SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 10, 1999
Commission File Number 0-1469
CHURCHILL DOWNS INCORPORATED
(Exact name of registrant as specified in its charter)
Kentucky 61-0156015
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
700 Central Avenue, Louisville, KY 40208 (Address
of principal executive offices)
(Zip Code)
(502) 636-4400
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name or former address, if changed since last report)
1
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
A. FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
Report of Independent Public Accountants
To The Board of Directors and Stockholders of
Hollywood Park, Inc.:
We have audited the accompanying combined balance sheets of the
Hollywood Park Race Track and Casino, combined on the basis described in Note 2,
to be acquired by Churchill Downs, Inc. from Hollywood Park, Inc. (the
"Parent"), pursuant to the purchase agreement dated May 5, 1999, as of December
31, 1998 and 1997, and the related combined statements of operations, Parent's
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of Hollywood Park,
Inc.'s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of the Hollywood Park
Race Track and Casino as of December 31, 1998, and 1997, 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.
ARTHUR ANDERSEN LLP
Los Angeles, California
June 9, 1999
2
<PAGE>
HOLLYWOOD PARK RACE TRACK AND CASINO
Combined Balance Sheets
As of
December 31,
1998 1997
---- ----
Assets
Current Assets:
Cash and cash equivalents $ 2,241,951 $ 3,788,016
Restricted cash 287,518 407,241
Other receivables, net allowance
for bad debts of $916,916
in 1998 and $557,336 in 1997 7,391,583 6,680,902
Intercompany receivable 6,202,692 -
Prepaid expenses and other assets 2,558,380 3,005,197
------------ ------------
Total current assets 18,682,124 13,881,356
Property, plant and equipment, net 75,626,084 78,220,360
Goodwill, net 19,286,227 19,825,171
Long term gaming assets 1,260,417 1,764,584
Other assets 18,401 20,398
------------ ------------
$114,873,253 $113,711,869
============ ============
Liabilities and Parent's Equity
Current Liabilities:
Accounts payable $ 5,704,233 $ 5,625,780
Intercompany payable - 9,137,382
Accrued liabilities 6,108,774 7,218,328
Accrued workers' compensation 2,356,266 2,176,827
Accrued slip and fall claims 1,176,693 1,255,442
Gaming liabilities 2,444,371 2,459,881
Amounts due to horsemen for purses,
stakes and awards - 278,356
Outstanding pari-mutuel tickets 1,850,288 3,245,466
Current portion of notes payable 37,309 36,018
Income taxes payable 16,232,324 11,259,411
------------ ------------
Total current liabilities 35,910,258 42,692,891
Notes payable 227,679 255,923
Deferred tax liabilities, net 4,934,437 5,115,886
------------ ------------
Total liabilities 41,072,374 48,064,700
Parent's Equity:
Common stock-$.10 par value, authorized 100 shares;
100 issued and outstanding in 1998 and in 1997 10 10
Capital in excess of par 990 990
Accumulated earnings 73,799,879 65,646,169
------------ ------------
Total Parent's equity 73,800,879 65,647,169
------------ ------------
$114,873,253 $113,711,869
============ ============
See accompanying notes to combined financial statements.
3
<PAGE>
HOLLYWOOD PARK RACE TRACK AND CASINO
Combined Statements of Operations
For the years ended December 31,
1998 1997 1996
Revenues:
Pari-mutuel commissions $39,524,470 $40,412,063 $40,735,953
Gaming-Casino 46,254,519 50,816,983 50,271,952
Admissions, programs,
and other racing income 15,099,076 16,635,495 17,422,226
Concession sales 11,008,599 11,601,280 11,557,248
Other income 2,863,941 2,333,206 2,282,324
----------- ----------- -----------
114,750,605 121,799,027 122,269,703
----------- ----------- -----------
Expenses:
Operating expenses 88,670,970 92,717,751 91,499,991
Depreciation and amortization 8,410,852 8,437,757 8,306,739
----------- ----------- -----------
Operating expenses 97,081,822 101,155,508 99,806,730
----------- ----------- -----------
Selling, general and administrative 6,676,729 6,586,853 8,194,726
----------- ----------- -----------
Operating income 10,992,054 14,056,666 14,268,247
Interest expense 23,048 25,156 27,101
----------- ----------- -----------
Income before income taxes 10,969,006 14,031,510 14,241,146
Income tax expense 4,791,464 6,103,638 6,142,480
----------- ----------- -----------
Net income $6,177,542 $7,927,872 $8,098,666
=========== =========== ===========
See accompanying notes to combined financial statements.
4
<PAGE>
HOLLYWOOD PARK RACE TRACK AND CASINO
Combined Statements of Cash Flows
For the years ended December 31, 1998, 1997, and 1996
Balance as of December 31, 1996 $ 57,719,297
Net income 7,927,872
------------
Balance as of December 31, 1997 65,647,169
Net income 6,177,542
Capital contribution 1,976,168
------------
Balance as of December 31, 1998 $ 73,800,879
============
See accompanying notes to combined financial statements.
5
<PAGE>
HOLLYWOOD PARK RACE TRACK AND CASINO
Combined Statements of Cash Flows
For the years ended December 31,
1998 1997 1996
Cash flows from operating activities:
Net income $6,177,542 $7,927,872 $8,098,666
Adjustments to reconcile net income
to net cash provided by
operating activities:
Taxes and licenses 504,167 504,166 1,035,417
Depreciation and Amortization 8,410,852 8,437,757 8,306,739
Changes in assets and liabilities:
Decrease (increase) in restricted cash 119,723 4,078,752 (3,841,535)
Decrease in short term investments - - 1,942,716
(Increase) decrease in other
receivables, net (710,681) (1,213,922) 560,564
Decrease (increase) in prepaid
expenses and other assets 446,817 (390,111) 1,561,985
Increase (decrease) in accounts
payable 78,453 178,271 (1,132,946)
(Decrease) increase in accrued
liabilities (1,109,554) (805,029) 325,088
Increase (decrease) in accrued
workers' compensation 179,439 210,165 (310,659)
(Decrease) increase in slip and
fall claims (78,749) (462,927) 175,326
(Decrease) in accrued gaming
liabilities (15,510) (38,773) (1,499,278)
(Decrease) increase in amounts due
to horsemen for purses, stakes and
awards (278,356) (4,075,426) 3,645,085
(Decrease) increase in outstanding
pari-mutuel tickets (1,395,178) 2,086,898 (1,366,633)
Increase in income taxes payable 4,972,913 5,424,476 5,834,935
(Decrease) increase in deferred tax
liabilities, net (181,449) 679,162 307,545
------------ ------------ -----------
Net cash provided by operating
activities 17,120,429 22,541,331 23,643,015
------------ ------------ -----------
Cash flows from investing activities:
Additions to property, plant and
equipment (3,301,464) (3,336,628) (4,596,255)
Other assets 1,997 4,003 1,999
------------ ------------ -----------
Net cash used in investing activities (3,299,467) (3,332,625) (4,594,256)
------------ ------------ -----------
Cash flows from financing activities:
Increase in intercompany receivable,
net (15,340,074) (19,317,848) (21,795,049)
Payment of unsecured notes payable,
net (26,953) (24,844) (22,899)
Long term gaming liabilities - - (500,000)
------------ ------------ -----------
Net cash used for financing
activities (15,367,027) (19,342,692) (22,317,948)
------------ ------------ -----------
Decrease in cash and cash equivalents (1,546,065) (133,986) (3,269,189)
Cash and cash equivalents at the
beginning of the period 3,788,016 3,922,002 7,191,191
------------ ------------ -----------
Cash and cash equivalents at the
end of the period $2,241,951 $3,788,016 $3,922,002
============ ============ ===========
Supplemental disclosure of non-cash transactions:
Contribution of capital $1,976,168 - -
Supplemental disclosure of cash flow information:
Cash paid during the year for
interest $ 23,000 $ 25,000 $ 27,000
Cash paid during the year for
income taxes $ - $ - $ -
See accompanying notes to combined financial statements.
6
<PAGE>
HOLLYWOOD PARK RACE TRACK AND CASINO
Notes to Combined Financial Statements
1. Basis of Presentation
On May 5, 1999, Hollywood Park, Inc. ("Hollywood Park" or the "Parent") and
Churchill Downs, Inc. ("Churchill Downs") signed a definitive agreement for
Churchill Downs to acquire the Hollywood Park Race Track in Inglewood,
California, along with 240 acres of surrounding land, and the Hollywood Park
Casino. The Hollywood Park Race Track and Hollywood Park Casino will be sold to
Churchill Downs for purchase prices totaling $140 million in cash. The
transaction is subject to certain closing conditions, including the approval of
the California Horse Racing Board, and is expected to close in the third quarter
of 1999. Churchill Downs will grant Hollywood Park a long-term lease with a
renewal option at a lease rate of $3 million per year for the Hollywood Park
Casino.
2. Summary of Significant Accounting Policies
Principles of Combination
These combined financial statements have been prepared from Hollywood Park's
historical accounting records and present operations of the businesses that will
be acquired by Churchill Downs as if the Company had been a separate entity for
all periods presented. These combined financial statements principally include
the accounts of the Hollywood Park Operating Company (the "HPOC"), a Delaware
corporation, and its two wholly owned subsidiaries, Hollywood Park Food
Services, Inc. and Hollywood Park Fall Operating Company, and the Hollywood Park
Casino which is a division of Hollywood Park, Inc. (collectively referred to as
the "Hollywood Park Race Track and Casino" or the "Company"). Long-term debt
historically recorded on HPOC's books, consisting of $125 million in 9.5% Notes
which were co-issued in August 1997 by Hollywood Park and HPOC, and related
interest expense, have been excluded from the combined financial statements
because the proceeds of the notes were used to fund other businesses of the
Parent. All significant intercompany accounts and transactions have been
eliminated in the preparation of these combined financial statements. The
financial information included herein may not necessarily reflect the combined
results of operations, financial position, changes in Parent's equity and cash
flows of the Company in the future or what they would have been had it been a
separate, stand-alone entity during the periods presented.
Acquisition of Pacific Casino Management, Inc.
The Hollywood Park Casino was opened by the Parent in July 1994 under a third
party leasing arrangement with Pacific Casino Management, Inc. ("PCM"). On
November 17, 1995, Hollywood Park acquired substantially all of the assets,
property and business of PCM, and assumed substantially all of PCM's
liabilities. Prior to the acquisition, under a lease with the Company, PCM
operated the gaming floor activities of the Hollywood Park Casino. The purchase
price of PCM's net assets was an aggregate $2,640,000, payable in shares of
Hollywood Park, Inc. common stock, in three installments: (i) shares of
Hollywood Park common stock, having a value of $1,600,000, or 136,008 common
shares, issued on November 17, 1995, (ii) shares of Hollywood Park common stock,
having a value of $540,000, or 48,674 common shares, issued on November 19, 1996
and (iii) shares of Hollywood Park common stock, having a value of $500,000, or
33,417 common shares, issued on February 10, 1997. Virtually all of the
approximately $21,568,000 of excess acquisition cost over the recorded value of
the net assets acquired from PCM was allocated to goodwill and is being
amortized over 40 years. The amortization of the goodwill is not deductible for
income tax purposes.
7
<PAGE>
HOLLYWOOD PARK RACE TRACK AND CASINO
Notes to Combined Financial Statements (continued)
2. Summary of Significant Accounting Policies (cont'd)
Restricted Cash
Restricted cash as of December 31, 1998 and 1997, was for amounts due to
horsemen for purses, stakes and awards.
Racing Revenues and Expenses
The Company records pari-mutuel revenues, admissions, food and beverage and
other racing income associated with racing on a daily basis, except for prepaid
admissions, which were recorded ratably over the racing season. Expenses
associated with racing revenues were charged against income in those periods in
which the racing revenues are recognized. Other expenses were recognized as they
occurred throughout the year.
Gaming-Casino Revenue and Promotional Allowances
Gaming-Casino gaming revenues consisted of fees collected from patrons on a per
seat or per hand basis. Revenues in the accompanying statements of operations
exclude the retail value of food and beverage provided to card players on a
complimentary basis. The estimated cost of providing these promotional
allowances during the years ended December 31, 1998, 1997, and 1996 was
approximately $554,000, $945,000, and $1,316,000, respectively.
Property, Plant and Equipment
Property, plant and equipment are depreciated on the straight line method over
their estimated useful lives as follows:
Years
Land improvements 3 to 25
Buildings 5 to 40
Equipment 3 to 10
Maintenance and repairs were charged to operations of facilities; betterments
were capitalized. The cost of property sold or otherwise disposed of and the
accumulated depreciation were eliminated from both the property and accumulated
depreciation accounts with any gain or loss recorded in the expense accounts.
Property, plant and equipment is carried on the Company's balance sheets at
depreciated cost. Whenever there are recognized events or changes in
circumstances that affect the carrying amount of the property, plant and
equipment, management reviews the assets for possible impairment.
8
<PAGE>
HOLLYWOOD PARK RACE TRACK AND CASINO
Notes to Combined Financial Statements (continued)
2. Summary of Significant Accounting Policies (cont'd)
Income Taxes
The Company accounts for income taxes under Statement of Financial Accounting
Standards ("SFAS") 109, Accounting for Income Taxes, whereby deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under SFAS 109, the effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
included the enactment date.
Cash Flows
Cash and cash equivalents consisted of cash, certificates of deposit and short
term investments with original maturities of 90 days or less.
Accounting Pronouncements
Segment Information
Statement of Financial Accounting Standards No. 131 Disclosures about Segments
of an Enterprise and Related Information ("SFAS No. 131") was effective for
years after December 31, 1997, and has been adopted by the Company for all
periods presented in these combined financial statements. SFAS No. 131
establishes revised guidelines for public companies in determining operating
segments based on those used for internal reporting to management. Based on
these guidelines, Hollywood Park reports information under a single gaming
segment.
Long-lived Assets
The Company periodically reviews the propriety of the carrying amount of
long-lived assets and the related intangible assets as well as the related
amortization period to determine whether current events or circumstances warrant
adjustments to the carrying value and/or the estimates of useful lives. This
evaluation consists of the Company's projection of the undiscounted operating
income before depreciation, amortization and interest over the remaining lives
of the excess costs, in accordance with FASB Statement No. 121 Accounting for
the Impairment of Long-Lived Assets to Be Disposed Of. Based on its review, the
Company believes that as of December 31, 1998, there were no significant
impairments of its long-lived assets or related intangible assets.
Start-Up Costs
The Company's policy has been to expense start-up costs as incurred. In April
1998, Statement of Position 98-5 Reporting on the Costs of Start-Up Activities
was issued and was effective for years after December 31, 1998. Statement of
Position 98-5 required that start-up activities and organizational costs be
expensed as incurred. The adoption of Statement of Position 98-5 did not have an
impact on the financial statements of the Company.
9
<PAGE>
HOLLYWOOD PARK RACE TRACK AND CASINO
Notes to Combined Financial Statements (continued)
2. Summary of Significant Accounting Policies (cont'd)
Accounting Pronouncements (cont'd)
Derivative Instruments and Hedging Activities
In September 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 Accounting for Derivative Instruments and
Hedging Activities ("SFAS No.133"). The Company has not made such investments in
the past and does not expect to make such investments in the foreseeable future,
and thus SFAS No. 133 has no impact on the financial reporting of the Company.
SFAS No. 133 established accounting and reporting standards with respect to
recording derivative instruments on the balance sheet measured at its fair
value. SFAS No. 133, also sets reporting requirements for changes in the fair
value of a derivative, and for qualifying hedges. SFAS No. 133 will be effective
for accounting years beginning after June 15, 1999.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard's No. 130, Reporting Comprehensive Income
("SFAS No. 130"), which became effective for years beginning after December 31,
1997. The Company adopted SFAS No. 130 in 1998. SFAS No. 130 requires the
classification of other comprehensive income by its nature in a financial
statement, and to disclose the accumulated balance of other comprehensive
income separately in the shareholders' equity section of the balance sheet.
Interim Period Financial Statements
The combined interim financial statements have been prepared by the Company and
is unaudited, however, in the opinion of the Company, the interim data includes
all adjustments, consisting of only normal recurring adjustments necessary for a
fair statement of the results of cash flows for the interim period. The interim
results of operations are not indicative of the results for the full year, due
to the seasonality of the horse racing business.
3. Allowance for Bad Debts
Balance as of December 31, 1996 $1,088,510
Charges to expense 76,000
Write offs 607,174
----------
Balance as of December 31, 1997 557,336
Charges to expense 481,000
Write offs 121,420
----------
Balance as of December 31, 1998 $916,916
========
10
<PAGE>
HOLLYWOOD PARK RACE TRACK AND CASINO
Notes to Combined Financial Statements (continued)
4. Property, Plant and Equipment
Property, plant and equipment held at December 31, 1998, and 1997 consisted of
the following:
December 31,
1998 1997
Land and land improvements $12,251,511 $12,059,906
Buildings 119,470,712 117,472,053
Equipment 21,874,841 18,728,723
Construction in progress 449,244 509,845
----------- -----------
154,046,308 148,770,527
Less accumulated depreciation 78,420,224 70,550,167
----------- -----------
$75,626,084 $78,220,360
=========== ===========
5. Unsecured Notes Payable
Notes payable as of December 31, 1998, and 1997 consisted of the following:
December 31,
1998 1997
Unsecured note payable-Gold Cup $264,988 $291,941
Less current maturities 37,309 36,018
-------- --------
$227,679 $255,923
======== ========
The Company's Gold Cup note payable resulted from the $1,000,000 Gold Cup
Contest on July 20, 1986. The prize money is payable to the winner in 20 annual
installments of $50,000, beginning August 1, 1986. The remaining liability at
December 31, 1998 is net of unamortized discount at 8.5%.
6. Income Taxes
During the periods presented, the Company was included in the consolidated tax
returns of Hollywood Park, Inc. The Company has provided for income taxes as if
it were a stand-alone taxpayer, in accordance with SFAS No. 109. The Company was
part of the Hollywood Park tax group and therefore did not directly pay any
current taxes on a stand-alone basis.
11
<PAGE>
HOLLYWOOD PARK RACE TRACK AND CASINO
Notes to Combined Financial Statements (continued)
6. Income Taxes (cont'd)
The composition of the Company's income tax expense for the years ended December
31, 1998, 1997 and 1996 is as follows:
Current Deferred Total
YEAR ENDED DECEMBER 31, 1998:
U.S. Federal $3,879,000 $(141,000) $3,738,000
State 1,093,913 (40,449) 1,053,464
---------- ------------ ----------
$4,972,913 $(181,449) $4,791,464
========== ========== ==========
YEAR ENDED DECEMBER 31, 1997:
U.S. Federal $4,232,000 $530,000 $4,762,000
State 1,192,476 149,162 1,341,638
---------- --------- ----------
$5,424,476 $679,162 $6,103,638
========== ========= ==========
YEAR ENDED DECEMBER 31, 1996:
U.S. Federal $4,551,000 $240,000 $4,791,000
State 1,283,935 67,545 1,351,480
---------- -------- ----------
$5,834,935 $307,545 $6,142,480
========== ======== ==========
The following table reconciles the Company's income tax expense (based on its
effective tax rate) to the federal statutory tax rate of 35%:
1998 1997 1996
---- ---- ----
Income before income tax expense,
at the statutory rate $3,839,152 $4,911,029 $4,984,401
State taxes 593,477 806,251 818,296
Goodwill amortization 220,434 220,434 220,434
Political and lobbying costs 120,000 139,000 92,000
Other non-deductible expenses 18,401 26,924 27,349
--------- ---------- ----------
Income tax expense $4,791,464 $6,103,638 $6,142,480
========== ========== ==========
12
<PAGE>
HOLLYWOOD PARK RACE TRACK AND CASINO
Notes to Combined Financial Statements (continued)
6. Income Taxes (cont'd)
For the years ended December 31, 1998, and 1997, the tax effects of temporary
differences that gave rise to significant portions of the deferred tax assets
and deferred tax liabilities are presented below.
1998 1997
---- ----
CURRENT DEFERRED TAX ASSETS:
Workers' compensation insurance reserve $960,177 $887,056
General liability insurance reserve 479,502 511,593
Legal accrual 86,000 113,000
Vacation and sick pay accrual 291,149 250,117
Bad debt allowance 373,644 227,114
Other 36,555 76,656
-------- ---------
Current deferred tax assets 2,227,027 2,065,536
CURRENT DEFERRED TAX LIABILITIES:
Business insurance and other 134,000 134,000
--------- ----------
Net current deferred tax assets $2,093,027 $1,931,536
========== ==========
NON-CURRENT DEFERRED TAX LIABILITIES:
Depreciation 7,027,464 7,047,422
---------- ----------
Net non-current deferred tax liabilities $7,027,464 $7,047,422
========== ==========
7. Parent's Equity
The Parent owns 100% of the outstanding common stock of the HPOC. Divisional
equity of the Hollywood Park Casino is included in accumulated earnings in the
accompanying balance sheets.
8. Retirement Plans
The employees of the Company were included in the 401(k) Investment Plan of
Hollywood Park (the "401(k) Plan") which is subject to the provisions of the
Employee Retirement Income Security Act of 1994. The 401(k) Plan is open to all
employees of the Company (except those covered by collective bargaining
agreements) who have completed one year of service. Employees can contribute up
to 15% of pretax income (subject to legal limitation of $10,000 for 1998). The
Company offers a discretionary matching, and for the years ended December 31,
1998 and 1997 contributed $459,325 and $389,804, respectively. The Company did
not provide a matching contribution in 1996.
The Company's employees were also included in Hollywood Park's Pension Plan,
prior to its termination on January 31, 1997. The funds accumulated under the
Pension Plan were distributed to the Pension Plan participants. The Company also
contributed to several collectively-bargained multi-employer pension and
retirement plans which are administered by unions, and to a pension plan
covering non-union employees which is administered by an association of race
track owners. Amounts charged to pension cost and contributed to these plans for
the years ended December 31, 1998, 1997 and 1996 totaled $1,689,757, $1,842,127,
and $1,872,674, respectively. Contributions to the collectively-bargained plans
were determined in accordance with the provisions of negotiated labor contracts
and generally are based on the
13
<PAGE>
HOLLYWOOD PARK RACE TRACK AND CASINO
Notes to Combined Financial Statements (continued)
8. Retirement Plans (cont'd)
number of employee hours or days worked. Contributions to the non-union plans
are based on the covered employees' compensation. Information from the plans
administrators was not available to permit the Company to determine its share of
unfunded vested benefits or prior service liability. It is the opinion of
management that no material liability exists.
9. Related Party Transactions
The Company is guarantor on both the Hollywood Park, Inc. $125,000,000 aggregate
principal amount of 9.5% Notes issued on August 6, 1997 and the Hollywood Park,
Inc. $350,000,000 aggregate principal amount of 9.25% Notes issued on February
18, 1999.
The Parent pays for various expenses, including legal and insurance premiums on
the Company's behalf. This activity is included in operating and selling,
general and administrative expenses and the net intercompany receivable
(payable) in the accompanying combined financial statements.
10. Commitments and Contingencies
Lease Obligations
The Company leases certain equipment primarily for use in racing operations
(pari-mutuel wagering equipment) and general office equipment. Minimum lease
payments required under operating leases that have initial terms in excess of
one year as of December 31, 1998 are approximately $678,000 in 1999 and annually
thereafter. Total rent expense for these long term lease obligations for the
years ended December 31, 1998, 1997 and 1996 was $769,194, $834,150 and
$817,564, respectively.
Litigation
The Company is a defendant in various litigation in the normal course of
business. Although the outcome of litigation cannot be predicted with certainty,
in the opinion of management, based on the facts known at this time, the
resolution of such litigation is not anticipated to have a material adverse
effect on the financial position or results of operations of the Company.
14
<PAGE>
HOLLYWOOD PARK RACE TRACK AND CASINO
Combined Balance Sheets
As of
June 30,
1999
----------------
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 8,335,320
Restricted cash 12,301,629
Other receivables, net allowance for bad debts 7,536,111
Intercompany receivable 20,216,612
Prepaid expenses and other assets 2,511,611
------------
Total current assets 50,901,283
Property, plant and equipment, net 72,964,081
Goodwill, net 19,016,755
Long term gaming assets 1,008,334
Other assets 17,400
------------
$143,907,853
See accompanying notes to combined financial statements.
15
<PAGE>
HOLLYWOOD PARK RACE TRACK AND CASINO
Combined Balance Sheets
As of
June 30,
1999
------------
(Unaudited)
Liabilities and Parent's Equity
Current Liabilities:
Accounts payable $ 6,110,356
Accrued liabilities 8,243,382
Accrued workers' compensation 2,576,644
Accrued slip and fall claims 1,182,941
Gaming liabilities 2,624,143
Amounts due to horsemen for purses, stakes and awards 14,162,570
Outstanding pari-mutuel tickets 2,214,020
Current portion of notes payable 48,187
Income taxes payable 21,220,001
------------
Total current liabilities 58,382,244
Notes payable 177,679
Deferred tax liabilities, net 4,843,713
------------
Total liabilities 63,403,636
Parent's Equity:
Common stock - $.10 par value, authorized 100 shares;
100 issued and outstanding in 1998 10
Capital in excess of par 990
Accumulated earnings 80,503,217
------------
Total Parent's equity 80,504,217
------------
$143,907,853
============
See accompanying notes to combined financial statements.
16
<PAGE>
HOLLYWOOD PARK RACE TRACK AND CASINO
Combined Statements of Earnings
For the
six months ended
June 30,
--------------------------
1999 1998
------------ ----------
(Unaudited)
REVENUES:
Pari-mutuel commissions $22,644,404 $21,312,518
Gaming - Casino 24,253,671 23,116,915
Admissions, programs, and other
racing income 8,830,425 8,085,314
Concession sales 5,740,125 5,743,306
Other income 1,757,698 1,715,264
----------- -----------
63,226,323 59,973,317
----------- -----------
EXPENSES:
Operating expenses 44,022,701 44,200,777
Depreciation and amortization 4,286,367 4,207,807
----------- -----------
Operating expenses 48,309,068 48,408,584
Selling, general and administrative 3,316,964 3,080,221
----------- -----------
Total expenses 51,626,032 51,488,805
----------- -----------
Income before income taxes 11,600,291 8,484,512
Income tax expense 4,896,953 3,627,397
----------- -----------
Net income $ 6,703,338 $ 4,857,115
=========== ===========
See accompanying notes to combined financial statements.
17
<PAGE>
HOLLYWOOD PARK RACE TRACK AND CASINO
Combined Statements of Cash Flows
For the
six months ended
June 30,
--------------------------
1999 1998
--------------------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,703,338 $4,857,115
Adjustments to reconcile net income to net
cash provided by operating activities:
Taxes and licenses 252,083 252,084
Depreciation and Amortization 4,286,367 4,207,807
Changes in assets and liabilities:
Increase in restricted cash (12,014,111) (5,771,211)
Increase in other receivables, net (144,528) (2,303,590)
Decrease (increase) in prepaid expenses and
other assets 46,769 (660,380)
Increase in accounts payable 406,123 3,339,556
Increase (decrease) in accrued liabilities 2,134,608 (108,859)
Increase (decrease) in accrued workers' compensation 220,378 (88,003)
Increase (decrease) in slip and fall claims 6,248 (47,836)
Increase (decrease) in accrued gaming liabilities 179,772 (16,929)
Increase in amounts due to horsemen for purses,
stakes and awards 14,162,570 12,504,063
Increase (decrease) in outstanding pari-mutuel
tickets 363,732 (1,057,252)
Increase in income taxes payable 4,987,677 3,718,122
Decrease in deferred tax liabilities, net (90,724) (90,724)
------------ -----------
Net cash provided by operating activities 21,500,302 18,733,963
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,354,892) (1,264,873)
Decrease (increase) in other assets 1,001 (59,003)
------------ -----------
Net cash used in investing activities (1,353,891) (1,323,876)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in intercompany receivable, net (14,013,920) (4,544,753)
Payment of unsecured notes payable, net (39,122) (38,018)
------------ -----------
Net cash used for financing activities (14,053,042) (4,582,771)
------------ -----------
Increase in cash and cash equivalents 6,093,369 12,827,316
Cash and cash equivalents at the beginning of
the period 2,241,951 3,788,016
------------ -----------
Cash and cash equivalents at the end of the
period $ 8,335,320 $16,615,332
=========== ===========
See accompanying notes to combined financial statements.
18
<PAGE>
HOLLYWOOD PARK RACE TRACK AND CASINO
Combined Statements of Cash Flows (Continued)
For the
six months ended
June 30,
--------------------------
1999 1998
----------- -----------
(Unaudited)
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING TRANSCATIONS:
Contribution of capital $ - $ 1,970,917
=========== ===========
See accompanying notes to combined financial statements.
19
<PAGE>
HOLLYWOOD PARK RACE TRACK AND CASINO
Notes to Combined Financial Statements (Unaudited)
NOTE 1 - BASIS OF PRESENTATION
These combined financial statements principally include the accounts of the
Hollywood Park Operating Company (the "HPOC"), a Delaware corporation, and its
two wholly owned subsidiaries, Hollywood Park Food Services, Inc. and Hollywood
Park Fall Operating Company, and the Hollywood Park Casino which is a division
of Hollywood Park, Inc. (collectively referred to as the "Hollywood Park Race
Track and Casino" or the "Company"). These combined financial statements have
been prepared from the historical accounting records of Hollywood Park, Inc. and
present operations of the businesses that were acquired by Churchill Downs
Incorporated ("Churchill Downs") as if the Company had been a separate entity
for all periods presented.
Long-term debt historically recorded on HPOC's books, consisting of $125 million
in 9.5% Notes which were co-issued in August 1997 by Hollywood Park, Inc. and
HPOC, and related interest expense, have been excluded from the combined
financial statements because the proceeds of the notes were used to fund other
businesses of Hollywood Park, Inc. All significant intercompany accounts and
transactions have been eliminated in the preparation of these combined financial
statements. The financial information included herein may not necessarily
reflect the combined results of operations, financial position, and cash flows
of the Company in the future or what they would have been had it been a
separate, stand-alone entity during the periods presented.
The combined interim financial statements have been prepared by the Company and
are unaudited. In the opinion of management, the interim data includes all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair statement of the financial position and results of operations and cash
flows of the Company for the interim period. The interim results of operations
are not indicative of the results for the full year due to the seasonality of
the horse racing business. These combined interim financial statements are based
on, and should be read in conjunction with, the historical combined financial
statements and the related notes thereto of the Hollywood Park Race Track and
Casino included in this Form 8-K/A.
NOTE 2 - SUBSEQUENT EVENT
On September 10, 1999, Churchill Downs acquired from Hollywood Park, Inc. the
Hollywood Park Race Track and the Casino in Inglewood, California, including
approximately 240 acres of land upon which the racetrack and casino are located.
The purchase price was approximately $142.5 million including acquisition costs
of approximately $2.5 million. The Company will lease the Hollywood Park Casino
to Hollywood Park, Inc. under a ten-year lease with one ten-year renewal option.
The lease provides for annual rent of $3.0 million, subject to adjustment during
the renewal period.
20
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
B. PRO FORMA FINANCIAL INFORMATION
CHURCHILL DOWNS INCORPORATED
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed balance sheet was derived from our
unaudited consolidated balance sheet and the unaudited balance sheet of
Hollywood Park Race Track and Casino ("Hollywood Park") as of June 30, 1999. The
unaudited pro forma condensed statements of earnings for the six-month periods
ended June 30, 1999 and 1998 were derived from our unaudited consolidated
statements of earnings, the unaudited statements of earnings of Hollywood Park
for the six-month periods ended June 30, 1999 and 1998, the unaudited statements
of earnings for Calder Race Course, Inc. ("Calder") and Tropical Park, Inc
("Tropical") (which together comprise Calder Race Course) for the period from
January 1, 1999 through April 23, 1999 and for the six-month period ended June
30, 1998 and the unaudited statement of earnings of Racing Corporation of
America (Ellis Park) for the period from January 1, 1998 through April 21, 1998.
The unaudited pro forma condensed statement of earnings for the year ended
December 31, 1998 was derived from our audited consolidated statement of
earnings for the year ended December 31, 1998, the audited statements of
earnings of Hollywood Park, Calder and Tropical for the year ended December 31,
1998 and the unaudited statement of earnings of Ellis Park for the period from
January 1, 1998 through April 21, 1998. The unaudited pro forma financial
statements reflect the pro forma effects of the acquisitions of Hollywood Park,
Calder, Tropical, and Ellis Park, as well as our new credit agreement. These
unaudited pro forma financial statements give effect to the acquisitions and the
new credit agreement as if they had occurred on January 1, 1998 for the
statements of earnings and June 30, 1999 for the balance sheet. The statements
do not purport to represent what our results of operations or financial position
actually would have been if the acquisitions and the new credit agreement had
occurred on or as of such dates and are not necessarily indicative of future
operating results or financial position. The unaudited pro forma condensed
consolidated financial statements are based upon, and should be read in
conjunction with, the historical consolidated financial statements of Churchill
Downs Incorporated, including notes thereto, included in its report on Form 10-K
for the year ended December 31, 1998 and its unaudited interim financial
statements including notes thereto, included in its report on Form 10-Q for the
quarterly period ended June 30, 1999, the financial statements including notes
thereto of Calder Race Course and Ellis Park included in our Forms 8-K/A dated
June 18, 1999 and December 21, 1998, respectively, and the audited annual
financial statements and the unaudited interim financial statements of Hollywood
Park, and the notes thereto included in this Form 8-K/A.
The acquisitions of Hollywood Park, Calder Race Course and Ellis Park have been
accounted for using the purchase method of accounting. Under the purchase method
of accounting, the purchase price is allocated to the fair value of the tangible
and identifiable intangible assets acquired and liabilities assumed. The pro
forma adjustments related to the Hollywood Park acquisition are based on
preliminary assumptions of the allocation of the purchase price and are subject
to revision once appraisals, evaluations and other studies of the fair value of
assets acquired and liabilities assumed are completed. Actual purchase
accounting adjustments related to Hollywood Park may differ from the pro forma
adjustments presented herein.
21
<PAGE>
Unaudited Pro Form Condensed Consolidated Balance Sheet
June 30, 1999
(in thousands)
<TABLE>
<CAPTION>
Pro Forma
Churchill Hollywood Adjustments Pro Forma
Downs Park and Churchill
Historical Historical Eliminations(1) Downs
---------- ---------- --------------- ---------
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 21,927 $ 8,335 $ (8,335)(2) $ 21,927
Accounts receivable 14,653 27,753 (27,753)(2) 14,653
Other current assets 1,670 14,813 (14,504)(2) 1,979
---------- ---------- ----------- ---------
Total current assets 38,250 50,901 (50,592) 38,559
Other assets 8,947 1,026 (1,026)(2) 8,947
Plant and equipment, net 133,461 72,964 (4,569)(2)
73,846 (3) 275,702
Intangibles, net of amortization 62,269 19,017 (19,017)(2) 62,269
---------- ---------- ----------- ---------
Total assets $ 242,927 $ 143,908 $ (1,358) $385,477
========== ========== =========== =========
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 14,718 $ 6,110 $ (6,110)(2) $ 14,718
Accrued liabilities 16,938 31,004 (31,004)(2) 16,938
Income taxes payable 7,679 21,220 (21,220)(2) 7,679
Deferred revenue 3,362 - - 3,362
Long-term debt, current portion 479 49 (49)(2) 479
---------- ---------- ----------- ---------
Total current liabilities 43,176 58,383 (58,383) 43,176
Long-term Liabilities:
Long-term debt, due after one
year 103,271 178 142,372 (4) 245,821
Other liabilities 4,554 - - 4,554
Deferred income taxes 15,982 4,843 (4,843)(2) 15,982
---------- ---------- ----------- ---------
Total liabilities 166,983 63,404 79,146 309,533
Shareholders' equity
Common stock 8,927 - - 8,927
Retained earnings 67,255 80,503 (80,503)(2) 67,255
Additional paid-in-capital - 1 (1)(2) -
Deferred compensation costs (173) - - (173)
Notes receivable for common
stock (65) - - (65)
---------- ---------- ----------- ---------
Total shareholders' equity 75,944 80,504 (80,504) 75,944
---------- ---------- ----------- ---------
Total liabilities and
shareholders' equity $ 242,927 $ 143,908 $ (1,358) $385,477
========== ========== =========== =========
</TABLE>
(1) Adjustments give pro forma effect to the Hollywood Park acquisition as if
the transaction had occurred on June 30, 1999.
(2) To eliminate assets and liabilities of Hollywood Park that were not
acquired or assumed by Churchill Downs in the transaction.
(3) To record the revaluation of acquired property, plant and equipment to its
estimated fair value.
(4) To record borrowings on Churchill Downs' line of credit necessary to
finance the purchase price of $140.0 million plus estimated acquisition
costs of $2.5 million and to eliminate historical long-term debt of
$178,000 not assumed by Churchill Downs.
22
<PAGE>
Unaudited Pro Forma Consolidated Statement of Earnings
For the Six-Month Period ended June 30, 1999
(in thousands, except per share data)
<TABLE>
<CAPTION>
Calder Race Course Hollywood Park
------------------------------------------------- --------------------------
Pro Form Pro Forma
Churchill Adjustments Pro Forma Adjustments Pro Forma
Downs Historical(1) And with Calder and Churchill
Historical Calder Tropical Eliminations(1) Race Course Historical(2) Eliminations(2) Downs
---------- ------- -------- ------------ ----------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 101,803 $2,394 $ 1,181 - $ 105,378 $ 63,226 (29,014)(8)
19,620 (9)
1,580 (10)
---------- ------- -------- ------------ ----------- ---------- ------------ ---------
101,803 2,394 1,181 - 105,378 63,226 (7,814) 160,790
---------- ------- -------- ------------ ----------- ---------- ------------ ---------
Operating expenses 74,820 2,911 1,068 (115)(3) 48,309 (22,426)(8)
65 (4) 19,620 (9)
377 (5) 79,126 (505)(11)
(1,248)(12)
---------- ------- -------- ------------ ----------- ---------- ------------ ---------
74,820 2,911 1,068 327 79,126 48,309 (4,559) 122,876
---------- ------- -------- ------------ ----------- ---------- ------------ ---------
Gross profit (loss) 26,983 (517) 113 (327) 26,252 14,917 (3,255) 37,914
Selling, general and
administrative expenses 6,890 685 212 - 7,787 3,317 (1,701)(8) 9,403
---------- ------- -------- ------------ ----------- ---------- ------------ ---------
Operating income (loss) 20,093 (1,202) (99) (327) 18,465 11,600 (1,554) 28,511
Other income(expense):
Interest income 363 33 79 - 475 - - 475
Interest expense (2,209) (446) (325) (1,504)(6) (4,484) - (5,290)(13) (9,774)
Rental income - 191 13 (115)(3) 89 - - 89
Miscellaneous income 125 - - - 125 - - 125
---------- ------- -------- ------------ ----------- ---------- ------------ ---------
(1,721) (222) (233) (1,619) (3,795) - (5,290) (9,085)
Earnings (loss) before income
tax provision (benefit) 18,372 (1,424) (332) (1,946) 14,670 11,600 (6,844) 19,426
Federal and state income
tax provision (benefit) 7,716 - - (1,555)(7) 6,161 4,897 (2,874)(14) 8,184
---------- ------- -------- ------------ ----------- ---------- ------------ ---------
Net earnings (loss) $ 10,656 $(1,424) $ (332) $ (391) $ 8,509 $ 6,703 $ (3,970) $ 11,242
========== ======== ======== ============ =========== ========== ============ =========
Earnings per common share:
Basic $ 1.42 $ 1.49
========== =========
Diluted $ 1.39 $ 1.47
========== ========
Weighted average shares
outstanding
Basic 7,525 7,525
Diluted 7,671 7,671
</TABLE>
23
<PAGE>
(1) The Calder Race Course acquisition occurred on April 23, 1999, and the
results of operations of Calder Race Course have been included in the
historical statement of earnings of Churchill Downs since that date. The
pro forma Calder Race Course adjustments give effect to the Calder Race
Course acquisition and Churchill Downs' new credit agreement if these
transactions had occurred on January 1, 1998. Historical Calder Race
Course statement of earnings information is based on the unaudited
financial statement for the period from January 1, 1999 to April 23,
1999.
(2) Adjustments necessary to give pro forma effect to the Hollywood Park
acquisition as if the transaction had occurred on January 1, 1998.
Historical statement of earnings information is based on the unaudited
financial statements for the six month period ended June 30, 1999.
(3) To eliminate intercompany rental income and expense between Calder and
Tropical.
(4) To record the estimated increase in depreciation expense as a result of
the revaluation of the acquired Calder and Tropical property, plant and
equipment to its fair value and estimated useful lives.
(5) To record estimated amortization over 40 years of the excess of the
Calder Race Course purchase price over the fair value of net assets
acquired of $48.7 million.
(6) To record the estimated incremental interest expense using an average
7.45% interest rate on borrowings of $92.0 million necessary to finance
the Calder Race Course acquisition and fund deferred financing costs,
including amortization expense of $250,000 related to deferred financing
costs of $2.5 million over 5 years.
(7) To adjust historical Calder Race Course tax benefit and to record the
income tax effect of the estimated increase in depreciation and
incremental interest expense resulting from the Calder Race Course
acquisition to our estimated federal and state income tax rate of 42%.
(8) To eliminate the historical results of operations of Hollywood Park
Casino, which will not be operated by Churchill Downs under the terms of
the transaction.
(9) To reclassify purse expense of Hollywood Park to conform to Churchill
Downs' historical presentation of this item.
(10) To record $1.5 million in rental income and $80,000 in admissions
revenue related to the lease by Churchill Downs of the Hollywood Park
Casino to Hollywood Park, Inc. under the terms of the transaction.
(11) To eliminate historical depreciation expense on Hollywood Park assets
not acquired by Churchill Downs in the transaction.
(12) To record the estimated decrease in depreciation expense as a result of
the revaluation of the acquired Hollywood Park property, plant and
equipment to its fair value and estimated useful lives.
(13) To record the estimated incremental interest expense using an average of
7.45% interest rate on borrowings of $142.5 million necessary to finance
the Hollywood Park acquisition.
(14) To record the income tax effect of the pro forma adjustments related to
the acquisition of Hollywood Park to our estimated federal and state
income tax rate of 42%.
24
<PAGE>
<TABLE>
<CAPTION>
Unaudited Pro Forma Consolidated Statement of Earnings
For the Six-Month Period ended June 30, 1998
(in thousands, except per share data)
Ellis Park Calder Race Course
------------------------------------------ ------------------------------------------------
Pro Forma
Pro Forma with
Churchill Pro Forma Historical(2) Adjustments Ellis Park
Downs Pro Forma with ----------------- and and Calder
Historical Historical(1) Adjustments(1) Ellis Park Calder Tropical Eliminations(2) Race Course
---------- ---------- ----------- ---------- ------ ------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 82,760 $ 1,972 - $ 84,732 $11,367 $ 1,218 $ - $ 97,317
---------- ---------- ----------- ---------- ------ -------- ------------ -----------
82,760 1,972 - 84,732 11,367 1,218 - 97,317
---------- ---------- ----------- ---------- ------ -------- ------------ -----------
Operating expenses 58,337 2,553 221 (3) 11,875 1,077 (107)(7)
28 (4) 61,139 132 (8)
610 (9) 74,726
---------- ---------- ----------- ---------- ------ -------- ------------ -----------
58,337 2,553 249 61,139 11,875 1,077 635 74,726
---------- ---------- ----------- ---------- ------ -------- ------------ -----------
Gross profit (loss) 24,423 (581) (249) 23,593 (508) 141 (635) 22,591
Selling, general and
administrative expenses 4,973 269 - 5,242 1,057 286 - 6,585
---------- ---------- ----------- --------- ------ -------- ------------ -----------
Operating income (loss) 19,450 (850) (249) 18,351 (1,565) (145) (635) 16,006
Other income(expense):
Interest income 362 362 38 125 - 525
Interest expense (405) (9) (384)(5) (798) (969) (698) (2,011)(10) (4,476)
Rental income - - - - 207 30 (107)(7) 130
Miscellaneous income 166 - - 166 - - - 166
---------- ---------- ----------- ---------- ------ -------- ------------ -----------
123 (9) (384) (270) (724) (543) (2,118) (3,655)
Earnings (loss)before income
tax provision (benefit) 19,573 (859) (633) 18,081 (2,289) (688) (2,753) 12,351
Federal and state income
tax provision (benefit) 7,620 - (207)(6) 7,413 - - (2,349)(11) 5,064
---------- ---------- ----------- ---------- ------ -------- ------------ -----------
Net earnings (loss) $ 11,953 $ (859) $ (426) $ 10,668 $(2,289) $ (688) $ (404) $ 7,287
========== ========== =========== ========== ====== ========= ============ ===========
Earnings per common share:
Basic $ 1.62
==========
Diluted $ 1.61
==========
Weighted average shares
outstanding
Basic 7,395 200
Diluted 7,438 200
Unaudited Pro Forma Consolidated Statement of Earnings
For the Six-Month Period ended June 30, 1998
(in thousands, except per share data)
Hollywood Park
------------------------------
Pro Forma
Adjustments Pro Forma
and Churchill
Historical(2) Eliminations Downs
---------- ------------ ----------
Net revenues $ 59,974 $ (26,995)(12)
18,368 (13)
1,594 (14)
---------- ----------- ----------
59,974 (7,033) $ 150,258
---------- ----------- ----------
Operating expenses 48,409 (22,087)(12)
18,368 (13)
(521)(16)
(1,151)(16)
---------- ----------- ----------
48,409 (5,391) 117,744
---------- ----------- ----------
Gross profit (loss) 11,565 (1,642) 32,514
Selling, general and
administrative expenses 3,080 (1,389)(12) 8,276
---------- ----------- ----------
Operating income (loss) 8,485 (253) 24,238
Other income(expense):
Interest income - - 525
Interest expense - (5,290)(17) (9,766)
Rental income - - 130
Miscellaneous income - - 166
---------- ----------- ----------
- (5,290) (8,945)
Earnings (loss)before income
tax provision (benefit) 8,485 (5,543) 15,293
Federal and state income
tax provision (benefit) 3,627 (2,422)(18) 6,269
---------- ----------- ----------
Net earnings (loss) $ 4,858 $ (3,121) $ 9,024
Earnings per common share:
Basic $ 1.19
==========
Diluted $ 1.18
==========
Weighted average shares
outstanding
Basic 7,595
Diluted 7,638
</TABLE>
25
<PAGE>
(1) The Ellis Park acquisition occurred on April 21, 1998, and the results of
operations of Ellis Park have been included in the historical statement
of earnings of Churchill Downs since that date. The pro forma Ellis Park
adjustments give effect to the Ellis Park acquisition and Churchill
Downs' new credit agreement as if these transactions had occurred on
January 1, 1998. Historical Ellis Park statement of earnings information
is based on the unaudited financial statements for the period from
January 1, 1998 to April 21, 1998.
(2) Adjustments necessary to give pro forma effect to the Calder Race Course
and Hollywood Park acquisitions and Churchill Downs' new credit agreement
as if these transactions had occurred on January 1, 1998. Historical
Calder Race Course and Hollywood Park statement of earnings information
is based on the unaudited financial statements of these entities for the
six month period ended June 30, 1998.
(3) To record additional depreciation expense from January 1, 1998 through
April 21, 1998 as a result of the revaluation of the Ellis Park property,
plant and equipment to its fair value and estimated useful lives.
(4) To record estimated amortization over 40 years from January 1, 1998
through April 21, 1998 of the excess of the Ellis Park purchase price
over the fair value of net assets acquired of $6.4 million.
(5) To record the estimated incremental interest expense using an average of
7.45% interest rate on borrowings of $16.2 million necessary to finance
the Ellis Park acquisition.
(6) To adjust historical Ellis Park tax benefit and to record the income tax
effect of the estimated increase in depreciation and incremental interest
expense resulting from the Ellis Park acquisition to our estimated
federal and state income tax rate of 41%.
(7) To eliminate intercompany rental income and expense between Calder and
Tropical.
(8) To record the estimated increase in depreciation expense as a result of
the revaluation of the acquired Calder and Tropical property, plant and
equipment to its
fair value and estimated useful lives.
(9) To record estimated amortization over 40 years of the excess of the
Calder Race Course purchase price over the fair value of net assets
acquired of $48.7 million.
(10) To record the estimated incremental interest expense using an average
7.45% interest rate on borrowings of $92.0 million necessary to finance
the Calder Race Course acquistion and fund deferred financing costs,
including amortization expense of $250,000 related to deferred financing
costs of $2.5 million over 5 years.
(11) To adjust historical Calder Race Course tax benefit and to record the
income tax effect of the estimated increase in depreciation and
incremental interest expense resulting from the Calder Race Course
acquisition to our estimated federal and state income tax rate of 41%.
(12) To eliminate the historical results of operations of Hollywood Park
Casino, which will not be operated by Churchill Downs under the terms of
the transaction.
(13) To reclassify purse expense of Hollywood Park to conform to Churchill
Downs' historical presentation of this item.
(14) To record $1.5 million in rental income and $94,000 in admissions revenue
related to the lease by Churchill Downs of the Hollywood Park Casino to
Hollywood Park, Inc. under the terms of the transaction.
(15) To eliminate historical depreciation expense on Hollywood Park assets not
acquired by Churchill Downs in the transaction.
(16) To record the estimated decrease in depreciation expense as a result of
the revaluation of the acquired Hollywood Park property, plant and
equipment to its fair value and estimated useful lives.
(17) To record the estimated incremental interest expense using an average of
7.45% interest rate on borrowings of $142.5 million necessary to finance
the Hollywood Park acquisition.
(18) To record the income tax effect of the pro forma adjustments related to
the acquisition of Hollywood Park to our estimated federal and state
income tax rate of 41%.
26
<PAGE>
Unaudited Pro Forma Consolidated Statement of Earnings
For the Year ended December 31, 1998
(in thousands, except per share data)
<TABLE>
<CAPTION>
Ellis Park Calder Race Course
----------------------------------------- ------------------------------------------------
Pro Forma
Pro Forma with
Churchill Pro Forma Adjustments Ellis Park
Downs Pro Forma with Historical(2) and and Calder
Historical Historical(1) Adjustments(1) Ellis Park Calder Tropical Eliminations(2) Race Course
---------- ---------- ----------- ---------- ------ -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 147,300 $ 1,972 $ - $ 149,272 $49,974 $21,356 $ - $ 220,602
---------- ---------- ----------- ---------- ------ -------- ------------ -----------
147,300 1,972 - 149,272 49,974 21,356 - 220,602
Operating expenses:
Purses 50,193 491 50,684 23,347 9,655 - 83,686
Other direct expenses 68,896 2,062 221(3) - 16,858 6,535 (803)(7)
28(4) 71,207 234 (8)
1,219 (9) 95,250
---------- ---------- ----------- ---------- ------ -------- ------------ -----------
119,089 2,553 249 121,891 40,205 16,190 650 178,936
---------- ---------- ----------- ---------- ------ -------- ------------ -----------
Gross Profit (Loss) 28,211 (581) (249) 27,381 9,769 5,166 (650) 41,666
Selling, general and
administrative expenses 11,068 269 - 11,337 2,424 930 - 14,691
---------- ---------- ----------- ---------- ------ -------- ------------ -----------
Operating income (loss) 17,143 (850) (249) 16,044 7,345 4,236 (650) 26,975
Other income(expense):
Interest income 680 680 165 174 - 1,019
Interest expense (896) (9) (427)(5) (1,332) (1,867) (1,347) (4,097)(10) (8,643)
Rental income - - - - 1,011 70 (803)(7) 278
Miscellaneous income 342 - - 342 - - - 342
---------- ---------- ----------- ---------- ------ -------- ------------ -----------
126 (9) (427) (310) (691) (1,103) (4,900) (7,004)
Earnings (loss) before income
tax provision (benefit) 17,269 (859) (676) 15,734 6,654 3,133 (5,550) 19,971
Federal and state income
tax provision (benefit) 6,751 - (311)(6) 6,440 2,641 1,221 (2,114)(11) 8,188
---------- ---------- ----------- ---------- ------ -------- ------------ -----------
Net earnings (loss) 10,518 (859) (365) 9,294 4,013 1,912 (3,436) 11,783
Dividends on preferred
stock - - - - 38 - - 38
---------- ---------- ----------- ---------- ------ -------- ------------ -----------
Net earnings (loss) attributable
to common shareholders $ 10,518 $ (859) $ (365) $ 9,294 $3,975 $ 1,912 $ (3,436) $ 11,745
========== ========== =========== ========== ====== ======== ============ ===========
Earnings per common share:
Basic $ 1.41
==========
Diluted $ 1.40
==========
Weighted average
shares outstanding
Basic 7,460 60
Diluted 7,539 60
Unaudited Pro Forma Consolidated Statement of Earnings
For the Year ended December 31, 1998
(in thousands, except per share data)
Hollywood Park
-----------------------------------------
Pro Forma
Adjustments
and Churchill
Historical(2) Eliminations(2) Downs
---------- ----------- ---------
Net revenues $ 114,751 $ (54,442)(12)
33,887 (15)
(39)(15)
3,192 (13)
---------- ----------- ---------
114,751 (17,402) 317,951
Operating expenses:
Purses 33,887 (15) 117,573
Other direct expenses 97,082 (45,530)(12)
(1,001)(14)
(2,078)(16) 143,723
---------- ----------- ---------
97,082 (14,722) 261,296
---------- ----------- ---------
Gross Pofit (Loss) 17,669 (2,680) 56,655
Selling, general and
administrative expenses 6,677 (3,128)(12) 18,240
---------- ----------- ---------
Operating income (loss) 10,992 448 38,415
Other income(expense):
Interest income - 39 (15) 1,058
Interest expense (23) (10,556)(17) (19,222)
Rental income - - 278
Miscellaneous income - - 342
---------- ----------- --------
(23) (10,517) (17,544)
Earnings (loss) before income
tax provision (benefit) 10,969 (10,069) 20,871
Federal and state income
tax provision (benefit) 4,791 (4,422)(18) 8,557
---------- ----------- ---------
Net earnings (loss) 6,178 (5,647) 12,314
Dividends on preferred
stock - - 38
---------- ----------- ---------
Net earnings (loss) attributable
to common shareholders $ 6,178 $ (5,647) $ 12,276
========== =========== ==========
Earnings per common share:
Basic 1.63
=========
Diluted 1.62
=========
Weighted average
shares outstanding
Basic 7,520
Diluted 7,599
</TABLE>
27
<PAGE>
(1) The Ellis Park acquisition occurred on April 21, 1998, and the results of
operations of Ellis Park have been included in the historical statement of
earnings of Churchill Downs since that date. The pro forma Ellis Park
adjustments give effect to the Ellis Park acquisition and Churchill Downs'
new credit agreement as if these transactions had occurred on January 1,
1998. Historical Ellis Park statement of earnings information is based on
the unaudited financial statements for the period from January 1, 1998 to
April 21, 1998.
(2) Adjustments necessary to give pro forma effect to the Calder Race Course
and Hollywood Park acquisitions and Churchill Downs' new credit agreement
as if these transactions had occurred on January 1, 1998. Historical
Calder Race Course and Hollywood Park statement of earnings information is
based on the financial statements of these entities for the year ended
December 31, 1998.
(3) To record additional depreciation expense from January 1, 1998 through
April 21, 1998 as a result of the revaluation of the Ellis Park property,
plant and equipment to its fair value and estimated useful lives.
(4) To record estimated amortization over 40 years from January 1, 1998
through April 21, 1998 of the excess of the Ellis Park purchase price over
the fair value of net assets acquired of $6.4 million.
(5) To record the estimated incremental interest expense using an average
of 7.45% interest rate on borrowings of $16.2 million necessary to finance
the Ellis Park acquisition.
(6) To adjust historical Ellis Park tax benefit and to record the income tax
effect of the estimated increase in depreciation and incremental interest
expense resulting from the Ellis Park acquisition to our estimated federal
and state income tax rate of 41%.
(7) To eliminate intercompany rental income and expense between Calder and
Tropical.
(8) To record the estimated increase in depreciation expense as a result of
the revaluation of the acquired Calder and Tropical property, plant and
equipment to its fair value and estimated lives.
(9) To record estimated amortization over 40 years of the excess of the Calder
Race Course purchase price over the fair value of net assets acquired of
$48.7 million.
(10) To record the estimated incremental interest expense using an average
7.45% interest rate on borrowings of $92.0 million necessary to finance
the Calder Race Course acquisition and fund deferred financing costs,
including amortization expense of $250,000 related to deferred financing
costs of $2.5 million over 5 years.
(11) To adjust historical Calder Race Course tax benefit and to record the
income tax effect of the estimated increase in depreciation and
incremental interest resulting from the Calder Race Course acquisition to
our estimated federal and state income tax rate of 41%.
(12) To eliminate the historical results of operations of Hollywood Park
Casino, which will not be operated by Churchill Downs under the terms of
the transaction.
(13) To record $3.0 million in rental income and $192,000 in admissions revenue
related to the lease by Churchill Downs of the Hollywood Park Casino to
Hollywood Park, Inc. under the terms of the transactions.
(14) To eliminate historical depreciation expense on Hollywood Park assets not
acquired by Churchill Downs in the transaction.
(15) To reclassify purse expense and interest income of Hollywood Park to
conform to Churchill Downs' historical presentation of these items.
(16) To record the estimated decrease in depreciation expense as a result of
the revaluation of the acquired Hollywood Park, property, plant and
equipment to its fair value and estimated useful lives.
(17) To record the estimated incremental interest expense using an average of
7.45% interest rate on borrowings of $142.5 million necessary to finance
the Hollywood Park acquisition.
(18) To record the income tax effect of the pro forma adjustments related to
the acquisition of Hollywood Park to our estimated federal and state
income tax rate of 41%.
28
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
C. EXHIBITS
2.1 Asset Purchase Agreement dated as of May 5, 1999 by and
between Churchill Downs Incorporated and Hollywood Park,
Inc., incorporated by reference to the Company's
Registration Statement on Form S-3 dated May 21, 1999,
File No. 333-79031. *
2.2 Amendment No.1 to Asset Purchase Agreement dated as of August 31,
1999 by and among Churchill Downs Incorporated, Churchill Downs
California Company and Hollywood Park, Inc. *
10.1 Casino Lease Agreement dated as of September 10, 1999 by and
between Churchill Downs California Company and Hollywood Park,
Inc. *
23 Consent of Arthur Andersen LLP
99 Press release issued on September 10, 1999 by Churchill Downs
Incorporated. *
* Previously filed
29
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHURCHILL DOWNS INCORPORATED
November 24, 1999 \s\Thomas H.Meeker
Thomas H. Meeker
President and Chief Executive Officer
(Director and Principal Executive
Officer)
November 24, 1999 \s\Robert L. Decker
Robert L. Decker
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
November 24, 1999 \s\Vicki L. Baumgardner
Vicki L. Baumgardner
Vice President, Finance and Treasurer
(Principal Accounting Officer)
30
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 8-K/A and in the Registration Statements on Form S-8
(No.33-85012, 333-62103, and 33-61111) of our report dated June 9, 1999 on the
combined financial statements of the Hollywood Park Race Track and Casino, which
report appears in Amendment No. 2 to the Registration Statement on Form
S-3/A (Registration No. 333-79031) of Churchill Downs Incorporated.
\s\Arthur Andersen LLP
Los Angeles, California
November 24, 1999
31
