basic $1.41 $1.25 $1.08
Diluted $1.40 $1.25 $1.08
Pro-forma
Basic $1.35 $1.18 $1.01
Diluted $1.34 $1.18 $1.01
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. The Company anticipates making awards in
the future under its stock-based compensation plans.
11. Fair Values of Financial Instruments:
Financial Accounting Standards Board ("FASB") Statement No. 107,
"Disclosure about Fair Value of Financial Instruments," is a part of a
continuing process by the FASB to improve information on financial
instruments. The following methods and assumptions were used by the
Company in estimating its fair value disclosures for such financial
instruments as defined by the Statement:
Cash and Cash Equivalents - The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Long-Term Debt - The carrying amounts of the Company's borrowings under
its line of credit agreements and other long-term debt approximates fair
value, based upon current interest rates.
48
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Contingencies:
On January 22, 1992, the Company acquired certain assets of Louisville
Downs, Incorporated for $5,000,000 including the site of the Louisville
Sports Spectrum. In conjunction with this purchase, the Company withheld
$1,000,000 from the amount due to the sellers to offset certain costs
related to the remediation of environmental contamination associated
with underground storage tanks at the site. All of the $1,000,000 hold
back had been utilized as of December 31, 1998 and additional costs of
remediation have not yet been conclusively determined. The sellers have
now received a reimbursement from the State of Kentucky of $995,000 for
remediation costs and that amount is now being held in an escrow account
to pay further costs of remediation. Approximately $985,000 remains in
the account. In addition to the hold back, the Company has obtained an
indemnity to cover the full cost of remediation from the prior owner of
the property.
It is not anticipated that the Company will have any liability as a
result of compliance with environmental laws with respect to any of the
Company's property. Except as discussed herein, compliance with
environmental laws has not affected the ability to develop and operate
the Company's properties and the Company is not otherwise subject to any
material compliance costs in connection with federal or state
environmental laws.
13. Earnings Per Common Share Computations:
The following is a reconciliation of the numerator and denominator of
the earnings per common share computations:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net earnings (numerator) amounts used
for basic and diluted per share computations: $10,518,548 $9,148,560 $8,071,526
=========== ========== ==========
Weighted average shares (denominator) of
common stock outstanding per share
computations:
Basic 7,460,058 7,312,052 7,445,542
Plus dilutive effect of stock options 79,424 8,618 2,164
----------- ---------- ----------
Diluted 7,539,482 7,320,670 7,447,706
=========== ========== ==========
Earnings per common share:
Basic $1.41 $1.25 $1.08
Diluted $1.40 $1.25 $1.08
</TABLE>
Options to purchase 51,766, 9,800 and 135,250 shares for the years ended
December 31, 1998, 1997 and 1996, respectively, were not included in the
computation of earnings per common share-assuming dilution because the
options' exercise prices were greater than the average market price of
the common shares.
49
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Segment Information
In 1998 the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." The Company has determined that
it currently operates in the following four segments: (1) Churchill
Downs racetrack and the Louisville Sports Spectrum simulcast facility,
(2) Ellis Park racetrack and its on-site simulcast facility, (3) Hoosier
Park racetrack and its on-site simulcast facility and the other three
Indiana simulcast facilities and (4) Other operations.
Most of the Company's revenues are generated from commissions on
pari-mutuel wagering at the Company's racetracks and simulcast wagering
facilities, as well as simulcast fees, admissions and concessions
revenue and other sources. Other operations includes the Kentucky Horse
Center and the Company's investments in various other business
enterprises. The Company's equity in the net income of equity method
investees is not significant. Eliminations include the elimination of
management fees and other intersegment transactions.
The accounting policies of the segments are the same as those described
in the "Summary of Significant Accounting Policies." The Company
evaluates the performance of its segments and allocates resources to
them based on earnings before interest, taxes, depreciation and
amortization ("EBITDA") and operating income.
50
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Segment Information: (cont'd)
The table below presents information about reported segments for the
years ending December 31, 1998, 1997 and 1996:
Segment Information (in thousands)
<TABLE>
<CAPTION>
Churchill Hoosier Ellis Park Other Elimina-
Downs Park Operations tions Total
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
1998 $80,925 $47,744 $17,386 $2,497 $(1,252) $147,300
1997 77,404 41,503 - 1,299 (1,299) 118,907
1996 74,540 33,319 - 1,334 (1,334) 107,859
EBITDA:
1998 $14,417 $5,599 $2,305 $909 - $23,230
1997 14,205 4,282 - 802 - 19,289
1996 15,390 1,565 - 847 - 17,802
Operating income:
1998 $10,700 $4,499 $1,422 $522 - $17,143
1997 10,557 3,088 - 760 - 14,405
1996 11,482 6 - 827 - 12,315
Total assets:
1998 $89,427 $31,732 $23,038 $71,109 $(100,655) $114,651
1997 72,490 29,689 - 31,180 (47,510) 85,849
1996 71,047 28,626 - 26,062 (45,006) 80,729
</TABLE>
Following is a reconciliation of total EBITDA to income before
provision for income taxes:
(in thousands) 1998 1997 1996
---- ---- ----
Total EBITDA $23,230 $19,289 $17,802
Depreciation and amortization (5,744) (4,559) (4,814)
Interest income (expense) (216) 243 53
-------- -------- --------
Earnings before provision for
income taxes $17,270 $14,973 $13,041
======== ======== =========
51
<PAGE>
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. Subsequent Events:
On January 13, 1999, the Company acquired a 60% interest in Charlson
Broadcast Technologies, LLC ("CBT") for a purchase price of $5.4
million. CBT provides simulcast graphic software video services to
racetracks and simulcast wagering facilities throughout the United
States. The purchase agreement includes provisions for an additional
contingent purchase price to be paid by the Company to the former owners
of the 60% interest based upon the achievement of certain operating
targets.
On January 21, 1999, the Company entered into an agreement to acquire
all of the outstanding shares of Calder Race Course, Inc., and
Tropical Park, Inc. ("Calder"), from KE Acquisition Corp., a private
holding company. Terms of the agreement include a purchase price of $86
million subject to certain adjustments. Closing of the acquisition is
expected in early April 1999.
52
<PAGE>
<TABLE>
<CAPTION>
Supplementary Financial Information(Unaudited) Common Stock Information
Per Share of Common Stock
-----------------------------------------------------
Operating Net Basic Diluted
Net Income Earnings Earnings Earnings Market Price
Revenues (Loss) (Loss) (Loss) (Loss) Dividends High Low
-------- ---------- ----------- -------- -------- --------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 $147,300,299 $17,143,410 $10,518,548 $1.41 $1.40
Fourth Quarter 31,241,540 (1,290,562) (779,990) (.10) (.10) $0.50 $36.44 $27.25
Third Quarter 33,299,256 (1,016,288) (654,915) (.09) (.09) 41.44 27.63
Second Quarter 67,374,352 22,219,991 13,522,484 1.81 1.79 43.25 24.00
First Quarter 15,385,151 (2,769,731) (1,569,031) (.21) (.21) 25.31 19.31
- -----------------------------------------------------------------------------------------------------------------------
1997 $118,907,367 $14,405,288 $9,148,560 $1.25 $1.25
Fourth Quarter 28,021,261 (269,688) 30,749 0.00 0.00 $0.50 $23.38 $20.75
Third Quarter 16,827,607 (3,005,270) (1,819,209) (0.25) ( 0.25) 21.00 16.25
Second Quarter 60,779,635 20,815,669 12,785,706 1.75 1.75 19.00 16.50
First Quarter 13,278,864 (3,135,423) (1,848,686) (0.25) (0.25) 18.50 16.00
- -----------------------------------------------------------------------------------------------------------------------
1996 $107,858,818 $12,314,897 $ 8,071,526 $1.08 $1.08
Fourth Quarter 26,369,324 (1,092,044) (171,138) (0.02) (0.02) $0.33 $18.25 $17.00
Third Quarter 15,200,752 (2,782,430) (1,580,988) (0.21) (0.21) 18.75 17.00
Second Quarter 54,939,249 19,637,584 11,896,865 1.59 1.59 22.00 18.00
First Quarter 11,349,493 (3,448,213) (2,073,213) (0.27) (0.27) 20.00 16.00
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company's Common Stock is traded in the over-the-counter market. As of March
29, 1993, the Company's Common Stock was listed on the National Association of
Securities Dealers, Inc.'s SmallCap Market under the symbol CHDN. As of March
24, 1999, there were approximately 3,100 stockholders of record.
Earnings (loss) per share and other per share amounts have been retroactively
adjusted for the 2-for-1 stock split with a record date of March 30, 1998.
Quarterly earnings (loss) per share figures may not equal total earnings (loss)
per share for the year due in part to the fluctuation of the market price of the
stock.
The above table sets forth the high and low bid quotations (as reported by
NASDAQ) and dividend payment information for the Company's Common Stock during
its last three years. Quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commissions, and may not necessarily reflect actual
transactions.
53
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required herein is incorporated by reference from
sections of the Company's Proxy Statement titled "Section 16(a) Beneficial
Ownership Reporting Compliance," "Election of Directors," and "Executive
Officers of the Company," which Proxy Statement will be filed with the
Securities and Exchange Commission pursuant to instruction G(3) of the General
Instructions to Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from
sections of the Company's Proxy Statement titled "Election of Directors -
Compensation and Committees of the Board of Directors," "Compensation Committee
Report on Executive Compensation," "Compensation Committee Interlocks and
Insider Participation," "Performance Graph," and "Executive Compensation," which
Proxy Statement will be filed with the Securities and Exchange Commission
pursuant to instruction G(3) of the General Instructions to Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required herein is incorporated by reference from
the sections of the Company's Proxy Statement titled "Common Stock Owned by
Certain Persons," "Election of Directors" and "Executive Officers of the
Company," which Proxy Statement will be filed with the Securities and Exchange
Commission pursuant to instruction G(3) of the General Instructions to Form
10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated by reference from
the section of the Company's Proxy Statement titled "Certain Relationships and
Related Transactions," which Proxy Statement will be filed with the Securities
and Exchange Commission pursuant to instruction G(3) of the General Instructions
to Form 10-K.
54
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
Pages
(a)(1) Consolidated Financial Statements
The following financial statements of Churchill Downs
Incorporated for the years ended December 31, 1998, 1997
and 1996 are included in Part II, Item 8:
Report of Independent Accountants 31
Consolidated Balance Sheets 32
Consolidated Statements of Earnings 33
Consolidated Statements of Stockholders' Equity 34
Consolidated Statements of Cash Flows 35
Notes to Consolidated Financial Statements 36-52
(2) Schedule VIII - Valuation and Qualifying Accounts 57
All other schedules are omitted because they are not
applicable, not significant or not required, or because
the required information is included in the financial
statement notes thereto.
(3) For the list of required exhibits, see exhibit index.
(b) Reports on Form 8-K:
(1) Report on Form 8-K - Description of Capital Stock, Item 5 Other Events,
was filed on December 14, 1998
(2) Report on Form 8-K/ A-2, filing of accountant's consent, Item 7
Financial Statements and Exhibits, ws filed on December 21, 1998.
(c) Exhibits
See exhibit index.
(d) All financial statements and schedules except those items
listed under items 14(a)(l) and (2) above are omitted
because they are not applicable, or not required, or because
the required information is included in the financial
statements or notes thereto.
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
CHURCHILL DOWNS INCORPORATED
/s/Thomas H. Meeker
---------------------
Thomas H. Meeker
President and Chief Executive
Officer
March 16, 1999
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/Thomas H. Meeker /s/Robert L. Decker /s/Vicki. L. Baumgardner
- --------------------------------- ----------------------------- --------------------------------
Thomas H. Meeker, President and Robert L. Decker, Executive Vicki L. Baumgardner, Vice
Chief Executive Officer Vice President and Chief President, Finance and Treasurer
March 16, 1999 Officer March 16, 1999
(Director and Principal Executive March 16, 1999 (Principal Accounting Officer)
Officer) (Principal Financial Officer)
/s/Daniel P. Harrington /s/Frank B. Hower, Jr.
- --------------------------------- ----------------------------- --------------------------------
Daniel P. Harrington Frank B. Hower, Jr. Arthur B. Modell
March 16, 1999 March 16, 1999 March 16, 1999
(Director) (Director) (Director)
/s/William S. Farish /s/G. Watts Humphrey, Jr. /s/Carl F. Pollard
- --------------------------------- ----------------------------- --------------------------------
William S. Farish G. Watts Humphrey, Jr. Carl F. Pollard
March 16, 1999 March 16, 1999 March 16, 1999
(Director) (Director) (Director)
/s/J. David Grissom /s/W. Bruce Lunsford /s/Dennis D. Swanson
- --------------------------------- ----------------------------- --------------------------------
J. David Grissom W. Bruce Lunsford Dennis D. Swanson
March 16, 1999 March 16, 1999 March 16, 1999
(Director) (Director) (Director)
/s/Charles W. Bidwill, Jr. /s/Seth W. Hancock /s/Darrell R. Wells
- --------------------------------- ----------------------------- --------------------------------
Charles W. Bidwill, Jr. Seth W. Hancock Darrell R. Wells
March 16, 1999 March 16, 1999 March 16, 1999
(Director) (Director) (Director)
</TABLE>
56
<PAGE>
CHURCHILL DOWNS INCORPORATED
SCHEDULE VIII. - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance, Accounts Balance,
Beginning obtained in Charged to End
Description of Period Acquisition Expenses Deductions of Period
Year ended December 31,
1998:
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
account and notes receivable $176,000 $98,000 $1,000 $(56,000) $219,000
Valuation allowance for
deferred tax asset 173,000 - (173,000) - -
-------- -------- ---------- ---------- ---------
$349,000 $98,000 $(172,000) (56,000) $219,000
======== ======== ========== ========== =========
Year ended December 31,
1997:
Allowance for doubtful
account and notes receivable $165,000 - $61,000 $(50,000) $176,000
Valuation allowance for
deferred tax asset 176,000 - - (3,000) 173,000
-------- -------- -------- ---------- --------
$341,000 - $61,000 $(53,000) $349,000
======== ======== ======== ========== ========
Year ended December 31,
1996:
Allowance for doubtful
account and notes receivable $135,000 - $30,000 - $165,000
Valuation allowance for
deferred tax asset 104,000 - 72,000 - 176,000
-------- -------- -------- ---------- --------
$239,000 - $102,000 - $341,000
======== ======== ======== ========== ========
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Numbers Description By Reference To
<S> <C>
(2) (a) Stock Purchase Agreement dated as Exhibit 2.1 to Current Report on Form
of March 28, 1998 between Churchill 8-K dated April 21, 1998
Downs Incorporated and TVI Corp.
(b) Agreement and Plan of Merger dated Exhibit 2.2 to Current Report on Form
as of April 17, 1998 by and among 8-K dated April 21, 1998
TVI Corp., Racing Corporation of
America, Churchill Downs Incorporated
and RCA Acquisition Company
(3) (a) Amended and Restated Articles of Report on Form 10-Q for the fiscal
Churchill Downs Incorporatiod quarter ended June 30, 1998
(b) Restated Bylaws as amended Report on Form 10-Q for the fiscal
quarter ended June 30, 1998
(4) Rights Agreement dated as of Exhibit 4.1 to Current Report on Form
March 19, 1998 between Churchill 8-K dated March 19, 1998
Downs, Inc. and Bank of Louisville
(10)(a) Churchill Downs Incorporated Amended Pages 61 to 71, Report on Form 10-K
and Supplemental Benefit Plan dated the year ended December 31, 1998
December 1, 1998*
(b) Employment Agreement dated as of Exhibit 19(a) to Report on Form 10-Q
October 1, 1984, with for fiscal quarter ended 4
Thomas H. Meeker, President * October 31, 198
(c) Churchill Downs Incorporated for Exhibit 10 (c) to Report on Form 10-K
Incentive Compensation Plan (1997)* for the year ended December 31, 1996
(d) Churchill Downs Incorporated Exhibit 10(h) to Report on Form 10-K
for 1993 Stock Option Plan * for the eleven months ended
December 31, 1993
(e) Stock Purchase Agreement naming Exhibit 10(i) to Current Report on
Dominick Marotta, Frank Marotta, Form 8-K filed with the Securities
Louis E. Carlo and Edward F. and Exchange Commission on
Draugelis February 10, 1994
(f) Amendment of Employment Agreement Report on Form 10-K for the fiscal
with Thomas H. Meeker, President, year ended January 31, 1986; Report
dated October 1, 1984 * on Form 10-K for the fiscal year ended
January 31, 1987; 1988, 1990, 1991,
1992 and 1993
(g) Amendment No. 1 to Churchill Downs Exhibit 10 (g) to Report on Form 10-K
Incorporated 1993 Stock Option Plan* for the year ended December 31, 1994
58
<PAGE>
(h) $100 Million Revolving Facility Report on Form 10-Q for the fiscal
Credit Agreement between Churchill quarter ended September 30, 1998
Downs Incorporated, Churchill Downs
Management Company, Churchill Downs
Investmwnt Company, Racing Coporation
of America, Ellis Park Race Course,
Inc., the banks party thereto and PNC
Bank, National Association, as Agent,
dated as of September 15, 1998
(i) Amended and Restated Lease Exhibit 10 (l) to Report on Form 10-K
Agreement dated January 31, 1996 for the year ended December 31, 1995
(j) Partnership Interest Purchase Exhibit 10(k) to Report on Form 10-K
Agreement dated December 20, 1995 for the year ended December 31, 1995
among Anderson Park, Inc., Conseco
HPLP, LLC, Pegasus Group, Inc. and
Hoosier Park, L.P.
(k) Employment Agreement between Exhibit 10 (l) to Report on Form 10-Q
Churchill Downs Incorporated and for the fiscal quarter ended
Robert L. Decker * March 31, 1997
(l) Amendment No. 2 to Churchill Downs Report on Form 10-K for the year
Incorporated 1993 Stock Option Plan* ended December 31, 1997
(m) Churchill Downs Incorporated Report on Form 10-K for the year
1997 Stock Option Plan* ended December 31, 1997
(n) Churchill Downs Incorporated Amended Pages 72 to 88, Report on Form 10-K for
and Restated Deferred Compensation the year ended December 31, 1998
Plan for Employees and Directors*
(21) Subsidiaries of the registrant Report on Form 10-K for the year ended
December 31, 1994
59
<PAGE>
(23) Consent of PricewaterhouseCoopers, LLP Page 89, Report on Form 10-K for the
Independent Accountants year ended December 31, 1998
(27) Financial Data Schedule for the Page 90, Report on Form 10-K for
year ended December 31, 1998 the year ended December 31, 1998
*Management contract or compensatory plan or arrangement.
</TABLE>
60
<PAGE>
CHURCHILL DOWNS INCORPORATED
AMENDED AND RESTATED
SUPPLEMENTAL BENEFIT PLAN
This Amended and Restated Supplemental Benefit Plan replaces in its
entirety, as of April 1, 1999, the Churchill Downs Supplemental Benefit Plan
dated as of December, 1998.
Churchill Downs Incorporated ("Churchill Downs") desires to retain the
services of and provide rewards and incentives to members of a select group of
management employees who contribute to the success of the Corporation.
In order to achieve this objective, Churchill Downs has adopted the
following Supplemental Benefit Plan to provide supplemental death, disability,
and retirement benefits for those select management employees who become Members
of the Plan.
ARTICLE 1
TITLE AND EFFECTIVE DATE
1.1 This Plan Shall be known as the Churchill Downs Supplemental Benefit
Plan (hereinafter referred to as the "Plan").
1.2 The Effective Date of this Plan shall be December 1, 1998.
ARTICLE 2
DEFINITIONS
As used herein, the following words and phrases shall have the meanings
specified below unless a different meaning is clearly required by the context:
2.1 The term "Average Monthly Earnings" shall mean the Member's highest
monthly base salary (regardless of whether paid in that month or deferred under
the terms of a deferred compensation plan) determined at any time prior to
death, disability, or retirement, plus 1/12th of the Member's highest incentive
compensation award earned in any year prior to death, disability, or retirement
pursuant to the Churchill Downs Incorporated Incentive Compensation Plan or
similar plan maintained by the Employer. It shall not include compensation
earned pursuant to any stock option plan or any other form of compensation
earned by the Member.
2.2 The term "Board of Directors" shall mean the Board of Directors of
the Employer.
2.3 The term "Committee" shall mean the Compensation Committee or other
Committee appointed by the Board of Directors to administer the plan.
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<PAGE>
2.4 The term "Death Benefit" shall mean the benefit paid to a Member's
Surviving Spouse as provided in Article 6.
2.5 The term "Disability Benefit" shall mean the benefit paid to a
Disabled Member as provided in Article 5.
2.6 The term "Disabled Member" shall mean any Member who is Totally and
Permanently Disabled. If a Member fails to qualify for disability benefits under
the Employer's Long Term Disability Plan, the Board of Directors may, in its
sole discretion, pay a Disability Benefit to a Member.
2.7 The term "Effective Date" shall mean the date the Plan becomes
effective through the terms of a resolution adopted by the Board of Directors.
2.8 The term "Employer" shall mean Churchill Downs, its successors and
assigns, any subsidiary or affiliated organizations authorized by the Board of
Directors of Churchill Downs to participate in this Plan with respect to their
Members, and subject to the provisions of Article 9, any organization into which
the Employer may be merged or consolidated or to which all or substantially all
of its assets may be transferred.
2.9 The term "Member" shall mean an employee who is part of a select
group of management or highly compensated personnel and has become a Member as
provided in Article 3 hereof.
2.10 The term "Monthly Retirement Income" shall mean a monthly income
due a Retired Member under the terms of this Plan which shall commence as of his
Retirement Date and continue for the period provided herein.
2.11 The term "Plan" shall mean the Churchill Downs Supplemental Benefit
Plan.
2.12 The term "Plan Agreement" shall mean the written agreement entered
into by a Member and the Employer evidencing the Member's participation in the
Plan.
2.13 The term "Primary Social Security" shall mean the estimated Primary
Insurance Amount (payable monthly) available to a Member at the later of the
Member's Retirement Date or attainment of age 62 under the Social Security Act
in effect at the Member's Retirement Date. The fact that a Member does not
receive such amount shall be disregarded in computing Monthly Retirement Income
benefits herein.
2.14 The term "Qualified Plan" shall mean the Churchill Downs Pension
Plan.
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<PAGE>
2.15 The term "Retired Member" shall mean any member of the Plan who has
qualified for retirement and has retired, and who is eligible to receive a
Monthly Retirement Income by direction of the Committee.
2.16 The term "Retirement Date" shall mean the first day of the month
coinciding with or immediately following the Member's termination of employment
on or after attainment of age fifty-five (55).
2.17 The term "Surviving Spouse" shall mean the person legally married
to a Member at the time of the death of the Member.
2.18 The term "Total and Permanent Disability" or "Totally and
Permanently Disabled" shall mean eligibility for disability benefits under the
terms of the Employer's Long Term Disability plan in effect at the time the
Member becomes disabled.
2.19 For purposes of converting the amounts described in Sections 4.1D
and 5.1C to an annuity, such conversion shall be computed using an interest rate
assumption equal to the yield of a U.S. Treasury Bond with a term equal to the
Member's life expectancy (rounded to the nearest whole year), such yield and
life expectancy to be determined as of the last day of the calendar quarter
preceding the Member's Retirement Date or, in the event the Member becomes
Totally and Permanently Disabled prior to the attainment of age 55, as of the
last day of the calendar quarter preceding the date the Member attains age 55.
For purposes of determining the Member's life expectancy, the GAM 94 mortality
table shall be used.
ARTICLE 3
MEMBERSHIP IN THE PLAN
3.1 Eligibility for membership in this Plan shall be determined by the
Committee in its sole discretion, on an individual basis. However, a Member
whose benefits under the Plan have commenced to be paid shall not be removed
from membership in the Plan unless the Member is convicted of a felonious act
against the Employer.
3.2 If a Member is removed from the Plan under Section 3.1, all future
benefits payable under this Plan to the Member shall cease.
3.3 The payment of benefits to the Member under this Plan is conditioned
upon the continuous employment of the Member by the Employer (including periods
of disability and authorized leaves of absence) from the date of the Member's
participation in the Plan until the Member's Retirement Date or Disability,
whichever first occurs.
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<PAGE>
ARTICLE 4
MONTHLY RETIREMENT INCOME AND BENEFIT
4.1 The amount of a Member's Monthly Retirement Income shall be
forty-five percent (45%) of his Average Monthly Earnings increased by one
percent for each twelve month period that the Member remains employed by the
Employer following attainment of age 55 with the maximum Monthly Retirement
Income not to exceed fifty-five percent (55%) of his Average Monthly Earnings,
reduced as set forth in Sections 4.1A, 4.1B, 41.C and 4.1D.
A. One hundred percent (100%) of the Member's Primary Social
Security benefit under the Social Security law in effect on
his Retirement Date, such amount not being applied to reduce
the amount set forth in Section 4.01 hereof until the later of
the Member's Retirement Date or attainment of age 62. If the
Member's Retirement Date occurs on or after the attainment of
age 59, the reduction shall be 50% rather than 100%.
B. One hundred percent (100%) of the Member's monthly income
calculated in the form of a 50% Joint & Survivor annuity under
the Qualified Plan formerly maintained by the Employer as of
his Retirement Date, the specific amount of which is more
specifically set out in the Member's Plan Agreement.
C. One hundred percent (100%) of the Monthly Income Option
calculated as a 50% Joint & Survivor annuity from the cash
surrender value of all life insurance policies (if applicable)
listed on Schedule A attached to the Member's Plan Agreement.
Such Monthly Income shall be determined as of the Member's
Retirement Date. If the Member's Retirement Date occurs on or
after the attainment of age 59, this reduction shall be
eliminated.
D. One hundred percent (100%) of the Employer contributions
and any Member contributions up to a maximum of two thousand
($2,000) per year allocated to his accounts under the
Churchill Downs Incorporated Profit Sharing Plan, calculated
in the form of a 50% Joint & Survivor annuity payable on his
Retirement Date. If the Member's Retirement Date occurs on or
after the attainment of age 59, the reduction for Member
contributions shall be eliminated.
4.2 The basic form of Monthly Retirement Income (to which the formula
indicated in Section 4.1 applies) shall be a monthly income commencing on the
Member's Retirement Date and continuing for his life, with 50% of said benefit
being paid for the life of a Surviving Spouse. This benefit shall not be
actuarially reduced unless the Member's Retirement Date occurs prior to age 57.
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<PAGE>
4.3 A Member is entitled to receive a Monthly Retirement Income under
the Plan only by remaining in the employ of the Employer until age fifty-five
(55).
4.4 A Member may elect for the Member and/or the Member's Surviving
Spouse to continue to participate in the Employer's group health insurance plan
following Retirement or Disability. In the case of death under Article 6, the
Member's Surviving Spouse may make such an election. The Member, or Member's
Surviving Spouse, in the case of the Member's death, shall be responsible for
all expenses (including applicable premiums) associated with such election
ARTICLE 5
DISABILITY BENEFITS
5.1 If a Member is determined to be Disabled while employed by the
Employer prior to his attainment of age fifty-five (55), the Disabled Member
shall be entitled to receive a Monthly Retirement Income benefit, commencing on
the first day of the month coincident with or immediately following the
attainment of age fifty-five (55), equal to forty-five percent (45%) of the
Member's Average Monthly Earnings reduced by Sections 5.1A, 5.1B, and 5.1C.
A. One hundred percent (100%) of his monthly Long Term
Disability benefit or, in the event there is no Long Term
Disability benefit, one hundred percent (100%) of the Primary
Social Security Disability benefit payable to the Member at
age sixty-five (65) under the Social Security law in effect at
that time. This offset shall occur without regard to whether
the Member actually receives said benefits.
B. One hundred percent (100%) of his monthly income calculated
in the form of a 50% Joint & Survivor annuity under the
Qualified Plan as of the date Disability Benefits commence.
C. One hundred percent (100%) of the Employer contributions
allocated to his account(s) under the Churchill Downs
Incorporated Profit Sharing Plan, calculated in the form of a
50% Joint & Survivor annuity payable on the date Disability
Benefits commence.
5.2 If a Member becomes Disabled on or after attaining age 55, the
Member shall be treated as having elected Retirement at the time the
Disability is determined.
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<PAGE>
ARTICLE 6
DEATH BENEFITS
6.1 If a Member dies after attaining age 55 but prior to Retirement, the
Member's Surviving Spouse shall be entitled to a benefit as if the Member had
elected to retire on the day before the Member's death.
6.2 The Surviving Spouse of a Retired Member shall be entitled to a
benefit under the terms of 4.2 herein.
ARTICLE 7
PLAN ADMINISTRATION
7.1 The Board of Directors shall appoint a committee to administer the
Plan and keep records of individual Member benefits.
7.2 The Committee shall have the authority to interpret the Plan, to
adopt and review rules relating to the Plan and to make any other determinations
for the administration of the Plan.
Subject to the terms of the Plan, the Committee shall have exclusive
jurisdiction (i) to select the Members eligible to become Members, (ii) to
determine the eligibility for, and form and method of any benefit payments,
(iii) to establish the timing of benefit distributions, (iv) to settle claims
according to the provisions in Article 8, and (v) to remove Members from
participation in the Plan.
7.3 The Committee may employ such counsel, accountants, actuaries, and
other agents as it shall deem advisable. The Employer shall pay the compensation
of such counsel, accountants, actuaries, and other agents and any other expenses
incurred by the Committee in the administration of the Plan.
ARTICLE 8
CLAIMS PROCEDURE
8.1 The Treasurer of the Employer shall administer the claims procedure
under this Plan.
A. The business address and telephone number of the
Treasurer of the
Employer is:
Vicki L. Baumgardner
700 Central Avenue
Louisville, Kentucky 40208
(502) 636-4400
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<PAGE>
B. The Employer shall have the right to change the address and
telephone number of the Treasurer. The Employer shall give the
Member written notice of any change of the Treasurer, or any
change in the address and telephone number of the Treasurer.
8.2 Benefits shall be paid in accordance with the provisions of this
Plan. The Member (hereinafter referred to as the "Claimant") shall make a
written request for the benefits provided under this Plan. This written claim
shall be mailed or delivered to the Treasurer.
8.3 If the claim is denied, either wholly or partially, notice of the
decision shall be mailed to the Claimant within a reasonable time period. This
time period shall not exceed more than 90 days after the receipt of the claim by
the Treasurer.
8.4 The Treasurer shall provide such written notice to every Claimant
who is denied a claim for benefits under this Plan. The notice shall set forth
the following information:
A. the specific reasons for the denial;
B. the specific reference to pertinent plan provisions on
which the denial is based;
C. a description of any additional material or information
necessary for the Claimant to perfect the claim and an
explanation of why such material or information is
necessary; and
D. appropriate information and explanation of the claims
procedure under this Plan to permit the Claimant to submit
his claim for review.
8.5 The claims procedure under the Plan shall allow the Claimant a
reasonable opportunity to appeal a denied claim and to get a full and fair
review of that decision from the Board.
A. The Claimant shall exercise his right of appeal by
submitting a written request for review of the denied claim to
the Treasurer. This written request for review must be
submitted to the Treasurer within sixty (60) days after
receipt of by the Claimant of the written notice of denial.
B. The Claimant shall have the following rights under this
appeal procedure:
(1) to request a review by the Committee upon written
application to the Treasurer;
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<PAGE>
(2) to review pertinent documents with regard to the employee
benefit plan created under this Plan;
(3) the right to submit issues and comments in writing;
(4) to request an extension of time to make a written
submission of issues and comments; and
(5) to request that a hearing be held to consider
Claimant's appeal.
8.6 The decision on the review of the denied claim shall promptly be
provided by the Committee:
A. within forty-five (45) days after the receipt of the
request for review if no hearing is held; or
B. within ninety (90) days after the receipt of the request
for review, if an extension of time is necessary in order
to hold a hearing.
(1) If an extension of time is necessary in order to
hold a hearing, the Committee shall give the
Claimant written notice of the extension of
time and of the hearing. This notice shall be
given prior to any extension.
(2) The written notice of extension shall indicate
that an extension of time will occur to hold a
hearing on Claimant's appeal. The notice shall
also specify the place, date, and time of that
hearing and the Claimant's opportunity to
participate in the hearing. It may also include
any other information the Committee believes
may be important or useful to the Claimant in
connection with the appeal.
8.7 The decision to hold a hearing to consider the Claimant's appeal of
the denied claim shall be within the sole discretion of the Committee, whether
or not the Claimant requests such a hearing.
8.8 The Committee's decision on review shall be made in writing and
provided to the Claimant within the specified time periods. This written
decision on review shall contain the following information:
A. the decision(s);
B. the reasons for the decision(s); and
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<PAGE>
C. specific reference to the Plan provisions of the Plan on
which the decision(s) is/are based.
All of this information shall be written in a manner calculated to be
understood by the claimant.
ARTICLE 9
MISCELLANEOUS
9.1 Nothing contained in this Plan shall be deemed to give any Member or
Employee the right to be retained in the service of the Employer or to interfere
with the right of the Employer to discharge any Member or Employee at any time
regardless of the effect which such discharge shall have upon him as a Member of
the Plan.
9.2 Nothing contained in this Plan and no action taken pursuant to the
provisions of this Plan shall create or be construed to create a trust of any
kind or a fiduciary relationship between the Employer and the Member, his spouse
or any other person. Any funds which may be invested by the Employer to insure
itself against any and all financial losses which the Employer may incur under
the provisions of this Plan shall continue for all purposes to be a part of the
general funds of the Employer, and no person other than the Employer, shall, by
virtue of the provisions of this Plan, have any interest in such funds. To the
extent that any person acquires a right to receive payment from the Employer
under this Plan, such right shall be no greater than the right of any general
unsecured creditor of the Employer.
9.3 This Plan does not involve a reduction in salary for the Members or
a foregoing of an increase in future salary by the Member.
9.4 A retired Member shall not be considered an Employee for any purpose
under the law.
9.5 Except insofar as this provision may be contrary to applicable law,
no sale, transfer, alienation, assignment, pledge, collateralization, or
attachment of any benefits under this Plan shall be valid or recognized by the
Committee.
9.6 The Employer reserves the right at any time and from time to time,
by action of its Board of Directors to terminate, modify or amend, in whole or
in part, any or all of the provisions of the Plan, including specifically the
right to make any such amendments effective retroactively; provided that no such
action shall reduce the benefits of any Disabled or Retired Member who is
receiving a Monthly Retirement Income at the time of the termination,
modification or amendment.
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<PAGE>
9.7 The Employer shall not merge into, be acquired by, or consolidate
with any other Employer unless and until such other Employer agrees to assume
all rights and obligations set forth in this Plan.
9.8 This Plan shall be binding upon and inure to the benefits of the
Employer, its successors and assigns and each Member and his legal
representatives.
9.9 This Plan shall be governed by the laws of Kentucky. This Plan is
solely between the Employer and the Member. The Member shall only have recourse
against the Employer for enforcement of the Plan.
9.10 Any words herein used in the masculine shall be read and construed
in the feminine where they would so apply. Words in the singular shall be read
and construed as though used in the plural in all cases where they would so
apply.
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CERTIFICATE
I, Rebecca C. Reed, Secretary to Churchill Downs Incorporated, do hereby
certify that the foregoing Amended and Restated Churchill Downs Supplemental
Benefit Plan sets forth in its entirety and replaces, as of April 1, 1999, the
Churchill Downs Supplemental Benefit Plan dated as of December 1, 1998.
/s/ Rebecca C. Reed
---------------------------
Rebecca C. Reed
71
THE CHURCHILL DOWNS INCORPORATED
AMENDED AND RESTATED
DEFERRED COMPENSATION PLAN
FOR EMPLOYEES AND DIRECTORS
April 1, 1999
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<PAGE>
ARTICLE I
PURPOSE AND EFFECTIVE DATE
1.01 Title. This Plan shall be known as the Churchill Downs Incorporated
Amended and Restated Deferred Compensation Plan for Employees and Directors
(hereinafter referred to as the "Plan").
1.02 Purpose. The purpose of the Plan is to permit certain members of
management or highly compensated employees and Directors of the Company to defer
income pre-tax without regard to the limits imposed by the Internal Revenue Code
on tax-qualified savings and retirement plans. The Plan constitutes an unfunded
"top hat" arrangement under Title I of ERISA as well as for income tax purposes.
1.03 Effective Date. The effective date of this Plan shall be
April 1, 1999.
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<PAGE>
ARTICLE II
DEFINITIONS AND CONSTRUCTION OF THE PLAN DOCUMENT
2.01 Annual Deferral Amount. "Annual Deferral Amount" shall mean that
portion of a Participant's income to be paid during a Plan Year that a
Participant elects to have and is deferred in a Plan Year. In the event of a
Participant's Termination of Service prior to the end of a Plan Year, such
year's Annual Deferral Amount shall be the actual amount deferred and withheld
prior to such event.
2.02 Beneficiary. "Beneficiary" shall mean the person or persons or the
estate of a Participant entitled to receive any benefits under this Plan in the
event of the Participant's death.
2.03 Board. "Board" shall mean the Board of Directors of the Company.
2.04 Bookkeeping Account Balance. "Bookkeeping Account Balance" shall
mean with respect to a Participant the sum of (i) Deferred Compensation, plus
(ii) Company Contributions, plus (iii) interest credited in accordance with all
the applicable interest crediting provisions of this Plan, less (iv) all
distributions. This account shall be a bookkeeping entry only and shall be
utilized solely as a device for the measurement and determination of the amounts
to be paid to a Participant pursuant to this Plan.
2.05 Code. "Code" shall mean the Internal Revenue Code of 1986, as may
be amended from time to time.
2.06 Committee. "Committee" means the Compensation Committee of the
Board of Directors.
2.07 Company. "Company" shall mean Churchill Downs Incorporated and any
subsidiary or affiliated companies that adopt the Plan, with the Company's
approval.
2.08 Company Contribution. "Company Contribution" shall mean the
amounts credited to the Participant's Bookkeeping Account Balance under Section
4.02 of the Plan.
2.09 Crediting Rate. "Crediting Rate" shall mean, starting January 1,
1999 and for each month thereafter, an interest rate equal to the Prime Rate
listed in the Money Rates section of The Wall Street Journal on the first
business day of the applicable month, plus 100 basis points.
2.10 Deferred Compensation. "Deferred Compensation" shall mean the sum
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<PAGE>
of all of a Participant's Annual Deferral Amounts.
2.11 Director. "Director shall mean a member of the Board of Directors
of the Company.
2.12 Director Compensation. "Director Compensation" shall mean the
retainer and meeting fees paid by the Company to Directors.
2.13 Disabled. "Disabled" shall mean for an Employee Total and Permanent
Disability under the terms of the Company's long-term disability plan in effect
at the time of such determination of Disability.
2.14 Election Date. "Election Date" shall mean the date established by
the Committee as the date before which an Employee or Director must submit a
valid Election Form to the Plan Administrator. The applicable Election Dates can
be no later than the following: (a) 30 days after adoption of the Plan for
Employees and Directors who are eligible to participate at the time the Plan is
adopted, (b) 30 days after a newly eligible Employee or Director is notified of
the right to participate in the Plan, or (c) December 15 prior to an applicable
Plan Year if (a) or (b) above do not apply.
2.15 Election Form. "Election Form" shall mean the form established from
time to time by the Committee that an Employee or Director completes, signs and
returns to the Plan Administrator to make an election under the Plan.
2.16 Employee. "Employee" shall mean any member of management or highly
compensated employee who is eligible to participate in the Plan.
2.17 Employee Compensation. "Compensation" shall have the same meaning
as provided in the Qualified Plan (without regard to any limitations imposed by
the Code and without regard to any deferrals made under the terms of this Plan).
2.18 Participant. "Participant" shall mean an Employee or Director who
has Deferred Compensation pursuant to the terms of this Plan, and whose
Bookkeeping Account balance has not yet been fully distributed.
2.19 Plan. "Plan" shall mean the Churchill Downs Incorporated Deferred
Compensation Plan for Employees and Directors as described in this instrument
and as amended from time to time.
2.20 Plan Administrator. "Plan Administrator" shall mean the Vice
President of Human Resources of the Company.
2.21 Plan Year. "Plan Year" shall mean a calendar year.
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<PAGE>
2.22 Qualified Plan. "Qualified Plan" shall mean the Churchill Downs
Incorporated Profit Sharing Plan as in effect at the date of the adoption of
this Plan and as amended from time to time.
2.23 Termination of Service. "Termination of Service" or similar
expression shall mean the termination of the Participant's employment as an
employee of the Company (and any division, subsidiary or affiliate thereof) or,
if applicable, termination of service as a Director. A Disabled Participant
shall be deemed to have terminated employment for purposes of this Plan.
2.24 Unforeseeable Financial Emergency. "Unforeseeable Financial
Emergency" shall mean an unanticipated emergency that is caused by an event
beyond the control of the Participant that would result in severe financial
hardship to the Participant resulting from (i) a sudden and unexpected illness
or accident of the Participant or a dependent of the Participant, (ii) a loss of
the Participant's property due to casualty, or (iii) such other extraordinary
and unforeseeable circumstances arising as a result of events beyond the control
of the Participant, all as determined in the sole discretion of the Committee.
2.25 Valuation Date. "Valuation Date" shall mean the last day of
each month.
2.26 Gender and Number. Wherever the context so requires, masculine
pronouns include the feminine and singular words shall include the plural.
2.27 Titles. Titles of the Articles of this Plan are included for ease
of reference only and are not to be used for the purpose of construing any
portion or provision of this Plan document.
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<PAGE>
ARTICLE III
ELIGIBILITY AND PARTICIPATION
3.01 Eligibility. The Committee shall determine in its sole discretion,
which Employees shall be eligible to participate in the Plan. All Directors
shall be eligible for participation.
3.02 Participation. An Employee or Director, after having been selected
for participation by the Committee, shall, as a condition to participation,
complete and return to the Plan Administrator a duly executed Election Form no
later than the applicable Election Date. A Bookkeeping Account will be
established for each Participant at the time an Election Form is received by the
Plan Administrator.
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<PAGE>
ARTICLE IV
PARTICIPANT DEFERRALS OF COMPENSATION
AND COMPANY MATCHING CONTRIBUTIONS
4.01 Employee Compensation. Each Employee who participates in the Plan
may have a percentage of Employee Compensation deferred in accordance with the
terms and conditions of this Plan. The percentage to be deferred each pay period
under this section shall be any whole percentage from 1% to 15% of Employee
Compensation, offset by amounts actually deferred in the applicable pay period
to the Company's Qualified Plan.
4.02 Company Contribution. With respect to amounts contributed under
Section 4.01, the Company shall add an amount equal to the excess, if any, of
4.02(a) over 4.02(b) as follows:
4.02(a) The amount equal to the matching contribution the Company
would make to the Qualified Plan based on the
Participant's Compensation for such pay period if the
Participant made a contribution to the Qualified Plan in
the amount of (1) the contributions under Section 4.01
above, plus (2) the actual contributions to the Qualified
Plan for that pay period.
4.02(b) The amount equal to the Company's actual matching
contribution to the Qualified Plan for such pay period.
4.03 Employee Annual Incentive Awards. Each Employee who participates in
the Plan may have up to 100% of his annual incentive award deferred in
accordance with the terms and conditions of this Plan. There shall be no Company
Contribution with respect to the deferral of annual incentive awards.
4.04 Director Compensation. Each Director who participates in the Plan
may have up to 100% of his Compensation deferred under the terms and conditions
of this plan. There shall be no Company Contributions with respect to the
deferral of Director Compensation.
4.05 Vesting. A Participant shall be fully vested at all times in his or
her Deferred Compensation plus interest thereon. Vesting in Company
Contributions plus interest thereon shall occur at the same time and at the same
rate as vesting occurs for Company matching contributions to the Qualified Plan.
4.06 Duration of Election Form. A Participant's Election Form shall
remain in
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effect until modified or terminated as provided in Section 4.07. Future
deferrals will be terminated automatically for any Participant who is deemed (by
the Committee) to no longer be eligible for participation in the Plan.
4.07 Election to Modify or Terminate Future Contributions. A Participant
who desires to modify or terminate the amount of future Compensation being
deferred under the Plan must notify the Plan Administrator in writing on an
Election Form provided by the Plan Administrator. Elections to decrease or
terminate deferrals of future Compensation shall become effective as soon as
administratively possible. Elections to increase deferrals of future
Compensation shall become effective on January 1 of the next Plan Year.
4.08 Rollover Contributions. A Participant may request a roll over to
the Plan contributions previously made by, or on behalf of, the Participant to
another deferred compensation plan which qualified as an unfunded "top hat"
arrangement under Title I of ERISA as well as for income tax purposes. The
Compensation Committee, in its sole discretion, may elect to accept such roll
over amounts from other deferred compensation plans.
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ARTICLE V
DEFERRAL ACCOUNT AND CREDITING RATE
5.01 Bookkeeping Account. Compensation deferred by a Participant under
Sections 4.01, 4.03, and 4.04 herein and Company Contributions under Section
4.02 shall be credited to a Bookkeeping Account maintained for each Participant.
Distributions pursuant to Articles VI and VII shall be debited against the
Participant's Bookkeeping Account.
5.02 Interest. Prior to any distribution of a Participant's Bookkeeping
Account Balance under Article VI herein, an amount equal to the Crediting Rate
shall be credited and compounded monthly to a Participant's Bookkeeping Account
Balance on each Valuation Date. For purposes of this paragraph, a Participant's
Annual Deferral Amount and Company Contributions will be treated as though they
were made in two installments: (a) half at the beginning of the applicable
month, and (b) half at the end of the applicable month. Subsequent to the
commencement of installment distributions under Article VI herein, the interest
credited to a Participant's Bookkeeping Account Balance shall be equal to the
average (mean) crediting rate for the 12 months immediately prior to the
Participant's first distribution hereunder.
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ARTICLE VI
DISTRIBUTION
6.01 Distribution of Bookkeeping Account Balance. Distribution of the
value of a Participant's Bookkeeping Account Balance shall be in a lump sum or
in 60 equal monthly installments as specified on the Participant's Election
Form. If a payment form is not specified on an Election Form, a Participant's
Bookkeeping Account Balance shall be distributed as a lump sum. The selection of
a lump sum or installment payments must be made on a Participant's initial
Election Form and cannot be changed for future contributions and earnings
thereon.
6.02 Form of Distribution. All distributions of a Participant's
Bookkeeping Account shall be made in cash only.
6.03 Timing of Distribution. Distributions shall commence, or be paid in
a lump sum if so elected, as soon as administratively feasible after the earlier
of the date indicated on the Participant's Deferral Election Form or the
Participant's Termination of Service.
6.04 Death Prior to Distribution. In the event of a Participant's death
prior to the commencement of any distribution of payments hereunder, an amount
equal to the Participant's Bookkeeping Account Balance shall be paid to the
Participant's Beneficiary in a lump sum within 90 days after the Participant's
death.
6.05 Death of a Participant Subsequent to Commencement of Installment
Payments. In the event of the death of a Participant subsequent to commencement
of installment payments hereunder but prior to completion of such payments, the
installments shall continue and shall be paid to the designated Beneficiary as
if the Participant had survived.
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ARTICLE VII
UNFORESEEABLE FINANCIAL EMERGENCY
7.01 Unforeseeable Financial Emergency. At the request of a Participant
or at the request of any of the Participant's Beneficiaries after the
Participant's death, the Plan Administrator may, in its sole discretion,
accelerate and pay all or part of the value of a Participant's Bookkeeping
Account Balance in the event of an unforeseeable Financial Emergency. An
accelerated distribution must be limited to only that amount necessary to
relieve the financial emergency.
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ARTICLE VIII
BENEFICIARY
8.01 Beneficiary Designation. A Participant shall designate a
Beneficiary to receive benefits under the Plan on the Beneficiary Designation
Form provided by the Plan Administrator. If more than one Beneficiary is named,
the share and/or precedence of each Beneficiary shall be indicated. A
Participant shall have the right to change the Beneficiary by submitting to the
Plan Administrator a new Beneficiary Designation Form.
8.02 Proper Beneficiary. If the Plan Administrator has any doubt as to
the proper Beneficiary to receive payments hereunder, the Plan Administrator
shall have the right to withhold such payments until the matter is finally
adjudicated. However, any payment made by the Plan Administrator, in good faith
and in accordance with this Plan, shall fully discharge the Company from all
further obligations with respect to that payment.
8.03 Minor or Incompetent Beneficiary. In making any payments to or for
the benefit of any minor or an incompetent Beneficiary, the Plan Administrator,
in its sole and absolute discretion, may make a distribution to a legal or
natural guardian or other relative of a minor or court appointed committee of
such incompetent. Alternatively, it may make a payment to any adult with whom
the minor or incompetent temporarily or permanently resides. The receipt by a
guardian, committee, relative or other person shall be a complete discharge to
the Company. Neither the Company nor the Plan Administrator shall have any
responsibility to see to the proper application of any payments so made.
8.04 No Beneficiary Designation. If a Participant fails to designate a
Beneficiary as provided in Section 8.01 above, or if all designated
Beneficiaries predecease the Participant or die prior to complete distribution
of the Participant's benefits, then the Participant's designated Beneficiary
shall be deemed to be his or her surviving spouse. If the Participant has no
surviving spouse, the benefits remaining under the Plan to be paid to a
Beneficiary shall be payable to the executor or personal representative of the
Participant's estate.
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ARTICLE IX
ADMINISTRATION OF THE PLAN
9.01 Majority Vote. All resolutions or other actions taken by the
Committee shall be by vote of a majority of those present at a meeting at which
a majority of the members are present, or in writing by all the members at the
time in office if they act without a meeting.
9.02 Finality of Determination. Subject to the Plan, the Committee
shall, from time to time, establish rules, forms and procedures for the
administration of the Plan. Except as herein otherwise expressly provided, the
Committee shall have the exclusive right to interpret the Plan and to decide any
and all matters arising thereunder or in connection with the administration of
the Plan, and it shall endeavor to act, whether by general rules or by
particular decisions, so as not to discriminate in favor of or against any
person. The decisions, actions and records of the Committee shall be conclusive
and binding upon the Company and all persons having or claiming to have any
right or interest in or under the Plan, and cannot be overruled by a court of
law unless arbitrary or capricious.
9.03 Certificates and Reports. The members of the Committee and the
officers and directors of the Company shall be entitled to rely on all
certificates and reports made by any duly appointed accountants, and on all
opinions given by any duly appointed legal counsel, which legal counsel may be
counsel for the Company.
9.04 Indemnification and Exculpation. The Company shall indemnify and
hold harmless each current and former member of the Committee and each current
and former member of the Board in accordance with the bylaws of the Company.
9.05 Expenses. The expenses of administering the Plan shall be borne by
the Company.
9.06 FICA and Other Taxes. For each Plan Year in which an Annual
Deferral Amount is being withheld or a Company Contribution becomes vested, the
Company shall ratably withhold from that portion of the Participant's salary
that is not being deferred, the Participant's share of FICA and other employment
taxes.
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ARTICLE X
CLAIMS PROCEDURE
10.01 Written Claim. Benefits shall be paid in accordance with the
provisions of this Plan. The Participant, or a designated recipient or any other
person claiming through the Participant shall make a written request for
benefits under this Plan. This written claim shall be mailed or delivered to the
Plan Administrator. Such claim shall be reviewed by the Plan Administrator or a
delegate.
10.02 Denied Claim. If the claim is denied, in full or in part, the Plan
Administrator shall provide a written notice within ninety (90) days setting
forth the specific reasons for denial, and any additional material or
information necessary to perfect the claim, and an explanation of why such
material or information is necessary, and appropriate information and
explanation of the steps to be taken if a review of the denial is desired.
10.03 Review Procedure. If the claim is denied and a review is desired,
the Participant (or Beneficiary) shall notify the Plan Administrator in writing
within sixty (60) days after receipt of the written notice of denial. In
requesting a review, the Participant or Beneficiary may request a review of
pertinent documents with regard to the benefits created under this agreement,
may submit any written issues and comments, may request an extension of time for
such written submission of issues and comments, and may request that a hearing
be held, but the decision to hold a hearing shall be within the sole discretion
of the Committee.
10.04 Committee Review. The decision on the review of the denied claim
shall be rendered by the Committee within sixty (60) days after the receipt of
the request for review (if no hearing is held) or within sixty (60) days after
the hearing if one is held. The decision shall be written and shall state the
specific reasons for the decision including reference to specific provisions of
this Plan on which the decision is based.
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ARTICLE XI
NATURE OF COMPANY'S OBLIGATION
11.01 Company's Obligation. The Company's obligations under this Plan
shall be an unfunded and unsecured promise to pay. The Company shall not be
obligated under any circumstances to fund its financial obligations under this
Plan.
11.02 Creditor Status. Any assets which the Company may acquire or set
aside to help cover its financial liabilities are and must remain general assets
of the Company subject to the claims of its creditors. Neither the Company nor
this Plan gives a Participant or Beneficiary any beneficial ownership interest
in any asset of the Company. All rights of ownership in any such assets are and
remain in the Company. All Plan Participants and Beneficiaries shall be
unsecured general creditors of the Company.
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<PAGE>
ARTICLE XII
MISCELLANEOUS
12.01 Written Notice. Any notice which shall be or may be given under
the Plan shall be in writing and shall be mailed by United States mail, postage
prepaid. If notice is to be given to the Company, such notice shall be addressed
to the Plan Administrator at Churchill Downs Incorporated. If notice is to be
given to the Participant, such notice shall be sent to the Participant's last
known address.
12.02 Change of Address. Any party may, from time to time, change the
address to which notices shall be mailed by giving written notice of such new
address.
12.03 Merger, Consolidation or Acquisition. The Plan shall be binding
upon the Company, its assigns, and any successor to the Company which shall
succeed to substantially all of its assets and business through merger,
acquisition or consolidation, and upon a Participant, a Beneficiary, assigns,
heirs, executors and administrators.
12.04 Amendment and Termination. The Company retains the sole and
unilateral right to terminate, amend, modify, or supplement this Plan, in whole
or part, at any time. However, no Company action under this right shall reduce
the Bookkeeping Account Balance of any Participant or Beneficiary not yet in
payment status or reduce benefits that are in payment status.
12.05 Employment. This Plan does not provide a contract of employment
between the Company and the Participant.
12.06 Non-transferability. Except insofar as prohibited by applicable
law, no sale, transfer, alienation, assignment, pledge, collateralization or
attachment of any benefits under this Plan shall be valid or recognized by the
Company. Neither the Participant, spouse, or designated Beneficiary shall have
any power to hypothecate, mortgage, commute, modify, or otherwise encumber in
advance of any of the benefits payable hereunder, nor shall any of said benefits
be subject to seizure for the payment of any debts, judgments, alimony
maintenance, owed by the Participant or Beneficiary, or be transferable by
operation of law in the event of bankruptcy, insolvency, or otherwise.
12.07 Legal Fees. All reasonable legal fees incurred by any Participant
(or former Participant or Beneficiary) to successfully enforce valid rights
under this Plan shall be paid by the Company in addition to sums due under this
Plan.
12.08 Tax Withholding. The Company may withhold from a payment any
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federal, state, or local taxes required by law to be withheld with respect to
such payment and such sum as the Company may reasonably estimate as necessary to
cover any taxes for which the Company may be liable and which may be assessed
with regard to such payment.
12.09 Acceleration of Payment. The Company reserves the right to
accelerate the payment of any benefits payable under this Plan at any time
without the consent of the Participant, the Participant's estate, a Beneficiary
or any other person claiming through the Participant.
12.10 Applicable Law. This Plan shall be governed by the laws of the
Commonwealth of Kentucky.
IN WITNESS WHEREOF, the Company has caused this instrument to be
executed by its duly authorized officer on this ________ day of
_________________, 1999, effective as of the 1st day of __________________,
1999.
CHURCHILL DOWNS INCORPORATED
By:/s/Thomas H. Meeker
- ---------------------------------------
Thomas H. Meeker
President and Chief Executive Officer
ATTEST:
By:_____________________________________
[SEAL]
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<PAGE>
EXHIBIT 23
We consent to the incorporation by reference in the registration
statements of Churchill Downs Incorporated on Forms S-8 (File Nos. 33-85012,
333-62013, and 33-61111) of our report, dated February 24, 1999 on our audits of
the consolidated financial statements and consolidated financial statement
schedule of Churchill Downs Incorporated as of December 31, 1998, 1997 and 1996
and for each of the three years then ended which report is included in this
Annual Report on Form 10-K.
/s/ PricewaterhouseCoopersC
PricewaterhouseCoopers LLP
Louisville, Kentucky
March 29, 1999
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