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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, 1997
[ ] 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 Incorporation
or Organization IRS Employer Identification No.
700 CENTRAL AVENUE, LOUISVILLE, KENTUCKY 40208
- ---------------------------------------- -----
Address of Principal Executive Offices Zip Code
Registrant's Telephone Number, Including Area Code 502-636-4400
Securities registered pursuant to Section 12(b) of the Act:
NONE NONE
- ------------------------------ -----------------------------------------
Title of Each Class 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 27, 1998, 7,316,936 shares of the Registrant's Common Stock were
outstanding, and the aggregate market value of the shares held by nonaffiliates
of the Registrant was $132,000,000.
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Shareholders to be held on June 18, 1998 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 62 to 63.
Page 1 of 90
PART I
ITEM 1. BUSINESS
A. INTRODUCTION
Churchill Downs Incorporated (the "Company") primarily conducts
pari-mutuel wagering on Thoroughbred and Standardbred horse racing at its
facilities in Kentucky and Indiana. The Company owns and operates Churchill
Downs racetrack in Louisville, Kentucky ("Churchill Downs"). Churchill Downs has
conducted Thoroughbred racing continuously since 1875, and is internationally
known as home of the Kentucky Derby. Through its subsidiary, Hoosier Park, L.P.,
the Company is majority owner and operator of Hoosier Park in Anderson, Indiana
("Hoosier Park"), which conducts Thoroughbred, Quarter Horse and Standardbred
horse racing. The Company conducts simulcast wagering on horse racing year-round
at its four Churchill Downs Sports Spectrum facilities ("Sports Spectrum") in
Kentucky and Indiana, as well as at its racetracks.
In November 1997, the Company formed Churchill Downs Investment
Company ("CDIC"), a wholly owned subsidiary, to oversee those investments in
which the Company participates as an equity investor and does not actively
manage the operations. Among the investments held by CDIC are Tracknet, LLC
("Tracknet"), a telecommunications service provider for the pari-mutuel and
simulcasting industries, and EquiSource, LLC ("EquiSource"), a recently formed
procurement business which will assist in the group purchasing of supplies and
services for the equine industry. The Company is a minority investor in both
Tracknet and EquiSource. CDIC also holds the Company's investment in Kentucky
Downs, LLC, a racetrack which conducts a limited Thoroughbred race meet as well
as year-round simulcasting, near Franklin, Kentucky. These investments are not
material to the Company's operations at this time.
The Company was organized as a Kentucky corporation in 1928. Its
principal executive offices are located at Churchill Downs, 700 Central Avenue,
Louisville, Kentucky 40208.
B. KENTUCKY OPERATIONS
In Kentucky, the Company conducts Thoroughbred horse racing,
accepts pari-mutuel wagering on such races, and conducts related business
operations at Churchill Downs. The Company also owns and operates the Churchill
Downs Sports Spectrum, its flagship simulcast wagering facility.
Both facilities are located in Louisville, Kentucky.
Page 2 of 90
CHURCHILL DOWNS
RACING
Churchill Downs is a legendary sports venue and one of the premier
racetracks in the world. The racetrack was founded by Col. M. Lewis
Clark as the Louisville Jockey Club in 1874, and began conducting
Thoroughbred racing the following year. Churchill Downs rose to
prominence during the first half of this century as the Kentucky Derby
became an internationally renowned classic. Churchill Downs has also
hosted the Breeders' Cup Championship three times, in 1988, 1991 and
1994. Churchill Downs has been selected to host the Breeders' Cup for an
unprecedented fourth time, during its 1998 Fall Meet. The Breeders' Cup
races are held annually, featuring $12 million in purses, for the
purpose of determining Thoroughbred champions in seven different events.
Racetracks across North America compete for the privilege of hosting the
Breeders' Cup races each year. Historically, hosting the Breeders Cup
event has had a positive impact on the Company's annual results.
Churchill Downs annually conducts two live Thoroughbred race meetings, a
Spring Meet (late April through late June) and a Fall Meet (late October
through late November). Churchill Downs conducted live racing on 77 days
during the year ended December 31, 1997. For 1998, Churchill Downs has
received a license to conduct live racing for a total of 71 racing days
on approximately the same dates as the prior year's Spring and Fall race
meetings. Churchill Downs will host the Breeders' Cup on November 7,
1998. The total number of days on which Churchill Downs conducts live
racing fluctuates slightly each year.
Based on average daily purse levels and average number of starters per
race, Churchill Downs' 1997 Spring and Fall race meets ranked among the
most competitive racing programs in the country. The Company believes
that a quality live racing product will enable it to continue the growth
in sales of Churchill Downs' race signal to out-of-state simulcast
markets.
The Kentucky Derby and Kentucky Oaks, both annually run the first
weekend in May, continue to be the Company's premier events. In 1996,
the Company increased the purse for the Kentucky Derby from $500,000-
added to $1 million-guaranteed. At that same time, the purse for the
Kentucky Oaks was increased from $300,000-added to $500,000-guaranteed,
making it the country's richest three-year-old filly race. In 1997,
Kentucky Derby and Kentucky Oaks Days accounted for approximately 20.5%
of total on-track pari-mutuel wagering and 25.7% of total on-track
attendance in Kentucky.
Page 3 of 90
More than 140,000 people attended the 1997 Kentucky Derby on May 3, the
fourth-largest crowd in the Derby's 124-year history. Total wagering on
the Derby Day race card, including simulcast wagering offered at over
1,000 domestic and international sites, was a record $82.8 million. A
record crowd of 92,547 attended the 1997 Kentucky Oaks on May 2, making
it the second-largest attended day of racing, other than Derby Day, in
North America. Wagering on the Oaks Day race card totaled a record $21.4
million.
RACETRACK FACILITY
The Company owns its racetrack site and improvements located at or
adjacent to 700 Central Avenue, Louisville, Kentucky (the "racetrack
facility"). The racetrack facility consists of approximately 157 acres
of land with a one-mile oval dirt track, a seven-eighths (7/8) mile turf
track, permanent grandstands and a 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 the Company's office facilities. The
backside stable area has sprinkled barns sufficient to accommodate
approximately 1,400 horses, and other facilities for backstretch
personnel.
The Company has made numerous capital improvements to the racetrack
facility during the past ten years in order to better serve its horsemen
and patrons. The dirt and turf tracks provide excellent venues for live
Thoroughbred racing. The Company's ability to provide stabling
facilities and a training track for horses at the racetrack facility is
limited, but additional facilities are available, as discussed below.
The Company's physical plant is fully utilized only on those days when
live racing is conducted.
CHURCHILL DOWNS SPORTS SPECTRUM
GENERAL
The Company also owns the real property and improvements known as the
Churchill Downs Sports Spectrum (the "Louisville Sports Spectrum"),
located at 4520 Poplar Level Road, Louisville, Kentucky. Formerly a
Standardbred racetrack, this property was acquired by the Company in
1992, and converted into a simulcast wagering facility and Thoroughbred
training annex. The 100,000-square-foot Louisville Sports
Page 4 of 90
Spectrum is located on approximately 88 acres of land, about seven miles
from Churchill Downs.
SIMULCAST FACILITY
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. The Company generally
conducts simulcast wagering operations at the Louisville Sports Spectrum
during periods when Churchill Downs is not operating a live race meet.
However, the Louisville Sports Spectrum is open on Kentucky Derby Day
and the immediately following Sunday.
TRAINING AND STABLING ANNEX
A portion of the Sports Spectrum property is used as a Thoroughbred
stabling and training annex. The Company 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 the Company constructed new sprinkled barns sufficient
to accommodate approximately 500 horses, providing a year-round base of
operation for many horsemen, and enabling the Company to attract new
horsemen who desire to race at Churchill Downs.
LICENSING
Kentucky's racetracks, including Churchill Downs, are subject to the
licensing and regulation of the Kentucky Racing Commission ("KRC"),
which consists of 11 members appointed by the governor of Kentucky.
Licenses to conduct live Thoroughbred race meetings and to participate
in simulcasting (discussed below) are approved annually by the KRC based
upon applications submitted by the racetracks in Kentucky. Although to
some extent Churchill Downs competes with other racetracks in Kentucky
for the award of racing dates, the KRC is required by state law to
consider and seek to preserve each 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. As stated above, the
KRC has awarded Churchill Downs a total of 71 live racing dates in 1998.
A substantial change in the allocation of live racing days at Churchill
Downs could impact the Company's operations and earnings in future
years.
Page 5 of 90
SERVICE MARKS
The Company holds federal service mark registrations on the names
"Kentucky Derby," "Churchill Downs," "Churchill Downs Sports Spectrum,"
"Kentucky Oaks," and the Twin Spires design in various categories
including entertainment business, apparel, paper goods, printed matter
and housewares and glass. The Company also has applied for federal
service mark registration of the name "Churchill Charlie." The Company
licenses the use of these service marks and derives revenue from such
license agreements.
PARI-MUTUEL WAGERING
ON-TRACK WAGERING
Total wagering conducted on live racing and interstate simulcast
receiving at Churchill Downs during its 1997 Spring and Fall race meets
totaled $132.3 million, an increase of 2.2% from the $129.5 million
wagered in 1996. Wagering on Churchill Downs' live races was $118.0
million in 1997, down slightly from $119.2 million in 1996. Interstate
simulcast receiving (discussed below) conducted on track at the Paddock
Pavilion and in other selected areas throughout the clubhouse and
grandstand during the live race meets, totaled $14.3 million, up 38.1%
from the $10.3 million in 1996.
INTRASTATE SIMULCAST WAGERING
Churchill Downs sends its live race signal to other racetracks in
Kentucky, and receives race signals from other Kentucky racetracks, for
wagering purposes ("intrastate simulcasting"). Churchill Downs sends it
race signal to other Kentucky racetracks on all of its live racing days
("intrastate simulcast sending"). Patrons wagering at these locations
participate in the same pari-mutuel pool payouts as patrons at Churchill
Downs. Intrastate simulcast wagering on Churchill Downs' live racing
totaled $40.7 million in 1997, down 13% from the $46.7 million wagered
in 1996. These totals include wagering on Churchill Downs' live races at
all intrastate simulcasting and Kentucky Off-Track Betting sites in
Kentucky, through the Company's in-home wagering system, and at the
Louisville Sports Spectrum on Kentucky Derby Day.
Churchill Downs also participates in intrastate simulcasting by
receiving race signals from other Kentucky tracks ("intrastate simulcast
receiving"). Churchill Downs conducts wagering on racing held at other
Kentucky racetracks on all possible dates
Page 6 of 90
at its Louisville Sports Spectrum. In 1997, wagering at the Louisville
Sports Spectrum on other Kentucky race signals totaled $41.1 million, an
18.5% decrease from the $50.4 million wagered in 1996.
INTERSTATE SIMULCAST WAGERING
Churchill Downs sends its race signal to out-of-state simulcast sites,
and receives race signals from out-of-state racetracks, for wagering
purposes ("interstate simulcasting").Churchill Downs participates in
interstate simulcasting by sending its live race signal to racetracks
and off-track betting facilities located in other states and in foreign
countries ("interstate simulcast sending"). Depending upon the format
permitted at each facility, patrons may either participate in the same
pari-mutuel pool payouts as those patrons at Churchill Downs, known as a
commingled pool, or participate in a separate pari-mutuel pool generated
by wagering on Churchill Downs races at the respective facility.
Interstate simulcast sending wagering on Churchill Downs' live races
totaled $383.5 million in 1997, an 11.7% increase from the $343.5
million wagered in 1996. Churchill Downs plans to increase the
interstate and international exportation of its live race signal in
fiscal year 1998.
Churchill Downs also receives race signals from racetracks outside
Kentucky ("interstate simulcast receiving"). Such simulcasting allows
the Company to conduct interstate wagering daily on multiple race
programs from around the country, permitting greater utilization of the
Louisville Sports Spectrum asset. In 1997, wagering on out-of-state
racing was conducted at the Louisville Sports Spectrum on all possible
dates when Churchill Downs was not racing live. Interstate simulcast
receiving was also conducted in selected areas on track during Churchill
Downs' live meets, and through the Company's in-home wagering system, as
discussed below. Wagering on interstate simulcast receiving at the
Louisville Sports Spectrum totaled $83 million in 1997, a 17.7% increase
from the $70.5 million wagered in 1996.
IN-HOME WAGERING
Churchill Downs, in conjunction with ODS Entertainment ("ODS") and TKR
Cable of Greater Louisville, 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 1,050 homes in
Jefferson County, Kentucky as of December 31, 1997. In-home patrons may
wager on Churchill Downs' live racing, as well as intrastate and
interstate race signals. In 1997, in-home wagering on Churchill Downs'
race signal
Page 7 of 90
totaled $10.4 million, an increase of 69.2% from the $6.1 million
wagered in 1996. The Company believes development of such in-home
technology can be used as an efficient delivery system that could
increase business levels and attract new segments of the market to the
racetrack.
The second phase of the Company's relationship with ODS will be the
launching of the Television Games Network ("TVG"), which is projected in
late 1998. The new network is anticipated to eventually offer
24-hour-a-day programming throughout the U.S. that will be primarily
devoted to developing new fans for racing.
KENTUCKY OFF-TRACK BETTING, INC.
In 1992, the Company and three other Kentucky Thoroughbred racetracks
formed Kentucky Off-Track Betting, Inc. ("KOTB"), of which the Company
is a 25% 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 ("simulcast facilities"). A
simulcast facility may be located no closer than 75 miles from an
existing racetrack without the track's consent and in no event closer
than 50 miles to an existing track. Each simulcast facility must first
be approved by the KRC. Once approved, the simulcast facility may then
be established unless the local government where the facility is to be
located votes to disapprove its establishment. KOTB currently owns and
operates simulcast facilities in Corbin, Maysville, Jamestown, and
Pineville, Kentucky. Wagering at KOTB facilities on Churchill Downs'
live racing totaled $3.9 million in 1997, a decrease of 11.7 % from the
$4.4 million in 1996.
Simulcast facilities developed by KOTB provide additional markets for
the intrastate simulcasting of Churchill Downs' live races and
interstate simulcasting on out-of-state signals. By statute, of the
amount retained by KOTB on wagers (net of pari-mutuel taxes) placed at a
simulcast facility, 30% is set aside for the Company's horsemen and 34%
is paid to a Breeders Award Fund administered by the KRC. Of the
remaining 36%, KOTB operating and administrative expenses are funded by
the Company during the period of time Churchill Downs is conducting live
racing. KOTB did not contribute significantly to the Company's
operations in 1997, and is not anticipated to have a substantial impact
on operations in the future.
Page 8 of 90
C. INDIANA OPERATIONS
GENERAL
In Indiana, the Company conducts Thoroughbred, Quarter Horse and
Standardbred horse racing, accepts pari-mutuel wagering on such races
and conducts related business operations at Hoosier Park in Anderson,
Indiana ("Hoosier Park"). Hoosier Park is the only pari-mutuel racetrack
in Indiana. The Company conducts simulcasting operations at Hoosier Park
and also at its Churchill Downs Sports Spectrum facilities in
Merrillville, Fort Wayne and Indianapolis, Indiana ("Indiana Sports
Spectrums").
OWNERSHIP
Hoosier Park is owned by Hoosier Park, L.P. ("HPLP"), an Indiana limited
partnership formed in 1994. The Company currently owns a 77% interest in
HPLP through Anderson Park, Inc. ("Anderson"), a wholly-owned subsidiary
of Churchill Downs Management Company ("CDMC"). CDMC is a wholly-owned
subsidiary of the Company. The remaining 23% of HPLP is held by
unrelated third parties, Pegasus Group, Inc. ("Pegasus"), and Conseco
HPLP, L.L.C. ("Conseco"). 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 pursuant to which CDMC
has operational control of the day-to-day affairs of Hoosier Park and
its related simulcast operations. The Company, through CDMC, has loaned,
and committed to advance, up to 90% of $28.7 million in loans and
capital contributions to HPLP related to the development of the
racetrack and related satellite wagering facilities. Conseco assumed 10%
of the obligation for loans and capital contributions to HPLP upon
purchase of its 10% partnership interest in 1996. As of December 31,
1997, HPLP has a total loan balance of approximately $26.5 million, of
which $23.8 million is owed to CDMC. The loan bears interest of prime
plus 2% (10.50% at December 31, 1997).
On May 31, 1996, the Company sold 10% of Anderson's partnership interest
in HPLP to Conseco for a cash payment of $218,390 for the 10%
partnership interest and an additional cash payment of $2,603,514 for
the 10% interest in the debt owed by HPLP to CDMC at face value of debt
at the date of the closing.
Conseco has an option which expires December 31, 1998, to purchase from
Anderson an additional 47% partnership interest in HPLP for
approximately $6,222,000 and an additional 47% interest in the debt owed
by HPLP to CDMC for approximately
Page 9 of 90
$15,934,000. This purchase would be subject to the approval of the
Indiana Horse Racing Commission ("IHRC"). Should this transaction occur,
Conseco will be the sole general partner of HPLP, and Anderson and
Pegasus will be limited partners of HPLP with partnership interests of
30% and 13%, respectively. CDMC would continue to have a long-term
management agreement with HPLP pursuant to which CDMC would have
operational control of the day-to-day affairs of HPLP and its related
simulcast facilities.
HOOSIER PARK
RACING
Hoosier Park conducts live Standardbred racing (mid April to late
August), live Thoroughbred racing (mid-September to late November) and
Quarter Horse racing (late October). In 1997, the Company conducted 142
days of live racing, including 85 days of Standardbred racing and 57
days of Thoroughbred racing. Quarter Horse races were conducted during a
Thoroughbred race day. The Company has received a license to conduct
live racing in 1998 for a total of 152 racing days, including 94 days of
Standardbred racing, and 58 days of Thoroughbred racing (which also
includes Quarter Horse races).
RACETRACK FACILITY
Hoosier Park is located in Anderson, Indiana, about 40 miles northeast
of downtown Indianapolis. The Company 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 (7/8th) 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.
INDIANA SPORTS SPECTRUMS
HPLP 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
Churchill Downs' product. The Sports Spectrum at
Page 10 of 90
Merrillville, located about 30 miles southeast of Chicago, consists of
approximately 27,300 square feet of space. The Sports Spectrum at Fort
Wayne consists of approximately 15,750 square feet of space. Hoosier
Park also leases approximately 17,800 square feet of space in the
Claypool Courts Building in downtown Indianapolis where it operates the
Sports Spectrum at Indianapolis. The Company is continuing to evaluate
sites for the location of a fourth Sports Spectrum facility.
The State of Indiana has enacted legislation which requires a county
fiscal body to adopt an ordinance permitting simulcast wagering
facilities before such a facility can be located in that county. The
county fiscal body may require in the ordinance that the voters of the
county must approve the operation of a simulcast wagering facility in
that county. This legislation may affect the Company's ability to locate
its fourth facility in certain counties.
LICENSING
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 IHRC, which consists of 5
members appointed by the governor of Indiana. Licenses are approved
annually by the IHRC based upon applications submitted by the Company.
Currently, the Company is the only facility in Indiana licensed to
conduct live Standardbred, Quarter Horse or Thoroughbred racing and to
participate in simulcasting. As stated above, the IHRC has awarded
Hoosier Park a total of 152 live racing dates in 1998. A substantial
change in the allocation of live racing days at Hoosier Park could
impact the Company's operations and earnings in future years.
PARI-MUTUEL WAGERING
ON-TRACK WAGERING
Total wagering conducted on live racing and interstate simulcast
receiving at Hoosier Park during its 1997 Standardbred, Quarter Horse
and Thoroughbred race meets totaled $16.9 million, a decrease of 3.4%
from the $17.6 million wagered in 1996. Wagering on Hoosier Park's
Standardbred race meet was $5.6 million in 1997, a decrease of 14.5%
from the $6.6 million in 1996. Wagering on Hoosier Park's Thoroughbred
race meet (including wagering on Quarter Horse races) was $5.3 million
in 1997, up 3.7% from the $5.1 million in 1996. Interstate simulcast
receiving, as discussed below, conducted on track at Hoosier Park during
its live race meets totaled $6 million, an increase of 3% from the $5.9
million in 1996.
Page 11 of 90
INTRASTATE SIMULCAST WAGERING
Hoosier Park simulcasts its race signal to its three Sports Spectrum
facilities in Indiana. Patrons at the Sports Spectrums participate in
the same pari-mutuel pool payouts as patrons at Hoosier Park. Wagering
on Hoosier Park at these sites totaled $3.6 million in 1997, an increase
of 8.2% from the $3.3 million in 1996. The Indiana Sports Spectrums also
receive simulcast signals from out-of state racetracks, as discussed
below.
INTERSTATE SIMULCAST WAGERING
Hoosier Park participates in interstate simulcasting by sending its race
signal to out-of-state sites, and receiving race signals from
out-of-state racetracks, for wagering purposes. Hoosier Park sends its
live race signal to racetracks and off-track betting facilities located
in other states. Depending upon the format permitted at each facility,
patrons may either participate in the same pari-mutuel pool payouts as
those patrons at Hoosier Park, known as commingled pools, or participate
in separate pari-mutuel pools generated by wagering on Hoosier Park
races at the respective facility.
Interstate simulcast sending wagering on Hoosier Park's live racing
totaled $39.8 million in 1997, a 46.3% increase from the $27.2 million
wagered in 1996.
Hoosier Park and its three Sports Spectrum facilities also conduct
wagering on race signals from racetracks outside Indiana. Indiana law
provides that as long as Hoosier Park conducts live racing for a total
of not less than 120 days per year, interstate simulcast receiving
wagering can be conducted year round at each of these facilities.
Wagering on interstate simulcast receiving totaled $130 million in 1997,
a 1.3% decrease from the $131.7 million wagered in 1996.
Page 12 of 90
D. SOURCES OF INCOME
The Company's primary sources of income are commissions and fees
earned from pari-mutuel wagering on live and simulcast horse races which
accounted for 67% of total revenue in 1997. The Company retains the following
average amounts on revenue streams as a percentage of handle:
KENTUCKY INDIANA
---------------------------- --------------------------
Commissions/ Net Commissions/ Net
Fees (1) Retainage (2) Fees (1) Retainage (2)
------------ ------------- ------------ -------------
On-track live racing 14.8% 6.9% 18.0% 10.0%
On-track interstate
simulcasting receiving 17.1% 7.0% 18.3% 10.0%
Intrastate simulcast sending 6.9% 4.1% 17.3% 12.3%
Intrastate simulcast receiving 8.7% 4.9% - -
Interstate simulcast sending 3.2% 1.6% 2.8% 1.4%
Interstate simulcast receiving 10.2% 3.5% 17.1% 8.9%
(1) Commission from pari-mutuel wagers and fees from simulcasting net of
pari-mutuel taxes as applicable (2) Net of pari-mutuel taxes, purses to horsemen
and simulcast fees
Other sources of income include admissions and seating,
concession commissions (primarily for the sale of food and beverage items),
riverboat admission tax supplement, license, rights and broadcast fees and
sponsorship revenues.
E. OTHER FACTORS AFFECTING THE COMPANY'S BUSINESS
In 1997, the North American bloodstock market rebounded
dramatically from its decade long slump, marking its strongest year ever in
terms of gross revenue spent at public auction. According to THE BLOOD-HORSE
magazine, expenditures for Thoroughbred weanlings, yearlings, 2- year-olds and
broodmares totaled $693 million in 1997 compared to $611 million in 1996. The
total also surpassed the previous record of $683 million recorded in 1983.
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
declines ultimately resulted in a decrease in the number of Thoroughbreds
available to run in races that forced racetracks to compete for horses to
participate in live racing, and in some cases to curtail or eliminate live
racing and rely more heavily or exclusively on simulcast receiving for revenue.
Churchill Downs and Hoosier Park were able to effectively compete for horses and
experienced a high quality of racing in 1997. In 1997, average daily purses of
$387,760 per day at Churchill Downs ranked among the highest in the nation, and
the Company believes this attracted many of the country's top horses and
Page 13 of 90
trainers. Purse increases at Hoosier Park in 1997 strengthened both its
Thoroughbred and Standardbred racing programs, and created greater demand from
horsemen to race at the Indiana track. Average daily purses of $152,695 resulted
in competitive race fields for Hoosier Park's Thoroughbred meet, while average
daily purses of $124,241 during its Standardbred meet ranked Hoosier Park second
behind only The Meadowlands in New Jersey in terms of purse levels. Based on the
competitiveness of its racing products in Kentucky and Indiana, the Company is
well positioned to grow its share of the interstate simulcast market.
The Company generally does not directly compete with other
racetracks or simulcast facilities for patrons due to geographic separation of
such facilities. However, the Company competes with other sports, entertainment
and gaming options, including riverboat casinos and lotteries, for patrons for
both live racing and simulcasting (For a further discussion of the Company's
competitive environment, see "Management Discussion and Analysis of Financial
Condition and Results of Operations").
The Company has successfully grown its live racing product and
positioned itself to compete by strengthening its flagship operations,
increasing its share of the interstate simulcast market, and geographically
expanding its racing operations into Indiana. The Company also continues to
pursue legislation to allow video lottery terminals at its racetrack facilities
in Kentucky and Indiana as a means to attract new patrons and generate
additional revenue for purses and capital investment.
F. ENVIRONMENTAL MATTERS
On January 22, 1992, the Company acquired certain assets of
Louisville Downs, Incorporated for $5,000,000 including the site of the
Louisville Sports Spectrum. In conjunction with this purchase, the Company
withheld $1,000,000 from the amount due to the sellers to offset certain costs
related to the remediation of environmental contamination associated with
underground storage tanks at the site. All of the $1,000,000 hold back had been
utilized as of December 31, 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, the
Company has 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
Page 14 of 90
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, 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.
G. EMPLOYEES
The Company employs approximately 325 full-time employees. Due to
the seasonal nature of the Company's live racing business, the number of
seasonal and part-time persons employed will vary throughout the year, with peak
employment occurring Kentucky Derby week when the Company employs as many as
2,600 persons. During 1997, average employment per pay period was approximately
900 individuals.
ITEM 2. PROPERTIES
Information concerning property owned by the Company or its
subsidiaries required by this Item is incorporated by reference to the
information contained in Item 1. "Business" of this Report.
The Kentucky Derby Museum is operated on property adjacent to the
Company's racetrack facility. The Museum is owned and operated by the Kentucky
Derby Museum Corporation, a tax-exempt organization under Section 501(c)(3) of
the Internal Revenue Code of 1986.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than
ordinary routine litigation incidental to the business of the Company, to which
it is a party or of which any of its property is the subject and no such
proceedings are known to be contemplated by governmental authorities.
Page 15 of 90
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders
during the fourth quarter of the fiscal year covered by this Report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter
market. As of March 29, 1993, the Company's common stock was listed on the
National Association of Securities Dealers, Inc.'s Small Cap Market automated
quotation system ("NASDAQ"). As of March 27, 1998, there were approximately
3,100 stockholders of record.
The following table sets forth the high and low bid quotations
(as reported by NASDAQ) and dividend payment information for the Company's
Common Stock during its last two years:
1997 - BY QUARTER 1996 - BY QUARTER
--------------------------------- ---------------------------------
1ST 2ND 3RD 4TH 1ST 2ND 3RD 4TH
------ ------ ------ ------ ------ ------ ------ ------
High Bid $18.50 $19.00 $21.00 $23.38 $20.00 $22.00 $18.75 $18.25
Low Bid $16.00 $16.50 $16.25 $20.75 $16.00 $18.00 $17.00 $17.00
Dividend per share:
Annual $.25 $.25
Special $.25 $.08
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.
The Company presently expects that comparable annual cash
dividends (adjusted for any stock splits or other similar transactions) will
continue to be paid in the future.
Page 16 of 90
ITEM 6. CONSOLIDATED SELECTED FINANCIAL DATA
Eleven Months
Year Ended Year Ended Year Ended Year Ended Ended
December 31, December 31, December 31, December 31, December 31,
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ------------
Operations:
Net revenues $118,907,367 $107,858,818 $92,434,216 $66,419,460 $55,809,889
Operating income $14,405,288 $12,314,897 $10,305,210 $9,861,086 $8,959,220
Net earnings $9,148,560 $8,071,526 $6,203,135 $6,166,353 $5,906,034
Basic net earnings per share* $1.25 $1.08 $.82 $.82 $.78
Diluted net earnings per share* $1.25 $1.08 $.82 $.82 $.78
Dividend paid per share
Annual $.25 $.25 $.25 $.25 $.25
Special $.25 $.08 - - -
At Period End:
Total assets $85,848,808 $80,728,966 $77,486,482 $70,175,840 $56,819,959
Working capital
(deficiency) $(8,032,492) $(10,789,190) $(10,433,929) $(10,131,254) $(776,756)
Long-term debt $2,712,969 $2,999,191 $6,421,176 $8,683,314 $583,090
Stockholders' equity $53,392,497 $47,780,880 $46,653,157 $42,003,147 $36,995,853
Stockholders' equity
per share $7.30 $6.54 $6.17 $5.55 $4.90
Additions to racing
plant and equipment $4,568,494 $2,570,795 $8,589,535 $23,310,204 $1,409,888
* Earnings per share data for prior periods has been restated to reflect the adoption of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share".
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.
In 1993, the Company changed to a calendar year from a fiscal
year ending January 31. The change of fiscal year resulted in a transition
period of eleven months which began February 1, 1993 and ended December 31,
1993.
Page 17 of 90
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL INFORMATION
This discussion and analysis includes a forecast of future
results of operations. Such a forecast is a "forward-looking statement" under
the federal securities laws. Actual results could differ materially from this
forecast and there can be no assurance that such forecast of future results will
be achieved. Important factors that could cause actual results to differ
materially from the presently estimated amounts include: the continued ability
of the Company to effectively compete for the country's top horses and trainers
necessary to field high-quality horse racing; the continued ability of the
Company to grow its share of the interstate simulcast market; a substantial
change in allocation of live racing days; the impact of competition from
alternative gaming ( including riverboat casinos and lotteries) and other sport
and cultural options in those markets in which the Company operates; a decrease
in riverboat admissions revenue from the Company's Indiana operations; and the
Company's success in its pursuit of strategic initiatives designed to attract
new patrons and generate additional revenue for purses and capital investment.
Churchill Downs Incorporated (the "Company") primarily conducts
pari-mutuel wagering on Thoroughbred and Standardbred horse racing at its
facilities in Kentucky and Indiana. The Company owns and operates Churchill
Downs racetrack in Louisville, Kentucky ("Churchill Downs"). Churchill Downs has
conducted Thoroughbred racing continuously since 1875, and is internationally
known as home of the Kentucky Derby. Through its subsidiary, Hoosier Park, L.P.,
the Company is majority owner and operator of Hoosier Park in Anderson, Indiana
("Hoosier Park"), which conducts Thoroughbred, Quarter Horse and Standardbred
horse racing. The Company conducts simulcast wagering on horse racing year-round
at its four Churchill Downs Sports Spectrum facilities ("Sports Spectrum") in
Kentucky and Indiana, as well as its racetracks.
In November 1997, the Company formed Churchill Downs Investment
Company ("CDIC"), a wholly owned subsidiary, to oversee those investments in
which the Company participates as an equity investor and does not actively
manage the operations. Among the investments held by CDIC are Tracknet, LLC
("Tracknet"), a telecommunications service provider for the pari-mutuel and
simulcasting industries, and EquiSource, LLC ("EquiSource"), a recently formed
procurement business which will assist in the group purchasing of supplies and
services for the equine industry. The Company is a minority investor in both
Tracknet and EquiSource. CDIC also holds the Company's investment in Kentucky
Downs, a racetrack which conducts a limited Thoroughbred race meet as well as
year-round simulcasting, near Franklin, Kentucky. These investments are not
material to the Company's operations at this time.
The Company's primary sources of income are commissions and fees
earned from pari-mutuel wagering on live and simulcast horse races. Other
sources of income include admissions and seating, concession commissions
(primarily for the sale of food and beverages), riverboat admission tax
supplement, license, rights and broadcast fees and sponsorship revenues.
Page 18 of 90
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Kentucky's racetracks, including Churchill Downs, are subject to
the licensing and regulation of the Kentucky Racing Commission ("KRC"), which
consists of 11 members appointed by the governor of Kentucky. Licenses to
conduct live Thoroughbred race meetings and to participate in simulcasting are
approved annually by the KRC based upon applications submitted by the racetracks
in Kentucky. Although to some extent Churchill Downs competes with other
racetracks in Kentucky for the award of racing dates, the KRC is required by
state law to consider and seek to preserve each racetrack's usual and customary
live racing dates. Generally, there is no substantial change from year to year
in the racing dates awarded to each racetrack. Churchill Downs conducted live
racing on 77 days during the year ended December 31, 1997. For 1998, Churchill
Downs has received a license to conduct live racing for a total of 71 racing
days on approximately the same dates as the prior year's Spring and Fall race
meetings. The total number of days on which Churchill Downs conducts live racing
fluctuates annually according to the calendar year. A substantial change in the
allocation of live racing days at Churchill Downs could impact the Company's
operations and earnings in future years.
Churchill Downs will host Breeders' Cup Day on November 7, 1998.
Breeders' Cup Limited is a tax-exempt organization chartered to promote
Thoroughbred racing and breeding. The Breeders' Cup Day races are held annually,
featuring $12 million in purses, for the purpose of determining Thoroughbred
champions in seven different events. Racetracks across the United States compete
for the privilege of hosting the Breeders' Cup Day races each year. The
Breeders' Cup Day races were held in California in November 1997. Hosting the
event in 1998 may have a positive impact on the Company's 1998 results.
In Indiana, licenses to conduct live Standardbred and
Thoroughbred race meetings, including Quarter Horse races, and to participate in
simulcasting are approved annually by the Indiana Horse Racing Commission
("IHRC"), which consists of 5 members appointed by the governor of Indiana.
Licenses are approved annually by the IHRC based upon applications submitted by
the Company. Currently, the Company is the only facility in Indiana licensed to
conduct live Standardbred, Quarter Horse or Thoroughbred racing and to
participate in simulcasting. In 1997, the Company conducted 142 days of live
racing, including 85 days of Standardbred racing and 57 days of Thoroughbred
racing. Quarter Horse races were conducted during a Thoroughbred race day. The
Company has received a license to conduct live racing in 1998 for a total of 152
racing days, including 94 days of Standardbred racing, and 58 days of
Thoroughbred racing (which also includes Quarter Horse races). A substantial
change in the allocation of live racing days at Hoosier Park could impact the
Company's operations and earnings in future years.
Page 19 of 90
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company employs approximately 325 full-time employees. Due to
the seasonal nature of the Company's live racing business, the number of
seasonal and part-time persons employed will vary throughout the year, with peak
employment occurring Kentucky Derby week when the Company employs as many as
2,600 persons. During 1997, average employment per pay period was approximately
900 individuals.
The Company generally does not directly compete with other
racetracks or simulcast facilities for patrons due to geographic separation of
such facilities. However, the Company competes with other sports, entertainment
and gaming options, including riverboat casinos and lotteries, for patrons for
both live racing and simulcasting. The Company attempts to attract patrons by
providing the highest quality racing products in attractive entertainment
facilities with well-priced, appealing concession services. The Company is the
premier racetrack in Kentucky for both live racing and simulcasting, based upon
total handle and attendance, and the only facility in Indiana providing live and
simulcast racing.
The development of riverboat gaming facilities began in Indiana
pursuant to authorizing legislation passed by the state of Indiana in 1993.
Illinois had previously authorized riverboat gaming. There are currently four
riverboat casinos operating on the Ohio River along Kentucky's border -- two in
the southeastern Indiana cities of Lawrenceburg and Rising Sun, one in
southwestern Indiana in Evansville and one at Metropolis, Illinois.
Direct competition with these riverboats has negatively impacted
wagering at Churchill Downs and other racetracks in western and northern
Kentucky. However, Churchill Downs reversed this trend in 1997 with the increase
in attendance and wagering experienced during its 1997 Spring and Fall Meets,
due primarily to an aggressive on-track marketing program, and further expansion
of interstate simulcasting.
One, and possibly two, additional riverboats are anticipated to
open along the Indiana shore of the Ohio River. In May 1996, the Indiana Gaming
Commission awarded a preliminary license to RDI/Caesars World to operate the
world's largest riverboat casino in Harrison County, Indiana, just 10 miles from
Louisville. A construction permit was issued to RDI/Caesars World by the U.S.
Army Corps of Engineers in February 1998, and they have announced that the
riverboat will open in the summer of 1998. However, the U.S. Environmental
Protection Agency is now conducting a separate review of the Corps' decision,
and its recommendation could result in further delays for the project. The
Indiana Gaming Commission voted in December 1997 to postpone indefinitely the
Page 20 of 90
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
granting of a license to open a fifth Indiana riverboat along the Ohio River in
either Crawford County or Switzerland County, within 30 or 70 miles,
respectively, of Louisville.
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
Caesars World riverboat is open and mature. These same studies projected similar
declines in western and northern Kentucky but recent experience at Ellis Park
and Turfway Park indicates the impact may not be as severe as these studies
projected.
In addition to those riverboats operating along the Ohio River,
five riverboat casinos have opened along the Indiana shore of Lake Michigan near
the Company's Sports Spectrum in Merrillville, Indiana. The Company's
pari-mutuel wagering activities at the Merrillville facility have been adversely
impacted by the opening of these Lake Michigan riverboats.
Additionally, the Potawatomi Indian Tribe has expressed an
interest in establishing land-based casino operations in northeastern Indiana.
At this time, proposed changes to the Indian Gaming Regulatory Act could have an
impact on compact negotiations between the Potawatomi Tribe and the state of
Indiana. The Company continues to anticipate that development of any such Indian
casino operations will negatively impact pari-mutuel wagering activities at its
Indiana facilities. However, the extent of the impact is unknown at this time
due, in part, to the uncertain geographic distances between the Company's
operations and the number of potential casino sites.
The Company continues to pursue legislation to allow video
lottery terminals at its racetrack facilities in Kentucky and Indiana. The
integration of alternative gaming products is one of four core business
strategies developed by the Company to position itself to compete in this
changing environment. Implementing these strategies, the Company has
successfully grown its live racing product by strengthening its flagship
operations, increasing its share of the interstate simulcast market, and
geographically expanding its racing operations into Indiana. Alternative gaming
in the form of video lottery terminals and slot machines should enable Churchill
Downs to more effectively compete with Indiana riverboat casinos, and provide
new revenue for purse money and capital investment. Currently, Churchill Downs
is working with members of the Kentucky horse industry to establish a consensus
for a plan to operate video lottery terminals exclusively at Kentucky's
racetracks.
Page 21 of 90
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The horse industry in Indiana presently receives $.65 per $3
admission to riverboats in the state to compensate for the effect of riverboat
competition. Riverboat admissions revenue from the Company's Indiana operations
increased $7.9 million as a result of the opening of additional riverboats along
the Ohio River and Lake Michigan since December 31, 1996. The net increase in
riverboat admissions revenue, after required purse and marketing expense
increases of approximately $4.9 million, is $3.0 million. Legislation
challenging the allocation of the $.65 subsidy was introduced to the Senate
Finance Committee in the recent session of the Indiana General Assembly, but the
bill did not pass out of the committee. A change in Hoosier Park's share of the
tax would significantly impact funding for operating expenditures and would in
all likelihood reemphasize the need for the integration of alternative gaming
products at the racetrack in order for it to effectively compete with riverboat
casinos.
The Company owned and operated two live racing facilities and
four simulcast wagering facilities during the years ended December 31, 1997 and
1996. The chart below summarizes the attendance and wagering handle for the
operations in 1997 and 1996:
Page 22 of 90
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
KENTUCKY INDIANA
------------------------------------ ------------------------------------
Year Ended Year Ended Year Ended Year Ended
December 31, December 31, Increase/ December 31, December 31, Increase/
1997 1996 Decrease 1997 1996 Decrease
------------ ------------ --------- ------------ ------------ ---------
ON-TRACK
No. of Race Days 77 78 -1 142 132 10
Attendance 913,723 903,132 1% 169,709 168,849 1%
Handle $132,290,238 $129,484,436 2% $16,937,138 $ 17,530,325 -3%
Average daily
attendance 11,867 11,579 2% 1,195 1,279 -7%
Average daily handle $1,718,055 $1,660,057 3% $119,276 $132,805 -10%
Per capita handle $144.78 $143.37 1% $99.81 $103.84 -4%
INTRASTATE SIMULCAST SENDING
No. of Race Days 77 78 -1 - - -
Handle $40,650,783 $46,731,083 -13% - - -
Average daily handle $527,932 $599,116 -12% - - -
INTERSTATE SIMULCAST SENDING
No. of Race Days 77 78 -1 142 132 10
Handle $383,542,874 $343,482,505 12% $39,771,724 $27,193,841 46%
Average daily handle $4,981,076 $4,403,622 13% $280,083 $206,014 36%
INTRASTATE SIMULCAST RECEIVING
No. of Race Days 212 200 12 - - -
Handle $41,051,472 $50,384,375 -19% - - -
Average daily handle $193,639 $251,922 -23% - - -
INTERSTATE SIMULCAST RECEIVING*
No. of Race Days 212 200 12 1,215 1,192 23
Handle $83,033,566 $70,537,608 18% $130,019,991 $131,715,597 -1%
Average daily handle $391,668 $352,688 11% $107,012 $110,500 -3%
Total handle $680,568,933 $640,620,007 6% $186,728,853 $176,439,763 6%
* The Company's Indiana operations include four separate simulcast wagering
facilities.
Page 23 of 90
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Total handle in Kentucky increased approximately $39.9 million
(6%) primarily as a result of a $40 million (12%) increase in interstate
simulcast sending wagering. The Company's live races at Churchill Downs were
transmitted to a record number of outlets across the nation during 1997.
Additionally, the construction of an on-site simulcast wagering facility at
Churchill Downs used during live racing as well as growth at the Louisville
Sports Spectrum generated increases in interstate simulcast receiving handle of
$12.5 million (18%) which also contributed to the overall increase in Kentucky
handle.
In Indiana, total handle increased approximately $10.3 million
(6%) primarily as a result of a 46% increase in interstate simulcast sending
handle. The number of live race days in Indiana increased 10 days and were
transmitted to more outlets across the nation in 1997. Conversely, on-track
average daily attendance and average daily handle figures decreased by 7% and
10%, respectively.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO 1996
NET REVENUES
Net revenues during the year ended December 31, 1997 increased
$11.0 million (10%) to $118.9 million.
Pari-mutuel revenues increased $3.4 million (4%) with interstate
simulcast sending and receiving revenues contributing $1.6 and $1.7 million,
respectively, to the total increase. Increased interstate simulcast receiving
revenues in Kentucky were generated as a result of the new Paddock Pavilion
simulcast wagering facility at Churchill Downs used during live racing in
Kentucky as well as growth at the Louisville Sports Spectrum. Indiana Sports
Spectrums also experienced an overall growth in wagering which contributed to
the increase in interstate simulcast receiving revenues as well.
The net increase in riverboat admissions revenue from the
Company's Indiana operations was $3.0 million as a result of the opening of
additional riverboats along the Ohio River and Lake Michigan since December 31,
1996. The riverboat admissions revenue increase of $7.9 million was partially
offset by increases of $4.9 million of required purse and marketing expenses
associated with the riverboat admission subsidy.
Page 24 of 90
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Concession commission revenues declined $500,000 (19%) as a
result of concession price reductions as part of the Company's aggressive
on-track marketing program in Kentcuky.
Following is a summary of Net Revenues:
NET REVENUE SUMMARY
-----------------------------------------------------------------
Year Ended % To Year Ended % To 1997 VS. 1996
December 31, Total December 31, Total $ %
1997 Revenue 1996 Revenue Change Change
------------ ------- ------------ ------- ------ ------
Pari-Mutuel Revenue
On-track $22,628,807 19% $22,228,465 21% $400,342 2%
Intrastate Sending 6,961,803 6 6,875,000 6 86,803 1
Interstate Sending 13,370,372 11 11,794,255 11 1,576,117 13
Intrastate Receiving 4,839,827 4 5,173,803 5 (333,976) -6
Interstate Receiving 31,321,966 27 29,644,245 27 1,677,721 6
------------ ----- ------------ ------ ----------- ---
$79,122,775 67% $75,715,768 70% $3,407,007 4%
Riverboat Admission,
Promotion & Purse Revenue 12,741,531 11 4,809,484 5 7,932,047 165
Admission & Seat Revenue 12,302,467 10 12,252,044 11 50,423 -
License, Rights, Broadcast
& Sponsorship Fees 6,134,653 5 5,921,797 6 212,856 4
Concession Commission 2,063,849 2 2,559,736 2 (495,887) -19
Program Revenue 2,939,150 2 3,128,491 3 (189,341) -6
Other 3,602,942 3 3,471,498 3 131,444 4
------------ ---- ------------ ---- ----------- ---
$118,907,367 100% $107,858,818 100% $11,048,549 10%
============ ==== ============ ==== =========== ===
Page 25 of 90
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING EXPENSES
Total operating expenses increased $8.5 million (10%) during the
year ended December 31, 1997. Gross profit increased $2.3 million (11%) during
the same period but remained relatively flat as a percentage of net revenues.
Purse expense increased $5.3 million (15%) with riverboat purses
contributing $3.9 million (156%) to the total increase. In Kentucky and Indiana,
all other purse expense varies directly with pari-mutuel revenues and is
calculated as a percentage of the related revenue and may change from year to
year pursuant to contract or statute. Accordingly, on-track, intrastate and
interstate simulcast purses reflect changes in direct proportion to changes in
pari-mutuel revenues for the same categories. The increases in interstate
simulcast sending and interstate simulcast receiving of $819,000 and $426,000,
respectively, are directly related to the increases in net revenues for the same
categories.
Wages and contract labor increased $1.2 million (7%) but
decreased from 20% to 19% of total operating expenses. Salary increases
resulting from increased business activity and general cost of living increases
account for a significant portion of the variance.
Simulcast host fees increased primarily as a result of expansion
of interstate simulcast receiving wagering during the live race meets in
Kentucky.
Advertising, marketing and publicity expenses increased $1.2
million (30%) primarily as a result of an increase in marketing expenses in
Indiana of $1 million which were reimbursed from the riverboat admissions
subsidy.
Audio, video and signal distribution expense increase of $483,000
represent costs associated with sending the Company's live racing products to a
greater number of sites and additional equipment for enhanced and expanded areas
for simulcast receiving wagering in Kentucky.
Depreciation expense increased $250,000 as a result of property
and equipment additions during 1997. Amortization expense decreased $505,000 as
a result of organization and preopening costs associated with the Company's
Indiana operations becoming fully amortized.
Page 26 of 90
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following is a summary of Operating Expenses:
OPERATING EXPENSE SUMMARY
-------------------------------------------------------------------
Year Ended % To Year Ended % To 1997 VS. 1996
December 31, Total December 31, Total $ %
1997 Expense 1996 Expense Change Change
------------ ------- ------------- ------- ------ ------
Purses:
On-track $11,703,355 12% $11,560,896 13% $142,459 1%
Intrastate Sending 3,263,863 4 3,191,280 4 72,583 2
Interstate Sending 6,807,315 7 5,987,877 7 819,438 14
Intrastate Receiving 2,077,244 2 2,183,970 3 (106,726) -5
Interstate Receiving 9,423,476 10 8,997,908 10 425,568 5
Riverboat 6,443,121 7 2,517,212 3 3,925,909 156
----------- ---- ----------- ------ --------- ---
$39,718,374 42% $34,439,143 40% $5,279,231 15%
Wages and Contract Labor 18,521,052 19 17,283,823 20 1,237,229 7
Simulcast Host Fee 7,848,910 8 7,286,133 8 562,777 8
Advertising, Marketing &
Publicity 5,062,907 5 3,887,826 5 1,175,081 30
Racing Relations & Services 1,879,062 2 1,803,256 2 75,806 4
Totalisator Expense 1,523,350 2 1,506,146 2 17,204 1
Audio, Video and Signal
Distribution Expense 2,208,287 2 1,725,585 2 482,702 28
Program Expense 2,358,467 2 2,463,441 3 (104,974) -4
Depreciation & Amortization 4,558,761 5 4,814,114 5 (255,353) -5
Insurance, Taxes & License 2,633,896 3 2,513,002 3 120,894 5
Fees
Maintenance 1,745,524 2 1,875,191 2 (129,667) -7
Utilities 2,647,574 3 2,840,312 3 (192,738) -7
Facility Rent 837,722 1 842,930 1 (5,208) -1
Other Meeting Expense 3,880,210 4 3,597,077 4 283,133 8
----------- ---- ----------- ---- ---------- -----
$95,424,096 100% $86,877,979 100% $8,546,117 10%
=========== ==== =========== ==== ========== ===
Page 27 of 90
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 expenses increased by
$412,000 (5%) during the year ended December 31, 1997 to $9.1 million which
represents a decline of approximately one-half percent as a percentage of net
revenues.
OTHER INCOME AND EXPENSE
Interest income of $575,000 in 1997 increased by $184,000 as a
result of the additional earnings generated by the Company from its short-term
cash investments (cash equivalents). Miscellaneous income decreased by $348,000
in 1997 primarily as the result of the gain recognized on Conseco's acquisition
of 10% of Hoosier Park in 1996.
INCOME TAX PROVISION
Income tax provision increased by $855,000 in 1997 as the result
of an increase in pre-tax earnings of $1.9 million. The effective income tax
rate increased slightly from 38.1% to 38.9%.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO 1995
REVENUES
Net revenues during the year ended December 31, 1996 increased
$15.4 million (17%) to $107.9 million.
Pari-mutuel revenues increased $10 million (15%) with interstate
simulcast sending and receiving revenues contributing $3.5 and $6.2 million,
respectively, to the total increase. The Company's live races in both Kentucky
and Indiana were transmitted to a record number of outlets in 1996 contributing
to the increase in interstate simulcast sending revenues. All of the Indiana
wagering facilities were fully operational in 1996 which led to a majority of
the increase in interstate simulcast receiving revenues. Additional growth in
wagering at the Louisville Sports Spectrum also contributed to the increase in
interstate simulcast receiving.
The net increase in riverboat admissions revenue from the
Company's Indiana operations was $1.9 million. Gross revenues of $4.8 million
resulting from the opening of several
Page 28 of 90
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
riverboats along the Ohio River and Lake Michigan were offset partially by $2.9
million in related riverboat purse and marketing expenses.
Other revenues increased as additional space was added for
corporate patrons for the Kentucky Derby and Oaks Days.
Following is a summary of Net Revenues:
NET REVENUE SUMMARY
-----------------------------------------------------------------
Year Ended % To Year Ended % To 1996 VS. 1995
December 31, Total December 31, Total $ %
1996 Revenue 1995 Revenue Change Change
------------ ------- ------------ ------- ------ ------
Pari-Mutuel Revenue
On-track $22,228,465 21% $22,492,464 24% ($263,999) -1%
Intrastate Sending 6,875,000 6 6,451,715 7 423,285 7
Interstate Sending 11,794,255 11 8,316,380 9 3,477,875 42
Intrastate Receiving 5,173,803 5 5,020,915 6 152,888 3
Interstate Receiving 29,644,245 27 23,420,716 25 6,223,529 27
----------- ---- ----------- ---- ----------- ----
$75,715,768 70% $65,702,190 71% $10,013,578 15%
Riverboat Admissions
Promotion & Purse Revenue 4,809,484 4 - - 4,809,484 100
Admission & Seat Revenue 12,252,044 11 12,243,245 13 8,799 -
License, Rights, Broadcast
& Sponsorship Fees 5,921,797 5 5,642,092 6 279,705 5
Concession Commission 2,559,736 2 2,610,658 3 (50,922) -2
Program Revenue 3,128,491 3 2,931,315 3 197,176 7
Other 3,471,498 3 3,304,716 4 166,782 5
------------ ---- ---------- ---- ----------- ----
$107,858,818 100% $92,434,216 100% $15,424,602 17%
============ ==== =========== ==== =========== ====
Page 29 of 90
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OPERATING EXPENSES
Total operating expenses increased $13.1 million (18%) during the
twelve month period. Gross profit increased $2.6 million (14%) during the same
period but remained relatively flat as a percentage of net revenues, decreasing
from 20.2% to 19.6% through December 31, 1996.
Purse expense increased by $6.8 million (25%) with riverboat
purses contributing $2.5 million (100%) to the total increase. In Kentucky and
Indiana, all other purse expense varies directly with pari-mutuel revenues and
is calculated as a percentage of the related revenue and may change from year to
year pursuant to contract or statute. Accordingly, on-track, intrastate and
interstate simulcast purses reflect changes in direct proportion to changes in
pari-mutuel revenues for the same categories. The increases in interstate
simulcast sending and interstate simulcast receiving of $1.9 million and $2.1
million, respectively, are directly related to the increases in net revenues for
the same categories.
Wages and Contract Labor decreased from 22% of total operating
expenses in 1995 to 20% in 1996 despite increases of $1.4 million primarily due
to staff expansion in Kentucky and Indiana and meet related payroll increases.
Churchill Downs conducted four extra racing days in 1996 and the Churchill Downs
Sports Spectrum was open on Kentucky Derby weekend, which in the past had been
closed on both days.
Simulcast Host Fee and Totalisator expenses increased $1.7
million and $413,000, respectively. Totalisator expenses are based on total
wagers taken at the facilities while Simulcast Host Fees are paid to the track
whose live races are being simulcast at the facilities. As total wagers
increase, these expenses, along with purses, increase accordingly.
The increase of $721,000 in Advertising, Marketing and Publicity
is due largely to the marketing of the satellite wagering facilities in Indiana.
Approximately $150,000 was spent in each of the Ft. Wayne and Anderson, Indiana
areas as part of an intensive marketing campaign in Indiana. In Kentucky, new
marketing programs such as Twin Spires Club and Winners Circle Sponsorship,
along with expenses incurred in conjunction with ESPN's Derby Week coverage,
caused increases during the twelve month period.
Program expenses increased $428,000 in 1996 primarily due to
increased attendance at the satellite wagering facilities in Indiana. In
addition, higher paper costs in Kentucky added to the increase.
Page 30 of 90
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Increases in Depreciation and Amortization are related to the
Thoroughbred improvements at Hoosier Park and depreciation on the Ft. Wayne
property for a full year. Insurance, Taxes and License Fees decreased $405,000
as a new property insurance carrier was selected and general liability rates
declined.
Facility rent increased $843,000 due to lease expense on the
Indianapolis, Indiana off-track wagering facility operating for a full year in
1996.
Page 31 of 90
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following is a summary of Operating Expenses:
OPERATING EXPENSE SUMMARY
----------------------------------------------------------------
Year Ended % To Year Ended % To 1996 VS. 1995
December 31, Total December 31, Total $ %
1996 Expense 1995 Expense Change Change
----------- ------- ------------ ------- ------ ------
Purses
On-track $11,560,896 13% $11,601,141 16% ($40,245) -
Intrastate Sending 3,191,280 4 2,949,510 4 241,770 8%
Interstate Sending 5,987,877 7 4,136,917 6 1,850,960 45
Intrastate Receiving 2,183,970 3 2,108,845 3 75,125 4
Interstate Receiving 8,997,908 10 6,855,068 9 2,142,840 31
Riverboat 2,517,212 3 - - 2,517,212 100
----------- ---- ----------- --- ---------- ---
$34,439,143 40% $27,651,481 38% $6,787,662 25%
Wages and Contract Labor 17,283,823 20 15,897,434 22 1,386,389 9
Simulcast Host Fee 7,286,133 8 5,561,467 7 1,724,666 31
Advertising, Marketing & 3,887,826 5 3,166,951 4 720,875 23
Publicity
Racing Relations & Services 1,803,256 2 1,623,518 2 179,738 11
Totalisator Expense 1,506,146 2 1,092,718 1 413,428 38
Audio, Video and Signal
Distribution Expense 1,725,585 2 1,505,310 2 220,275 15
Program Expense 2,463,441 3 2,035,447 3 427,994 21
Depreciation & Amortization 4,814,114 5 4,506,427 6 307,687 7
Insurance, Taxes & License 2,513,002 3 2,918,327 4 (405,325) -14
Fees
Maintenance 1,875,191 2 1,882,997 3 (7,806) -
Utilities 2,840,312 3 2,511,310 3 329,002 13
Facility Rent 842,930 1 - - 842,930 100
Other Meeting Expense 3,597,077 4 3,415,095 5 181,982 5
----------- ---- ----------- ---- ----------- -----
$86,877,979 100% $73,768,482 100% $13,109,497 18%
=========== ==== =========== ==== =========== =====
Page 32 of 90
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 expenses increased by
$305,000 (4%) during the year ended December 31, 1996 to $8.7 million which
represents a decline of one percent as a percentage of net revenues from 9.0% to
8.0%. Higher equipment lease expenses and development costs related to
legislative initiatives were offset by reduced spending on other development
projects.
OTHER INCOME AND EXPENSE
Interest income of $391,000 in 1996 increased by $157,000 as a
result of the additional earnings generated by the Company from its short-term
cash investments (cash equivalents). Interest expense was reduced $235,000 to
$337,000 as positive cash flow from operations has allowed the Company to pay
down its line of credit. Miscellaneous income increased by $385,000 in 1996
primarily as the result of the gain recognized on Conseco's acquisition of 10%
of Hoosier Park in 1996.
INCOME TAX PROVISION
The income tax provision increased by $919,000 in 1996 as the
result of an increase in pre-tax earnings of $2.8 million. The effective income
tax rate decreased from 39.5% to 38.1%.
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 the increased earnings of the Company.
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 $1.9 million due
primarily to the Company's ownership investment in and loan to BC Racing Group,
LLC totaling $2.2 million partially offset by accumulated amortization of
organization costs.
The cost of plant and equipment increased by $4.5 million due to
the construction of a new on-site simulcast facility at Churchill Downs as well
as routine capital spending throughout the Company. This was offset by
approximately $4.2 million in depreciation expense.
Page 33 of 90
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Dividends payable of $3.7 million represents the annual and
special dividends and increased by $1.3 million due to the special divided
declaration of $.25 per share in 1997 versus $.08 per share in 1996.
Income taxes payable decreased by $2.3 million in 1997 due
primarily to the timing of estimated tax payments made throughout the year.
Deferred revenue increased by $833,000 primarily as a result of
increased ticket prices for the 1998 Kentucky Derby and Oaks Days.
SIGNIFICANT CHANGES IN THE BALANCE SHEET DECEMBER 31, 1996 TO DECEMBER 31, 1995
The cash balances at December 31, 1996 were $2.4 million higher
than December 31, 1995 due primarily to declining cash requirements from the
Company's Indiana operations. In 1995 the Company opened satellite wagering
facilities and made improvements for the inaugural Indiana Thoroughbred horse
meet in Indiana.
Accounts receivable at December 31, 1996 were $3.1 million higher
than December 31, 1995 due primarily to the Indiana Riverboat Admission tax
which had not been received as of December 31, 1996. The first riverboat opened
in December 1995.
The cost of plant and equipment increased by $2.6 million as a
result of routine capital spending throughout the Company, offset by $4.0
million of depreciation expense.
Accounts payable and accrued expenses have increased by $3.6
million mostly due to increases in purses payable related to the increase in
simulcast revenue.
Income taxes payable which relates to the estimated expense due
for the twelve month period, less any estimated tax payments, increased $1.5
million due to an increase in earnings and the timing of federal and state
income tax payments.
Long-term debt was $3.5 million lower at December 31, 1996 as
positive cash flow has allowed the Company to eliminate its outstanding bank
debt.
Dividends payable increased by $500,000 to $2.4 million due to
the special dividend declaration of $.08 per share in 1996.
Page 34 of 90
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On May 7, 1996 the Company purchased 117,300 shares of common
stock at a total cost of $2,346,001. On August 2, 1996 the Company issued 7,818
shares of common stock to employees under its Stock Purchase Plan for total
proceeds of $112,970. Additionally, on September 27, 1996 the Company purchased
151,200 shares of common stock at a total cost of $2,608,192. These purchases
had a positive effect on earnings per share, adding $.02 to earnings per share
for the year ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of December 31, 1997, 1996 and 1995 follows:
1997 1996 1995
----------- ------------ ------------
Deficiency in working capital $(8,032,492) $(10,789,190) $(10,433,929)
Working Capital ratio .68 to 1 .57 to 1 .45 to 1
The working capital deficiency results from the nature and
seasonality of the Company's business. Cash flows provided by operations were
$10,470,197, $15,126,115 and $16,540,123 for the years ended December 31, 1997,
1996 and 1995, respectively. The decrease of $4.7 million in 1997 is primarily
the result of the timing of accounts payable, income taxes payable and accrued
expense balances. Management believes cash flows from operations during 1998
will be substantially in excess of the Company's disbursements for the year,
including debt repayments and capital improvements.
Cash flows used in investing activities were $6,905,994,
$2,570,795 and $9,051,071 for the years ended December 31, 1997, 1996 and 1995,
respectively. The increase of $4.3 million in 1997 in cash used for investing is
primarily due to the 24% ownership investment in and loan to BC Racing Group,
LLC of $2.2 million and additional capital spending for the construction of a
new on-site simulcast facility in Kentucky. In 1995, the Company funded $6.5
million to construct three satellite wagering facilities in Indiana and
improvements which allowed for Thoroughbred racing at Hoosier Park.
Cash flows used in financing activities were $2,493,384,
$10,202,094 and $4,153,897 for the years ended December 31, 1997, 1996 and 1995,
respectively. The decrease of $7.7 million in 1997 in cash used for financing is
the result of a $5 million repurchase of stock and the reduction of the
Company's line-of-credit balance in 1996.
Page 35 of 90
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company has a $20,000,000 unsecured line-of-credit all of
which is available at December 31, 1997 to meet working capital and other
short-term requirements. Management believes that the Company has the ability to
obtain additional long-term financing should the need arise.
IMPACT OF THE YEAR 2000 ISSUE
The Company has conducted a comprehensive review of its computer
systems to identify the systems that could be affected by the Year 2000 Issue
and has developed a comprehensive plan to resolve the issue. The Year 2000 Issue
is the result of computer programs that fail to utilize the full four-digit
representation of a year which would cause date-sensitive software to recognize
a date using "00" as the year 1900 rather than the year 2000. An inability of
the systems to correctly recognize dates in date-sensitive calculations could
lead to system failure and disruption of operations. The Company plans to
complete the Year 2000 Issue project by June 30, 1999.
The pari-mutuel industry is very dependent upon telecommunication
links which connect companies together for normal commerce. The transition to
the year 2000 may adversely affect the operations of these links. In addition,
the Company obtains critical services necessary for normal operations from
technology vendors who likewise may be affected by the Year 2000 Issue. The
Company is communicating with its significant suppliers, customers and others
with which it conducts business to help them identify and resolve their own Year
2000 Issue. If necessary modifications and conversions by the Company and those
with which it conducts business are not completed timely, the Year 2000 Issue
may have a material adverse effect on the Company's results of operations.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (SFAS 128). SFAS 128 is designed to
improve the EPS information provided in financial statements by simplifying the
existing computational guidelines. The footnotes to the financial statements
contain the required disclosures. The adoption of this standard did not have a
material impact on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130). SFAS 130 establishes standards for reporting
and display of comprehensive income and its components (revenues, expenses,
gains and losses) in a full set of general-purpose financial statements. SFAS
130 is effective for financial statements issued for periods beginning after
December 15, 1997. The
Page 36 of 90
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Company does not expect adoption of this standard will have a material impact on
its financial statements.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131). The Company will adopt SFAS 131 during the fourth
quarter of 1998 as required.
In February 1998, the FASB issued Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures about Pensions and other
Post-retirement Benefits" (SFAS 132). This statement revises employers'
disclosures about pensions and other post-retirement plans without changing the
measurement or recognition of those plans. The Company will adopt SFAS 132 in
1998.
SUBSEQUENT EVENTS
On March 19, 1998, the Company's Board of Directors authorized a
2-for-1 stock split with a record date of March 30, 1998 and also authorized the
increase in the number of authorized shares of no par value common stock from 10
million to 20 million shares, subject to approval of shareholders at the next
annual meeting of shareholders. Retroactive recognition has been given to this
stock split in this Form 10-K and in the accompanying financial statements.
Additionally, the Company's Board of Directors approved a
shareholder "Rights Plan" (the "Plan") on March 19, 1998 which grants each
shareholder 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 shareholders from takeover tactics that may be used by an acquirer
which the Board believes are not in the best interests of the shareholders. The
Plan expires on March 19, 2008.
On March 19, 1998 the Company's Board of Directors also
approved the execution of a new line of credit following a bank's commitment to
increase its unsecured bank line of credit from $20 million to $50 million. The
interest rate is based upon LIBOR plus 50 to 100 additional basis points
determined by certain Company financial ratios or at prime rate minus 50 basis
points, at the Company's election. The line of credit expires in March 2000.
Page 37 of 90
CHURCHILL DOWNS INCORPORATED
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On March 28, 1998, the Company entered into a stock purchase
agreement with TVI Corp., ("TVI") for the purchase of 100% of the stock of
Racing Corporation of America ("RCA"). 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 will be
approximately $22,000,000 in a combination of cash and common stock of the
Company. The sale which is expected to close in April is subject to various
closing conditions and approvals of several regulatory agencies, including the
Kentucky Racing Commission. The purchase is not anticipated to have any material
effect on earnings in 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not applicable.
Page 38 of 90
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Churchill Downs Incorporated
We have audited the accompanying consolidated balance sheets of Churchill Downs
Incorporated and subsidiaries as of December 31, 1997, 1996 and 1995 and the
related consolidated statements of earnings, stockholders' equity and cash
flows, and the consolidated financial statement schedule, for each of the three
years then ended as listed in Item 14 of this Form 10-K. These consolidated
financial statements and financial statement schedule are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Churchill Downs
Incorporated and subsidiaries as of December 31, 1997, 1996 and 1995 and the
results of their operations and cash flows for each of the three years then
ended in conformity with generally accepted accounting principles. In addition,
in our opinion, the consolidated financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects, the information required to be
included therein for the years ended December 31, 1997, 1996 and 1995.
/s/Coopers & Lybrand L.L.P.
- ------------------------------
Coopers & Lybrand L.L.P.
Louisville, Kentucky
March 7, 1998, except for Note 13, as to which
the date is March 28, 1998
Page 39 of 90
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31, December 31, December 31,
ASSETS 1997 1996 1995
------------ ------------ ------------
Current assets:
Cash and cash equivalents $9,280,233 $8,209,414 $ 5,856,188
Accounts receivable 7,086,889 5,218,236 2,098,901
Other current assets 540,489 679,221 549,820
----------- ----------- -----------
Total current assets 16,907,611 14,106,871 8,504,909
Other assets 5,778,430 3,739,906 4,632,044
Plant and equipment 104,554,196 100,025,412 97,451,463
Less accumulated depreciation (41,391,429) (37,143,223) (33,101,934)
----------- ----------- -----------
63,162,767 62,882,189 64,349,529
----------- ----------- -----------
$85,848,808 $80,728,966 $77,486,482
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $5,732,783 $5,403,000 $3,384,917
Accrued expenses 7,937,575 8,021,487 6,443,473
Dividends payable 3,658,468 2,375,271 1,892,302
Income taxes payable 186,642 2,510,508 1,049,508
Deferred revenue 7,344,830 6,511,902 6,098,541
Long-term debt, current portion 79,805 73,893 70,097
---------- ----------- -----------
Total current liabilities 24,940,103 24,896,061 18,938,838
Long-term debt, due after one year 2,633,164 2,878,714 6,351,079
Outstanding mutuel tickets (payable after one year) 1,625,846 2,031,500 2,256,696
Deferred compensation 880,098 825,211 871,212
Deferred income taxes 2,377,100 2,316,600 2,415,500
Stockholders' equity:
Preferred stock, no par value; authorized,
250,000 shares; issued, none
Common stock, no par value; authorized,
10,000,000 shares, issued 7,316,936 shares,
1997, 7,308,526 shares, 1996 and 7,569,208
shares, 1995 3,614,567 3,493,042 3,504,388
Retained earnings 49,842,930 44,352,838 43,486,460
Deferred compensation costs - - (272,691)
Note receivable for common stock (65,000) (65,000) (65,000)
----------- ----------- -----------
53,392,497 47,780,880 46,653,157
----------- ----------- -----------
$85,848,808 $80,728,966 $77,486,482
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
Page 40 of 90
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1996 1995
------------- ------------- ------------
Net revenues $118,907,367 $107,858,818 $92,434,216
------------- ------------- ------------
Operating expenses:
Purses 39,718,374 34,439,143 27,651,482
Other direct expenses 55,705,722 52,438,836 46,117,000
------------ ------------- ------------
95,424,096 86,877,979 73,768,482
------------ ------------ ------------
Gross profit 23,483,271 20,980,839 18,665,734
Selling, general and administrative 9,077,983 8,665,942 8,360,524
------------ ------------ ------------
Operating income 14,405,288 12,314,897 10,305,210
------------ ------------ ------------
Other income (expense):
Interest income 575,084 390,669 233,556
Interest expense (332,117) (337,438) (572,779)
Miscellaneous income 325,087 673,398 288,148
------------ ------------ ------------
568,054 726,629 (51,075)
------------ ------------ ------------
Earnings before income tax provision 14,973,342 13,041,526 10,254,135
Federal and state income tax provision 5,824,782 4,970,000 4,051,000
------------ ------------ -------------
Net earnings $9,148,560 $ 8,071,526 $ 6,203,135
============ ============ ============
Net earnings per share data:
Basic net earnings $1.25 $1.08 $.82
Diluted net earnings $1.25 $1.08 $.82
Weighted average shares outstanding:
Basic 7,312,052 7,445,542 7,568,278
Diluted 7,320,670 7,447,706 7,568,692
The accompanying notes are an integral part of the consolidated financial
statements.
Page 41 of 90
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1997, 1996 and 1995
Note Deferred
Common Stock Retained Receivable for Compensation
Shares Amount Earnings Common Stock Costs Total
--------- ---------- ----------- --------------- ------------ -----------
Balances December 31, 1994 7,566,634 $3,437,911 $39,175,627 $ (65,000) $ (545,391) $42,003,147
Net earnings 6,203,135 6,203,135
Deferred compensation
amortization 272,700 272,700
Issuance of common stock at
$25.83 per share 2,574 66,477 66,477
Cash dividends, $.25 per share (1,892,302) (1,892,302)
--------- ---------- ---------- ----------- ----------- -----------
Balances December 31, 1995 7,569,208 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 7,308,526 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 7,316,936 $3,614,567 $49,842,930 $ (65,000) - $53,392,497
========= ========== =========== ========== ========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
Page 42 of 90
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
Cash flows from operating activities:
Net earnings $9,148,560 $8,071,526 $6,203,135
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 4,558,761 4,814,114 4,506,427
Deferred income taxes 352,100 ( 461,000) 167,500
Deferred compensation 54,887 226,690 142,534
Increase (decrease) in cash resulting from
changes in operating assets and liabilities:
Accounts receivable (2,053,211) (2,943,932) 151,847
Other current assets (152,868) 232,699 191,740
Accounts payable 329,783 (1,114,508) 1,969,808
Accrued expenses (83,912) 4,710,605 943,622
Income taxes payable (2,323,866) 1,461,000 1,049,508
Deferred revenue 1,017,486 237,958 (17,100)
Other assets and liabilities (377,523) (109,037) 1,231,102
----------- ----------- -----------
Net cash provided by operating activities 10,470,197 15,126,115 16,540,123
----------- ----------- -----------
Cash flows from investing activities:
Additions to intangible assets - - (461,536)
Additions to plant and equipment, net (4,568,494) (2,570,795) (8,589,535)
Purchase of minority-owned investments (2,337,500) - -
---------- ----------- -----------
Net cash used in investing activities (6,905,994) (2,570,795) (9,051,071)
---------- ----------- ----------
Cash flows from financing activities:
Decrease in long-term debt, net (239,638) (3,468,569) (2,262,138)
Dividends paid (2,375,271) (1,892,302) (1,891,759)
Common stock issued 121,525 112,970 -
Common stock repurchased - (4,954,193) -
---------- ----------- -----------
Net cash used in financing activities (2,493,384) (10,202,094) (4,153,897)
---------- ----------- -----------
Net increase in cash and cash equivalents 1,070,819 2,353,226 3,335,155
Cash and cash equivalents, beginning of period 8,209,414 5,856,188 2,521,033
--------- ---------- ----------
Cash and cash equivalents, end of period $9,280,233 $8,209,414 $5,856,188
========== ============ ==========
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $151,397 $277,149 $485,908
Income taxes $7,914,974 $3,970,000 $2,790,000
Schedule of Non-cash Operating Activities:
Invoicing for 1998 Kentucky Derby and Oaks $402,328 $586,886 $411,483
The accompanying notes are an integral part of the consolidated financial
statements.
Page 43 of 90
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
Churchill Downs Incorporated (the "Company") conducts Spring and Fall
live race meetings for Thoroughbred horses and participates in
intrastate and interstate simulcast wagering as a host track and as a
receiving track in Kentucky. In Indiana, the Company, through its
subsidiary, Hoosier Park L.P. (Hoosier Park), conducts live
Thoroughbred, 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, Churchill Downs
Management Company (CDMC), Churchill Downs Investment Company (CDIC),
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 provided by
accelerated and straight-line methods over the estimated useful lives of
the related assets.
DEFERRED REVENUE:
Deferred revenue includes advance sales of tickets primarily for the
Kentucky Derby and Oaks races in Kentucky.
Page 44 of 90
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(cont'd)
OTHER ASSETS:
Amortization on a racing license is provided over forty years using the
straight-line method. Organizational costs and preopening costs are
amortized over 24 months. Amortization expense was $270,845, $775,979
and $688,916 for the years ended December 31, 1997, 1996 and 1995.
STOCK-BASED COMPENSATION:
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued
to Employees". In accordance with Statement of Financial Accounting
Standards No. 123 (SFAS 123) "Accounting for Stock-based Compensation"
proforma disclosure of net earnings and earnings per share are presented
in Note 7 as if SFAS 123 had been applied.
RECLASSIFICATION:
Certain financial statement amounts have been reclassified in the prior
years to conform to current year presentation.
COMPUTATION OF NET EARNINGS PER COMMON SHARE:
Basic net earnings per common share has been computed by dividing net
earnings by the weighted average number of common shares outstanding
during the period. Diluted net earnings per share has been computed by
dividing net earnings by the weighted average number of common and
common equivalent shares (stock options) outstanding during the period.
Prior period net earnings per share data has been restated to reflect
the adoption of Statement of Financial Accounting Standards No. 128,
"Earnings Per Share".
RECENT ACCOUNTING PRONOUNCEMENTS:
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). The
Company will adopt SFAS 131 during the fourth quarter of 1998 as
required.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and other
Post-retirement Benefits" (SFAS 132). This statement revises employers'
disclosures about pensions and other post-retirement plans without
changing the measurement or recognition of those plans. The Company will
adopt SFAS 132 in 1998.
Page 45 of 90
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. PLANT AND EQUIPMENT:
Plant and equipment are summarized as follows:
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
Land $5,999,036 $ 5,879,994 $ 5,930,242
Grandstands and buildings 57,579,747 56,154,054 55,946,326
Equipment 3,416,306 2,936,129 2,685,026
Furniture and fixtures 4,327,797 3,603,276 3,435,761
Tracks and other improvements 33,118,100 31,377,753 29,332,188
Construction in process 113,210 74,206 121,920
------------ ------------ ------------
$104,554,196 $100,025,412 $97,451,463
============ ============ ============
Depreciation expense was $4,287,916, $4,038,135 and $3,817,511 for the
years ended December 31, 1997, 1996 and 1995.
3. INCOME TAXES:
Components of the provision for income taxes follow:
Income taxes:
1997 1996 1995
----- ----- ----
Currently payable $5,472,900 $5,431,000 $3,883,500
Deferred income taxes 352,100 (461,000) 167,500
---------- ---------- ----------
$5,825,000 $4,970,000 $4,051,000
========== ========== ==========
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:
1997 1996 1995
---- ---- ----
Federal statutory tax on
earnings before income tax $5,141,000 $4,464,000 $3,486,000
State income taxes, net of
federal income tax benefit 612,000 537,000 552,400
Other 72,000 (31,000) 12,600
---------- ---------- ----------
$5,825,000 $4,970,000 $4,051,000
========== ========== ==========
Page 46 of 90
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. INCOME TAXES: (cont'd)
At December 31, 1997, the Company has accumulated net operating loss
carryforwards of approximately $5,097,000 for Indiana state income tax
purposes expiring from 2009 through 2011. Management is unable at this
time to project future taxable income which will utilize these loss
carryforwards. As a result, a valuation allowance was established in
prior years in the amount of $176,000 in 1996 and $104,000 in 1995.
Approximately $3,000 of this allowance was reversed in 1997. The tax
benefit of these carryforwards will be recognized when management is
able to project future taxable income in the state of Indiana.
Significant components of the Company's deferred tax assets and
liabilities at December 31 follows:
1997 1996 1995
---------- ----------- ----------
Deferred tax liabilities:
Excess of book over tax basis of
property & equipment $2,415,000 $2,284,000 $2,161,000
Book basis of racing license
in excess of tax basis 636,000 657,000 680,000
---------- ---------- ----------
Gross deferred tax liability 3,051,000 2,941,000 2,841,000
---------- ---------- ----------
Deferred tax assets:
Accrual for supplemental benefit plan (295,000) (273,000) (252,900)
Net operating loss carryforwards (173,000) (176,000) (104,000)
Allowance for uncollectible receivables (71,000) (66,000) (54,000)
Excess of book over tax basis of other (250,000) (136,000) -
assets
Other accruals (128,400) (511,500) (118,600)
---------- ---------- ----------
Gross deferred tax assets (917,400) (1,162,500) (529,500)
Valuation allowance for deferred
tax assets 173,000 176,000 104,000
---------- ---------- ----------
Net deferred tax liability $2,306,600 $1,954,500 $2,415,500
========== ========== ==========
Income taxes are classified in the balance sheet as follows:
Net non-current deferred tax liability $2,377,100 $2,316,600 $2,415,500
Net current deferred tax asset (70,500) (362,100) -
---------- ---------- ----------
$2,306,600 $1,954,500 $2,415,500
========== ========== ==========
Page 47 of 90
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. EMPLOYEE BENEFIT PLANS:
The Company has a profit-sharing plan which covers all full-time
employees with one year or more of service. The Company will match
contributions made by the employee up to 2% of the employee's annual
compensation and contribute a discretionary amount determined annually
by the Board of Directors. The cost of the plan for the years ended
December 31, 1997, 1996 and 1995 was $535,000, $402,000 and $280,000,
respectively.
The estimated present value of future payments under a supplemental
benefit plan is charged to expense over the period of active employment
of the employees covered under the plan. Supplemental benefit plan
expense for the years ended December 31, 1997, 1996 and 1995 was
$51,000, $51,000 and $57,000, 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, 1997, 1996 and 1995 was $205,000, $183,000, and $194,000,
respectively. The Company's policy is to fund this expense as accrued.
5. LONG-TERM DEBT:
The Company has an unsecured $20,000,000 bank line of credit with
various options for the interest rate, all of which are based on LIBOR
plus additional basis points determined by certain Company financial
ratios. The line of credit expires January 31, 1999. No borrowings were
outstanding at December 31, 1997 and 1996. There was $6.0 million
outstanding at December 31, 1995.
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 $276,000, $350,000 and
$420,000 at December 31, 1997, 1996 and 1995, respectively. The notes
require aggregate annual payments of $110,000. As described in the
contingency footnote (Note 9) any remediation costs for environmental
cleanup can be offset against any amounts due under these notes payable.
Page 48 of 90
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. LONG-TERM DEBT: (cont'd)
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 $2,437,000 at
December 31, 1997. The loan requires interest of prime plus 2% (10.50%
at December 31, 1997) payable monthly with principal due November, 2004.
The note is collateralized by 10% of the assets of Hoosier Park.
Maturities of all notes payable for the five years following December
31, 1997 follow:
PRINCIPLE AMOUNT
1998 - $ 80,000
1999 - 86,000
2000 - 93,000
2001 - 8,000
2002 - 9,000
Thereafter - 2,437,000
6. OPERATING LEASES:
The Company contracts for totalisator equipment and service extending
through October, 2001. The contract provides for rentals based on a
percentage of pari-mutuel wagers registered by the totalisator
equipment. Rental expense for the years ended December 31, 1997, 1996
and 1995 was $1,361,000, $1,257,000 and $1,093,000, respectively.
Hoosier Park leases land in Anderson, Indiana under an operating lease
agreement with the City of Anderson. Under the agreement, Hoosier Park
pays an annual rent of $128,520 or one-half of one percent of the total
annual handle wagered at the racetrack facility and at the three Indiana
simulcast facilities on live races at the track, whichever is greater.
The original term of the lease expires April 22, 2003. Hoosier Park has
options to renew the lease for three additional ten-year periods subject
to the same terms and conditions. Rent expense during 1997, 1996 and
1995 was $217,000, $219,000 and $308,000, respectively, which included
$88,000, $90,000 and $180,000 of contingent rentals in 1997, 1996 and
1995, respectively.
Page 49 of 90
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. OPERATING LEASES: (cont'd)
In November 1995, Hoosier Park entered into an operating lease agreement
which expires November 25, 2005 to lease property for the Indianapolis
off-track betting facility. Under this agreement, Hoosier Park pays an
annual minimum rent of $200,000, plus additional rent contingent upon
annual gross revenues. Hoosier Park has an option to renew the lease for
an additional five-year period. Under the terms of the renewal lease,
Hoosier Park pays an annual minimum rent of $300,000, plus additional
rent contingent upon annual gross revenues. Rent expense under this
agreement during 1997, 1996 and 1995 was $621,000, $620,000 and
$114,000, respectively.
The Company contracts for audio/video equipment and service under an
agreement which provides for daily fees, which vary based on the level
of programming provided. Expense under this agreement during 1997, 1996
and 1995 was $1,604,000, $1,369,000 and $1,403,000, respectively.
A summary of future minimum operating lease payments follows:
Year Ending Minimum Lease
December 31 Payment ($)
----------- -------------
1998 351,911
1999 359,638
2000 359,638
2001 336,300
2002 328,520
Later Years 626,173
Total minimum lease payments $2,362,180
7. 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 as required are presented below.
Page 50 of 90
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. STOCK-BASED COMPENSATION PLANS: (cont'd)
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 and directors of
the Company or any subsidiary.
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 1997, 1996 and 1995. 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, 1997, 1996 and 1995 and the changes during the year ended on those
dates is presented below:
1997 1996 1995
--------------------------- --------------------------- ---------------------------
# of Shares Weighted # of Shares Weighted # of Shares Weighted
Underlying Average Underlying Average Underlying Average
Options Exercise Prices Options Exercise Prices Options Exercise Prices
----------- --------------- ----------- --------------- ----------- ---------------
Outstanding at beginning
of the year 337,000 $19.08 248,000 $22.34 226,500 $22.97
Granted 89,532 $20.83 274,400 $18.97 21,500 $15.75
Exercised - - - - - -
Canceled - - 185,400 $23.27 - -
Forfeited - - - - - -
Expired - - - - - -
Outstanding at end
of year 426,532 $19.45 337,000 $19.08 248,000 $22.34
Exercisable at end
of year 207,400 $19.67 - - 123,600 $23.27
Weighted-average
fair value per share
of options granted
during the year $6.34 $5.55 $4.20
Page 51 of 90
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. STOCK-BASED COMPENSATION PLANS: (cont'd)
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 1997, 1996 and 1995,
respectively: dividend yields ranging from 1.2% to 1.6%; risk-free
interest rates are different for each grant and range from 5.39% to
6.63%; and the expected lives of options are different for each grant
and range from approximately 5.8 to 6.5 years, and a volatility of
19.38% in 1997 and 18.75% in 1996 and 1995.
The following table summarizes information about stock options
outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- --------------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices At 12/31/97 Contributing Life Exercise Price At 12/31/97 Exercise Price
--------------- ------------ ----------------- -------------- ----------- --------------
$15.75 to $19.25 315,900 7.05 $18.72 170,400 $19.25
$21.25 to $22.00 110,632 8.7 $21.54 37,000 $21.71
TOTAL 426,532 7.48 $19.45 207,400 $19.67
Employee Stock Purchase Plan:
Under the Company's Employee Stock Purchase Plan (the "Employee Stock
Purchase Plan"), the Company is authorized to sell, pursuant to
short-term stock options, shares of its common stock to its full-time
(or part-time for at least 20 hours per week and at least five months
per year) employees at a discount from the common stock's fair market
value through payroll deductions. The Employee Stock Purchase Plan
operates on the basis of recurring, consecutive one-year periods. Each
period commences on August 1 and ends on the next following July 31.
On the first day of each 12 month period, August 1, the Company will
offer to each eligible employee the opportunity to purchase common
stock. Employees may elect to participate for a period by electing to
have a designated percentage of their compensation withheld (after-tax)
and applied to purchase shares of common stock on the last day of the
period, July 31. The Employee Stock Purchase Plan allows withdrawals,
terminations and reductions on the amounts being deducted. The purchase
price for the common stock will be 85% of the lesser of the fair market
value of the common stock on (i) the first day of the period, or (ii)
the last day of the period. No employee may purchase common stock under
the Employee Stock Purchase Plan valued at more than $25,000 for each
calendar year.
Page 52 of 90
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. STOCK-BASED COMPENSATION PLANS: (cont'd)
Under the Employee Stock Purchase Plan, the Company sold 8,410 shares of
common stock to 111 employees pursuant to options granted on August 1,
1996 and exercised on July 31, 1997. Because the plan year overlaps the
company's fiscal year, the number of shares sold pursuant to options
granted on August 1, 1997 can only be estimated because the 1997 plan
year is not yet complete. The Company's estimate of options granted in
1997 under the Plan is based on the number of shares sold to employees
under the Plan for the 1996 plan year, adjusted to reflect the change in
the number of employees participating in the Plan in 1997.
In accordance with APB 25, the Company has not recognized any
compensation cost for the Employee Stock Purchase Plan for 1997, 1996 or
1995.
A summary of the status of the Company's stock options under the
Employee Stock Purchase Plan as of December 31, 1997, 1996 and 1995 and
the changes during the year ended on those dates is presented below:
1997 1996 1995
---------------------------- --------------------------- -----------------------------
# of Shares Weighted # of Shares Weighted # of Shares Weighted
Underlying Average Underlying Average Underlying Average
Options Exercise Prices Options Exercise Prices Options Exercise Prices
----------- --------------- ----------- --------------- ------------- ---------------
Outstanding at beginning
of the year 8,410 $14.45 7,818 $14.45 - -
Granted 8,030 $18.94 8,000 $17.22 7,818 $14.45
Exercised 8,410 $14.45 7,818 $14.45 - -
Forfeited - - - - - -
Expired - - - - - -
Outstanding at end
of year 8,030 - 8,000 - 7,818 -
Exercisable at end
of year - - - - - -
Weighted-average
fair value per share
of options granted
during the year $5.36 $5.35 $6.39
Page 53 of 90
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. 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 net earnings per common share for 1997, 1996 and 1995 would
approximate the pro forma amounts below:
1997 1996 1995
---------- ---------- ----------
Net earnings:
As reported $9,148,560 $8,071,526 $6,203,135
Pro-forma $8,605,000 7,530,000 6,153,000
Net earnings per common share:
As reported
Basic $1.25 $1.08 $0.82
Diluted $1.25 $1.08 $0.82
Pro-forma
Basic $1.18 $1.01 $0.81
Diluted $1.18 $1.01 $0.81
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.
8. FAIR VALUES OF FINANCIAL INSTRUMENTS:
Financial Accounting Standards Board ("FASB") Statement No. 107,
"Disclosure about Fair Value of Financial Instruments," is a part of a
continuing process by the FASB to improve information on financial
instruments. The following methods and assumptions were used by the
Company in estimating its fair value disclosures for such financial
instruments as defined by the Statement:
Cash and Cash Equivalents - The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Long-Term Debt - The carrying amounts of the Company's borrowings under
its line of credit agreements and other long-term debt approximates fair
value, based upon current interest rates.
Page 54 of 90
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. 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, 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, 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.
10. SALE OF 10% OF HOOSIER PARK:
On May 31, 1996, the Company sold 10% of Anderson's partnership interest
in Hoosier Park to Conseco for a cash payment of $218,390 for the 10%
partnership interest and an additional cash payment of $2,603,514 for
the 10% interest in the debt owed by Hoosier Park to CDMC at face value
of debt at the date of the closing.
Conseco has an option which expires December 31, 1998, to purchase from
Anderson an additional 47% partnership interest in Hoosier Park for
approximately $6,222,000 and an additional 47% interest in the debt owed
by Hoosier Park to CDMC for approximately $15,934,000. This purchase
would be subject to the approval of the Indiana Horse Racing Commission
("IHRC"). Should this transaction occur, Conseco will be the sole
general partner of Hoosier Park, and Anderson and Pegasus Group, Inc.
will be limited partners with partnership interests of 30% and 13%,
respectively. CDMC would continue to have a long-term management
agreement with Hoosier Park pursuant to which CDMC would have
operational control of the day-to-day affairs of Hoosier Park and its
related simulcast facilities.
.
Page 55 of 90
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. PURCHASE OF MINORITY-OWNED INVESTMENT
In July 1997, BC Racing Group, LLC (BC), of which a wholly-owned
subsidiary of the Company is a 24% owner, purchased Dueling Grounds
racecourse for $11 million at a Federal Bankruptcy Court sale after
having purchased underlying mortgage notes to the property from the
mortgagee at a discount. Located in Franklin, Kentucky, just north of
Nashville, Tennessee, Dueling Grounds opened in 1991, conducting short
race meets and year-round simulcasting. The Company's investment in BC
of $2,187,500, which includes notes receivable of $1,822,900 and equity
capital of $364,600, is accounted for under the equity method of
accounting.
12. NET EARNINGS PER SHARE COMPUTATIONS
The following is a reconciliation of the numerator and denominator of
the basic and diluted per share computations:
1997 1996 1995
---- ---- ----
Net earnings (numerator) amounts used
for basic and diluted per share computations: $9,148,560 $8,071,526 $6,203,135
---------- ---------- ----------
Weighted average shares (denominator) of
common stock outstanding per share
computations:
Basic 7,312,052 7,445,542 7,568,278
Plus dilutive effect of stock options 8,618 2,164 414
---------- ---------- ---------
Diluted 7,320,670 7,447,706 7,568,692
========== ========== =========
Net earnings per share
Basic $1.25 $1.08 $0.82
Diluted $1.25 $1.08 $0.82
Options to purchase 9,800, 135,250 and 113,050 shares for the years
ended December 31, 1997, 1996 and 1995, 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.
13. SUBSEQUENT EVENTS
On March 19, 1998, the Company's Board of Directors authorized a 2-for-1
stock split with a record date of March 30, 1998 and also authorized the
increase in the number of authorized shares of no par value common stock
from 10 million to 20 million shares, subject to approval of
shareholders at the next annual meeting of shareholders. Retroactive
recognition has been given to this stock split in the accompanying
financial statements.
Page 56 of 90
CHURCHILL DOWNS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. SUBSEQUENT EVENTS: (cont'd)
Additionally, the Company's Board of Directors approved a shareholder
"Rights Plan" (the "Plan") on March 19, 1998 which grants each
shareholder 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 shareholders
from takeover tactics that may be used by an acquirer which the Board
believes are not in the best interests of the shareholders. The Plan
expires on March 19, 2008.
On March 19, 1998 the Company's Board of Directors also approved the
execution of a new line of credit following a bank's commitment to
increase its unsecured bank line of credit from $20 million to $50
million. The interest rate is based upon LIBOR plus 50 to 100
additional basis points determined by certain Company financial ratios
or at prime rate minus 50 basis points, at the Company's election. The
line of credit expires in March 2000.
On March 28, 1998, the Company entered into a stock purchase
agreement with TVI Corp., ("TVI") for the purchase of 100% of the stock
of Racing Corporation of America ("RCA"). 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
will be approximately $22,000,000 in a combination of cash and common
stock of the Company. The sale which is expected to close in April is
subject to various closing conditions and approvals of several
regulatory agencies, including the Kentucky Racing Commission. The
purchase is not anticipated to have any material effect on earnings in
1998.
Page 57 of 90
SUPPLEMENTARY FINANCIAL INFORMATION(UNAUDITED) COMMON STOCK INFORMATION
[ PER SHARE OF COMMON STOCK ]
------------------------------------------------------
Operating Basic Net Diluted Net
Net Income Net Earnings Earnings Earnings Market Price
Revenues (Loss) (Loss) (Loss) (Loss) Dividends High Low
-------- ---------- ------------ ------ ---------- --------- ---- ---
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
- -----------------------------------------------------------------------------------------------------------------------
1995 $ 92,434,216 $10,305,210 $ 6,203,135 $0.82 $0.82
Fourth Quarter 21,264,267 (905,283) (500,096) (0.06) (0.06) $0.25 $19.25 $15.50
Third Quarter 13,222,206 (3,572,224) (2,174,704) (0.29) (0.29) 21.63 17.75
Second Quarter 49,335,136 17,645,591 10,650,212 1.41 1.41 23.00 20.50
First Quarter 8,612,607 (2,862,874) (1,772,277) (0.24) (0.24) 23.50 21.25
- -----------------------------------------------------------------------------------------------------------------------
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
27, 1998, 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 TOTAL EARNINGS (LOSS) PER
SHARE FOR THE YEAR DUE 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.
Page 58 of 90
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.
Page 59 of 90
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a)(1) Consolidated Financial Statements
PAGES
The following financial statements of Churchill Downs
Incorporated for the years ended December 31, 1997, 1996 and 1995
are included in Part II, Item 8:
Reports of Independent Accountants 39
Consolidated Balance Sheets 40
Consolidated Statements of Earnings 41
Consolidated Statements of Stockholders' Equity 42
Consolidated Statements of Cash Flows 43
Notes to Consolidated Financial Statements 44-57
Schedule VIII - Valuation and Qualifying Accounts 62
(2) 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:
None
(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.
Page 60 of 90
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 /S/ROBERT L. DECKER /S/VICKI L. BAUMGARDNER
Thomas H. Meeker Robert L. Decker Vicki L. Baumgardner
President Sr. Vice President, Finance Vice President, Finance/Treasurer
March 19, 1998 March 19, 1998 March 19, 1998
(Principal Executive Officer) (Principal Financial Officer) (Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
/S/CHARLES W. BIDWILL, JR. /S/THOMAS H. MEEKER
Charles W. Bidwill, Jr Seth W. Hancock Thomas H. Meeker
March 19, 1998 March 19, 1998 March 19, 1998
(Director) (Director) (Director)
/S/ CATESBY W. CLAY /S/FRANK B. HOWER, JR. /S/ARTHUR B. MODELL
Catesby W. Clay Frank B. Hower, Jr. Arthur B. Modell
March 19, 1998 March 19, 1998 March 19, 1998
(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 19, 1998 March 19, 1998 March 19, 1998
(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 19, 1998 March 19, 1998 March 19, 1998
(Director) (Director) (Director)
/S/DARRELL R. WELLS
Darrell R. Wells
March 19, 1998
Page 61 of 90
CHURCHILL DOWNS INCORPORATED
SCHEDULE VIII. - VALUATION AND QUALIFYING ACCOUNTS
Balance,
Beginning Charged to Balance,
Description Of Period Expenses Deductions End Of Period
--------- ---------- ---------- -------------
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
accounts and notes receivable $135,000 $30,000 - $165,000
Valuation allowance for
deferred tax asset 104,000 72,000 - 176,000
-------- --------- ---------- --------
$239,000 $ 102,000 - $341,000
======== ========= ========== ========
Year ended December 31, 1995:
Allowance for doubtful
accounts and notes receivable $215,000 - $80,000 $135,000
Valuation allowance for
deferred tax asset - $104,000 - 104,000
-------- --------- ---------- --------
$215,000 $104,000 $80,000 $239,000
======== ========= ========== ========
Page 62 of 90
EXHIBIT INDEX
NUMBERS DESCRIPTION BY REFERENCE TO
(3)(a) Restated Articles of Incorporation Exhibit 3(b) to Report on Form 10-Q
for the fiscal quarter ended September
30, 1997
(b) Restated Bylaws as amended Pages 67 to 76, Report on Form 10-K for the
year ended December 31, 1997
(4)(a) 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 Restated Exhibit 10 (a) to Report on Form 10-K for
Supplemental Benefit Plan dated the year ended December 31, 1994
March 1, 1995 *
(b) Employment Agreement dated as Exhibit 19(a) to Report on Form 10-Q
of October 1, 1984, with for fiscal quarter ended October 31, 1984
Thomas H.Meeker, President *
(c) Churchill Downs Incorporated Exhibit 10 (c) to Report on Form 10-K for
Incentive Compensation the year ended December 31, 1996
Plan (1997) *
(d) Churchill Downs Incorporated Exhibit 10(h) to Report on Form 10-K
for 1993 Stock Option Plan * the eleven months ended December 31,
1993
(e) Stock Purchase Agreement naming Exhibit 10(i) to Current Report on
Dominick Marotta, Frank Form 8-K filed with the Securities
Marotta, Louis E. Carlo and Exchange Commission on February 10, 1994
and Edward F. Draugelis
(f) Amendment of Employment Report on Form 10-K for the fiscal
Agreement with Thomas H. Meeker, year ended January 31, 1986; Report
President, dated October 1, on Form 10-K for the
1984 * fiscal year ended
January 31, 1987; 1988, 1990, 1991,
1992 and 1993
(g) Amendment No. 1 to Churchill Exhibit 10 (g) to Report on Form 10-K for
Downs Incorporated 1993 Stock the year ended December 31, 1994
Option Plan *
(h) Amendment to Note and Letter Pages 77 to 79, Report on Form 10-K for the
Agreement dated December 5, 1996 year ended December 31, 1997
in the principal amount of $20,000,000
by Churchill Downs Incorporated to
PNC Bank, Kentucky, Inc.
Page 63 of 90
(i) Amended and Restated Lease Exhibit 10 (I) to report on Form 10-K
Agreement dated January 31, 1996 for the year ended December 31,
1995
(j) Amendment No. 1 to Promissory Report on Form 10-K for the year
Note dated May 31, 1994 ended December 31, 1994
(k) Partnership Interest Purchase Exhibit 10(k) to report on Form 10-K
for Agreement dated December 20, the year ended December 31, 1995
1995 among Anderson Park, Inc.,
Conseco HPLP, L.L.C., Pegasus
Group, Inc. and Hoosier Park, L.P.
(l) Employment Agreement between Exhibit 10(l) to Report on Form 10-Q
Churchill Downs Incorporated and for the fiscal quarter ended March 31, 1997
Robert L. Decker*
(m) Amendment No. 2 to Churchill Pages 89 to 90, Report on Form 10-K for the
Downs Incorporated 1993 Stock year ended December 31, 1997
Option Plan*
(n) Churchill Downs Incorporated Pages 80 to 88, Report on Form 10-K for
1997 Stock Option Plan the year ended December 31, 1997
(21) Subsidiaries of the registrant Report on Form 10-K for the year ended
December 31, 1994
(23) Consent of Coopers & Lybrand, LLP Page 66, Report on Form 10-K for the year
Independent Accountants ended December 31, 1997
(27)(a) Financial Data Schedule for the year Report on Form 10-K for the year
ended December 31 1997 ended December 31, 1997
(b) Amended Financial Data Schedule Report on Form 10-K for the year
for the year ended December 31, 1996 ended December 31, 1997
(c) Amended Financial Data Schedule Report on Form 10-K for the year
for the year ended December 31, 1995 ended December 31, 1997
(d) Amended Financial Data Schedule Report on Form 10-K for the year
for the quarter ended September 30, ended December 31, 1997
1997
(e) Amended Financial Data Schedule Report on Form 10-K for the year
for the quarter ended June 30, 1997 ended December 31, 1997
(f) Amended Financial Data Schedule Report on Form 10-K for the year
for the quarter ended March 31, 1997 ended December 31, 1997
(g) Amended Financial Data Schedule Report on Form 10-K for the year
for the quarter ended September 30, ended December 31, 1997
1996
Page 64 of 90
(h) Amended Financial Data Schedule Report on Form 10-K for the year
for the quarter ended June 30, 1996 ended December 31, 1997
(i) Amended Financial Data Schedule Report on Form 10-K for the year
for the quarter ended March 31, 1996 ended December 31, 1997
* Management contract or compensatory plan or arrangement
Page 65 of 90