10-K 1 0001.txt FORM 10-K FOR YEAR ENDED 12/31/00 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, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________________ to _________________ Commission File Number 0-1469 CHURCHILL DOWNS INCORPORATED Exact name of registrant as specified in its charter KENTUCKY 61-0156015 State or other jurisdiction of IRS Employer Identification No. incorporation or organization 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 14, 2001, 13,048,717 shares of the Registrant's Common Stock were outstanding, and the aggregate market value of the shares held by nonaffiliates of the Registrant was $166,432,105. Portions of the Registrant's Proxy Statement for its Annual Meeting of Shareholders to be held on June 21, 2001 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 56 to 59. 1 PART I ITEM 1. BUSINESS A. INTRODUCTION Churchill Downs Incorporated (the "Company") is a racing company that primarily conducts pari- mutuel wagering on live Thoroughbred, Quarter Horse and Standardbred horse racing and simulcast signals of races. Additionally, we offer racing services through our other business interests. We were organized as a Kentucky corporation in 1928. Our principal executive offices are located at 700 Central Avenue, Louisville, Kentucky, 40208. We own and operate our flagship operation, Churchill Downs racetrack, in Louisville, Kentucky ("Churchill Downs"). Churchill Downs has conducted Thoroughbred racing continuously since 1875 and is internationally known as the home of the Kentucky Derby. The Churchill Downs operation also encompasses the Churchill Downs Sports Spectrum ("Louisville Sports Spectrum"), an off-track betting facility ("OTB"). In addition, the management of Churchill Downs oversees Ellis Park Race Course, Inc. ("Ellis Park"), which operates a Thoroughbred track in Henderson, Kentucky. Churchill Downs Management Company ("CDMC"), a wholly owned subsidiary, manages all of our other racing operations. CDMC oversees Arlington Park, a pari-mutuel horse racing operation in Arlington Heights, Illinois, effective with the merger in September 2000. Arlington Park operates five off-track betting facilities ("OTBs") in Illinois. CDMC also oversees Calder Race Course which holds licenses to conduct Thoroughbred horse racing in Miami, Florida. In addition, CDMC oversees Hollywood Park, a Thoroughbred racetrack in Inglewood, California. Calder Race Course and Hollywood Park were acquired in April 1999 and September 1999, respectively. Additionally, CDMC manages Hoosier Park at Anderson in Anderson, Indiana ("Hoosier Park"). Hoosier Park conducts Thoroughbred, Quarter Horse and Standardbred horse racing. Hoosier Park is owned by Hoosier Park, L.P. ("HPLP"), an Indiana limited partnership. Anderson Park, Inc. ("Anderson"), a wholly owned subsidiary of CDMC, is the sole general partner of HPLP, and currently owns a 77% interest. The remaining 23% is held by unrelated third parties, Centaur Racing, LLC ("Centaur"), and Conseco HPLP, LLC ("Conseco"). We previously entered into a definitive agreement with Centaur, Inc., which was subsequently assigned to Centaur, to sell an additional 26% interest in HPLP for a purchase price of $8.5 million. On September 12, 2000, we announced that approval for the sale had been denied as a result of action taken by the Indiana Horse Racing Commission ("IHRC") against Centaur, and as a result the ownership structure has not changed. Centaur's performance under the definitive agreement was guaranteed by an irrevocable Letter of Credit in the amount of $2.5 million, which was made available to us during the fourth quarter of 2000. These funds were used to set up Churchill Downs Foundation, Inc., a non-profit private charitable foundation pursuant to section 501(c)(3) of the Internal Revenue Code for the purpose of funding future contributions to qualifying charitable, civic and community causes in 2 locations where we do business. CDMC also manages three OTBs in Indiana owned by Hoosier Park ("Indiana Sports Spectrum"). These OTBs conduct simulcast wagering on horse racing year- round. We formed Churchill Downs Investment Company ("CDIC"), a wholly owned subsidiary, to oversee other industry related investments. CDIC owns a 60% ownership interest in Charlson Broadcast Technologies, LLC ("CBT"), a privately held company that provides television production and computer graphic software to the racing industry. CBT's proprietary software displays odds statistical data and other racing information on television in real-time for customers at racetracks and OTBs. Other investments owned by CDIC include a 35% interest in EquiSource, LLC ("EquiSource"), a procurement business that assists in the group purchasing of supplies and services for the equine industry, and a 30% interest in NASRIN Services, LLC ("NASRIN"), a telecommunications service provider for the pari-mutuel and simulcasting industries. CDIC also holds a 24% minority interest investment in Kentucky Downs, LLC ("Kentucky Downs"), a Franklin, Kentucky, racetrack that conducts a limited Thoroughbred race meet with seven live racing days in September, as well as year-round simulcasting. Our investments in CBT, EquiSource, NASRIN and Kentucky Downs are not material to the Company's financial position or results of operations. B. LIVE RACING OPERATIONS We conduct live horse racing at Churchill Downs, Hollywood Park, Calder Race Course, Arlington Park, Hoosier Park and Ellis Park, which produces revenues through pari-mutuel wagering at our racetracks and OTBs, simulcast fees, admissions and concessions revenue. The Kentucky Derby and the Kentucky Oaks, both held at Churchill Downs, continue to be our premier racing events. The Kentucky Derby offers a minimum $1.0 million in purse money, and the Kentucky Oaks offers a minimum $0.5 million in purse money. Calder Race Course is home to The Festival of the Sun, Florida's richest day in Thoroughbred racing, offering approximately $1.5 million in total purse money. Hollywood Park is home to the Hollywood Gold Cup, which offers $1.0 million in purse money. Hollywood Park's Autumn Meet is highlighted by the annual $2.1 million Autumn Turf Festival, comprised of six graded stakes races. The Arlington Million, which is run during the International Festival of Racing at Arlington Park, with a purse of $1.0 million, is one of three North American stops for the Emirates World Series Racing Championship. Other significant racing events are the Indiana Derby for Thoroughbreds and the Dan Patch Invitational for Standardbreds held at Hoosier Park, as well as the Gardenia Stakes for older fillies and mares held at Ellis Park. Churchill Downs hosted the Breeders' Cup Championship ("Breeders' Cup") in 1988, 1991, 1994, 1998 and 2000. Hollywood Park has also hosted the Breeders' Cup in 1984, 1987 and 1997. Breeders' Cup Limited, a tax-exempt organization chartered to promote Thoroughbred racing and 3 breeding, sponsors Breeders' Cup races, which feature $13.0 million in purses. These races are held annually for the purpose of determining Thoroughbred champions in eight different events. Racetracks across North America compete for the privilege of hosting the prestigious Breeders' Cup races each year. Churchill Downs The Churchill Downs racetrack site and improvements are located in Louisville, Kentucky ("Churchill facility"). The Churchill facility consists of approximately 147 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 facility includes clubhouse and grandstand seating for approximately 48,500 persons, a state-of- the-art simulcast wagering facility designed to accommodate 450 persons, a general admission area, and food and beverage facilities ranging from fast food to full-service restaurants. The site also has a saddling paddock, infield accommodations for groups and special events, parking areas for the public, and our racetrack and corporate office facilities. The backside stable area has barns sufficient to accommodate approximately 1,400 horses, a 114-room dormitory and other facilities for backstretch personnel. To supplement the facilities at Churchill Downs, we provide additional stabling facilities sufficient to accommodate 500 horses and a three-quarter (3/4) mile dirt track, which is used for training Thoroughbreds, at the Louisville Sports Spectrum. The facilities provide a year-round base of operation for many horsemen and enable us to attract new horsemen to race at Churchill Downs. We continue to make numerous capital improvements to the Churchill facility in order to better serve our horsemen and patrons, including the construction of a $4.8 million expansion of Churchill Downs' main entrance and corporate offices completed during 2000. Hollywood Park Hollywood Park and the Hollywood Park Casino site and improvements are located in Inglewood, California ("Hollywood Park facility"). The Hollywood Park facility consists of approximately 240 acres of land upon which the racetrack and casino are located with a one and one-eighth (1 1/8) mile oval dirt track, a one-mile oval turf track, permanent grandstands and stabling area. The facility includes clubhouse and grandstand seating for 16,675 persons, a general admission area, a saddling paddock area and food and beverage facilities ranging from fast food to full-service restaurants. The stabling area consists of stalls to accommodate approximately 2,000 horses, tack rooms, feed rooms, a federally approved quarantine facility, a half-mile oval training track, and a not-for-profit Equine Teaching Hospital and Research Center operated under the direction of the Southern California Equine Foundation. The Hollywood Park facility also features parking areas for the public and office facilities. The Hollywood Park Casino is a state-of-the-art facility that is open 24 hours a day, 365 days a year. The casino features more than 150 gaming tables offering a variety of California approved casino 4 games. Under California gaming law, the casino is a card club. Thus, it is not authorized to operate slot machines or video lottery terminals but instead rents tables to casino patrons for a seat fee charged on a per hand basis. The casino also offers facilities for simulcast wagering. We lease the facility to Pinnacle Entertainment, Inc., formerly Hollywood Park, Inc., under a 10-year lease for an annual rent of $3.0 million and, therefore, do not operate the casino. The lease includes a 10-year renewal option and is subject to an adjustment to the rent at the time the option is exercised. Calder Race Course The Calder Race Course racetrack and improvements are located in Miami, Florida ("Calder Race Course facility"). The Calder Race Course facility is adjacent to Pro Player Stadium, home of the Florida Marlins and Miami Dolphins. The Calder Race Course facility consists of approximately 220 acres of land with a one-mile dirt track, a seven-eighths (7/8) mile turf track, a training area with a five-eighths (5/8) mile training track, permanent grandstand and a stabling area. The facility includes clubhouse and grandstand seating for approximately 15,000 persons, a general admission area, and food and beverage facilities ranging from fast food to full-service restaurants. The stable area consists of a receiving barn, feed rooms, tack rooms, detention barns and living quarters and can accommodate approximately 1,800 horses. The Calder Race Course facility also features a saddling paddock, parking areas for the public and office facilities. Arlington Park Arlington Park was constructed in 1927 and reopened its doors in 1989 after a devastating fire engulfed the clubhouse four years earlier. The updated racecourse sits on 325 acres, has a one and one-eighths (1 1/8) mile oval dirt track, a one-mile turf course and a five-eighths (5/8) mile training track. The facility includes permanent clubhouse, grandstand and suite seating for 6,045 persons, and food and beverage facilities ranging from fast food to full- service restaurants. The backstretch consists of a stable area with 31 barns to accommodate approximately 2,030 horses. In February 2001, Arlington Park announced the construction of three new barns, a $3.0 million project, which will add 164 stalls and is expected to be completed during the second quarter of 2001. The Arlington Park facility also features a saddling paddock, parking areas for the public and office facilities. Ellis Park The Ellis Park racetrack and improvements, located in Henderson, Kentucky ("Ellis Park facility"), consist of approximately 230 acres of land just north of the Ohio River with a one and one-eighths (1 1/8) mile dirt track, a one-mile turf course, permanent grandstands and a stabling area for 1,290 horses. The facility includes clubhouse and grandstand seating for 8,000 people, a general admission area, and food and beverage facilities ranging from fast food to full-service restaurants. The Ellis Park facility also features a saddling paddock, parking areas for the public and office facilities. 5 Hoosier Park Hoosier Park is located in Anderson, Indiana, about 40 miles northeast of downtown Indianapolis ("Hoosier Park facility"). Hoosier Park leases the land under a long-term lease with the city of Anderson and owns all of the improvements on the site. The Hoosier Park facility consists of approximately 110 acres of leased land with a seven-eighths (7/8) mile oval dirt track, permanent grandstands and stabling area. The facility includes seating for approximately 2,400 persons, a general admission area, and food and beverage facilities ranging from fast food to a full-service restaurants. 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. C. SIMULCAST OPERATIONS We generate a significant portion of our revenues by transmitting signals of races from our racetracks to other facilities ("export"), and receiving signals from other tracks ("import"). Revenues are earned through pari-mutuel wagering on signals that we both import and export. Churchill Downs, Arlington Park and Calder Race Course conduct simulcast wagering only during live race meets, while Hollywood Park, Hoosier Park and Ellis Park offer year-round simulcast wagering. The Louisville Sports Spectrum primarily conducts simulcast wagering only when Churchill Downs is not operating a live race meet. The Indiana Sports Spectrums, Arlington Park's five OTBs and the Kentucky Off-Track Betting facilities conduct simulcast wagering year-round. The Churchill Downs Simulcast Network ("CDSN"), the product content provider of the Company, will present 680 racing programs from our six racetracks to wagering outlets worldwide during 2001. The role of CDSN is to drive simulcast growth by marketing a superior simulcast product. Louisville Sports Spectrum The Louisville Sports Spectrum is located in Louisville, Kentucky, about seven miles from Churchill Downs. This 100,000-square-foot property, on approximately 88 acres of land, is a Thoroughbred training and stabling annex which has state-of-the-art audio visual capabilities for pari-mutuel wagering. The Louisville Sports Spectrum provides audio and visual technology, seating for approximately 3,000 persons, parking, offices and related facilities for simulcasting races. Illinois Sports Spectrums Arlington Park also operates five OTBs that accept wagers on races at Arlington Park as well as on races simulcast from other locations. Arlington Trackside is located on the Arlington Park property, Arlington in Rockford is located in Rockford, Illinois and consists of approximately 8.6 acres, and Quad Cities Betting Parlor is located in Moline, Illinois approximately 232.6 acres. Arlington Park also leases two OTBs. Arlington in Waukegan is located in Waukegan, Illinois and consists of 6 approximately 25,000 square feet and Mud Bug OTB is located in Chicago, Illinois and consists of approximately 19,700 square feet. Indiana Sports Spectrums Hoosier Park owns and operates the Indiana Sports Spectrums, consisting of three OTBs providing a statewide distribution system for Hoosier Park's racing signal, and additional simulcast markets for our products. The Indiana Sports Spectrum at Merrillville, located about 30 miles southeast of Chicago, consists of approximately 27,300 square feet of space. The Indiana Sports Spectrum at Fort Wayne consists of approximately 15,750 square feet of space. A third Indiana Sports Spectrum is located in downtown Indianapolis where Hoosier Park leases approximately 24,800 square feet of space for the OTB. Hoosier Park is continuing to evaluate sites for the location of a fourth Indiana Sports Spectrum facility. The state of Indiana has enacted legislation that requires a county's fiscal body to adopt an ordinance permitting OTBs before such a facility can be located in that county, which may require local voter approval. This legislation may affect Hoosier Park's ability to locate its fourth facility in certain counties. Kentucky Off-Track Betting, LLC In 1992, the Company and three other Kentucky Thoroughbred racetracks formed Kentucky Off- Track Betting, Inc., of which we are a 50% owner. In December 2000, Kentucky Off-Track Betting, Inc. converted into a limited liability company, Kentucky Off-Track Betting, LLC ("KOTB"). KOTB's purpose is to own and operate facilities for the simulcasting of races and the acceptance of wagers on such races at locations other than a racetrack. These OTBs 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 OTB must first be approved by the Kentucky Racing Commission ("KRC") and the local government where the facility is to be located. KOTB currently owns or leases and operates OTBs in Corbin, Maysville, Jamestown and Pineville, Kentucky. OTBs developed by KOTB provide additional markets for the intrastate simulcasting of and wagering on Churchill Downs' and Ellis Park's live races and interstate simulcasting of and wagering on out-of-state signals. KOTB did not contribute significantly to our operations in 2000 and is not anticipated to have a substantial impact on operations in the future. Our investment in KOTB is not material to the Company's financial position or results of operations. In-Home Wagering Technological innovations have opened the distribution channels for live racing products to include in-home wagering. Television Games Network ("TVG"), affiliated with Gemstar- TV Guide International, Inc., offers high-quality live racing video signals in conjunction with its interactive television wagering system. We have entered into agreements to broadcast our racetrack simulcast 7 products as part of TVG's programming content. This new network is anticipated to eventually offer 24-hour-a-day programming throughout the United States that will be primarily devoted to developing new fans for racing. In jurisdictions where lawful, in-home patrons of TVG can wager on our live races as well as other race signals. As the originator of the live racing signal, we will receive a simulcast fee on in-home wagers placed on our races. In the past, the U.S. Justice Department has raised concerns whether interstate account wagering conducted through TVG's wagering hub would be legal under existing federal gambling laws. In addition, certain state attorneys general expressed concern over the legality of interstate account wagering. In December 2000, legislation was enacted amending the Interstate Horse Racing Act of 1978 ("IHA"). We believe this legislation clarifies that simulcasting and account wagering conducted by the racing industry is authorized under federal law, but the full scope of the legislation is still unclear. TVG-related revenues are not material to our operations. D. OTHER SOURCES OF REVENUE In addition to revenues generated from commissions on pari-mutuel wagering, we also generate revenues from Indiana riverboat admissions subsidy revenue, admissions, concessions revenue, sponsorship revenues, licensing rights and broadcast fees, lease income and other sources. Financial information about our segments required by this Item is incorporated by reference to the information contained in the Notes to Consolidated Financial Statements, in conformity with accounting principles generally accepted in the United States of America, included in Item 8 of this Report. Riverboat Admissions Subsidy To compensate for the adverse impact of riverboat competition, the horse industry in Indiana presently receives $0.65 per $3 admission to riverboats in the state. By IHRC rule we are required to allocate 70% of any revenue received from the subsidy directly for purse expenses, breed development and reimbursement of approved marketing costs. The balance, or 30%, is received by Hoosier Park as the only horse racetrack currently operating in Indiana. In November 1999, the Company and the IHRC agreed to a $6.8 million ceiling on Hoosier Park's share of the subsidy beginning in 2000. The ceiling represents an 8% decrease from the $7.4 million Hoosier Park earned for 1999. A more significant change in Hoosier Park's share of the subsidy, as a result of a possible second track approved in Indiana, would impact funding for operating expenditures, potentially reducing the number of race dates at Hoosier Park The need for the subsidy may be diminished if pending legislation allowing pari-mutuel pull tabs at Hoosier Park and the Indianapolis Sports Spectrum passes both Indiana chambers. The legislation, which also eliminates the requirement that riverboat casinos cruise while gaming is conducted, was passed by the Indiana House of Representatives in January 2001 and is currently before the Senate. The legislation retains the 65-cents share of riverboat admissions going to the horse racing industry but phases out and caps the portion going to Hoosier Park. While this legislation protects Hoosier 8 Park from increased riverboat competition, it could have an adverse impact on our Kentucky operations if passed. E. LICENSES AND LIVE RACING DATES Kentucky's racetracks, including Churchill Downs and Ellis Park, are subject to the licensing and regulation of the KRC. Licenses to conduct live Thoroughbred race meets and to participate in simulcasting are approved annually by the KRC based upon applications submitted by the racetracks in Kentucky. Although to some extent Churchill Downs and Ellis Park compete with other racetracks in Kentucky for the 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. We received approval from the KRC to conduct two live Thoroughbred racing meets at Churchill Downs from April 28 through July 8, 2001 ("Spring Meet"), and from October 28 through November 24, 2001 ("Fall Meet"), for a total of 76 days. Churchill Downs conducted live racing from April 29 through July 9, 2000, and from October 29 through November 25, 2000, for a total of 76 racing days, excluding the Breeders' Cup on November 4, 2000, compared to a total of 71 racing days in 1999. KRC approved a one week increase in Churchill Downs' Spring Meet during 2000, which was a reduction to Ellis Park's customary racing schedule. The KRC also awarded Ellis Park approval to conduct live Thoroughbred racing from July 11 through September 3, 2001, for a total of 41 live racing days. Ellis Park conducted live racing from July 12 through September 4, 2000, for a total of 41 racing days compared to 61 racing days in 1999. The decrease of 20 live race dates for 2000 compared to 1999 is the result of reducing the live racing week from 6 days of live racing to 5 days of live racing and the movement of one week of live racing to Churchill Downs' Spring Meet to better utilize the operations of both racetracks. This change had a positive effect on our 2000 results. In California, licenses to conduct live Thoroughbred racing and to participate in simulcasting are approved annually by the California Horse Racing Board based upon applications submitted by California racetracks. Generally, there is no substantial change from year to year in the racing dates awarded to each racetrack. Hollywood Park has been approved to conduct two live Thoroughbred race meets from April 20 through July 16, 2001 ("Spring/Summer Meet"), and from November 7 through December 17, 2001 ("Autumn Meet"), for a total of 97 live racing days. Hollywood Park conducted live racing during two live Thoroughbred race meets from April 28 through July 24, 2000 ("Spring/Summer Meet"), and from November 8 through December 24, 2000 ("Autumn Meet"), for a total of 100 days combined compared to 97 days of racing during 1999. In Florida, licenses to conduct live Thoroughbred racing and to participate in simulcasting are approved by the Department of Business and Professional Regulation, Division of Pari-Mutuel Wagering ("DPW"). The DPW is responsible for overseeing the network of state offices located at every pari-mutuel wagering 9 facility, as well as issuing the permits necessary to operate a pari- mutuel wagering facility. The DPW also approves annual licenses for Thoroughbred, Standardbred and Quarter Horse races. Calder Race Course received approval from the DPW to conduct two consecutive live Thoroughbred race meets from May 2 through November 3, 2001 ("Calder Meet"), and from November 4, 2001 through January 2, 2002 ("Tropical Meet"), for a total of 174 days of live racing. In 2000, Calder Race Course conducted live racing from May 23 through November 2, 2000, and from November 3, 2000 through January 2, 2001, for a collective total of 174 days of racing compared to 169 days during the 1999 live racing season, which included 2 days of racing in January 2000. Tax laws in Florida historically discouraged the three Miami-area racetracks in Florida from applying for licenses for race dates outside of their traditional racing season. Effective July 1, 2001, a new tax structure will eliminate this deterrent. Accordingly, Calder Race Course may face direct competition from other Florida racetracks and may have the ability to increase live racing dates or lose live racing dates in the future. At Arlington Park, an increase in wagering competition from non-horse racing sources such as casinos, riverboats and lotteries had an adverse impact on Arlington Park's operating results, such that in September 1997, Arlington announced the suspension of live racing and withdrew its application for Thoroughbred racing dates. In 1999, the Illinois Legislature amended the Illinois Horse Racing Act and the Illinois Gaming Act (collectively, the "Legislation"). Provisions within the Legislation favorably altered the economics of racing in Illinois. As a result, Arlington Park applied to the Illinois Racing Board, and received, dates to host Thoroughbred racing in 2000. Arlington Park has been approved to conduct live Thoroughbred racing from June 13 through October 28, 2001, for a total of 102 live racing days compared to 103 days of live racing during 2000. In Indiana, licenses to conduct live Standardbred and Thoroughbred race meets, including Quarter Horse races, and to participate in simulcasting are approved annually by the IHRC based upon applications submitted by Hoosier Park. Currently, Hoosier Park is the only facility in Indiana licensed to conduct pari-mutuel wagering on live Standardbred, Quarter Horse or Thoroughbred racing and to participate in simulcasting. The IHRC has approved Hoosier Park to conduct live Standardbred racing from February 23 through August 22, 2001, and live Thoroughbred racing from September 7 through December 3, 2001, for a total of 193 live racing dates. Hoosier Park conducted live racing from April 7 through August 23, 2000, and from September 8 through December 3, 2000, for a combined total of 166 days of racing during 2000 compared to 167 total days of racing during 1999. Indiana law requires us to conduct live racing for at least 120 days each year in order to simulcast races. The increase in the number of race dates in 2001 is anticipated to alleviate demands for a second track in that state. In February 2001, the IHRC accepted an application for a Standardbred racetrack near Shelbyville, Indiana, about 50 miles from Hoosier Park. The IHRC is not expected to make a decision until May 2001. The addition of a second racetrack in Indiana could potentially impact Hoosier Park's share of the riverboat admissions revenue, create an increase in competition in the market and reduce the 10 quality of racing. A reduction in Hoosier Park's live racing dates as a result of a second racetrack could also result in an adverse impact on long-term profitability of the facility. The total number of days on which each racetrack conducts live racing fluctuates annually according to the calendar year. A substantial change in the allocation of live racing days at any of our six racetracks could adversely impact our operations and earnings in future years. F. COMPETITION North American bloodstock sales climbed again in 2000, continuing a trend that began in 1995. According to The Blood-Horse magazine, gross revenues for Thoroughbred weanlings, yearlings, juveniles and broodmares topped $1.0 billion in 2000 in North America for the first time in history. The increase in Thoroughbred sales is an indicator of a resurgence of the Thoroughbred breeding industry, reversing a trend of declines from 1986 to 1995. The increase in the number of Thoroughbreds enables racetracks to increase the number of horses participating in live racing. We generally do not directly compete with other racetracks or OTBs for patrons due to geographic separation of facilities or differences in seasonal timing of meets. However, we compete with other sports, entertainment and gaming options, including riverboat, cruise ship and land-based casinos and lotteries, for patrons for both live racing and simulcasting. We attempt to attract patrons by providing high quality racing products in attractive entertainment facilities with fairly priced, appealing concession services. We have successfully grown our live racing product and positioned ourselves to compete by strengthening our flagship operations, in anticipation of projected growth for in-home wagering simulcast markets, and geographically expanding our racing operations. We also continue to seek asset utilization strategies for our racetrack facilities as a means to develop those facilities into earning assets year-round. 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 six riverboat casinos operating on the Ohio River along Kentucky's border, including three in the southeastern Indiana cities of Lawrenceburg, Rising Sun, and Florence; one in southwestern Indiana in Evansville and one in Metropolis, Illinois. The sixth riverboat casino, licensed to RDI/Caesars, opened in November 1998 in Harrison County, Indiana, 10 miles from Louisville. We experienced some decreases in attendance and pari-mutuel wagering at the Churchill Downs Sports Spectrum ("Louisville Sports Spectrum") during 2000 as compared to 1998. However, we experienced an increase in pari-mutuel wagering on Churchill Downs races, including export simulcasting, during the same period. It is impossible to accurately determine the extent of the riverboat's impact on our business at these facilities. Other factors, such as unfavorable weather conditions, may also have had an impact. 11 In addition to those riverboats operating along the Ohio River, five riverboat casinos are located along the Indiana shore of Lake Michigan and four are situated in Illinois near Chicago. These riverboats have adversely impacted pari-mutuel wagering activities at our Merrillville, Indiana, Sports Spectrum. Arlington Park also faces competition from state lotteries and riverboat casino operations in northeastern Illinois and northwestern Indiana. There are also Indian gaming operations in Wisconsin which have drawn from the Chicago market as well. Two additional gaming operations have been proposed in Wisconsin along the Illinois border. An additional Chicago riverboat operation is pending in Rosemont, Illinois, approximately 12 miles from Arlington Park. The increased competition from these additional gaming operations serving the Chicago market could adversely affect our revenues and profits. Additionally, several Native American tribes in Florida have expressed interest in opening casinos in southern Florida, which could compete with Calder Race Course. Construction for a casino operated by the Seminole Tribe of Florida, located approximately 10 miles from Calder Race Course, began in January 2001 and is expected to be open during 2002. Also, the state of Michigan has approved a proposal by the Pokagon Band of the Potawatomi Indian Tribe to develop a casino in New Buffalo, Michigan, which is approximately 45 miles from our Merrillville facility. The development of these casinos may negatively impact pari-mutuel activities at our nearby facilities. The potential integration of alternative gaming products at our racetrack facilities is one of our four core business strategies developed to position us to compete in this changing environment. We have successfully grown our live racing product by implementing our other core business strategies by strengthening our flagship operations, increasing our share of the interstate simulcast market and geographically expanding our racing operations in Kentucky, California, Florida, Illinois and Indiana. Alternative gaming in the form of video lottery terminals may enable us to more effectively compete with riverboat casinos and provide new revenue for purse money and capital investment. G. LEGISLATIVE CHANGES In Kentucky, two pieces of legislation significant to our operations were passed in the 2000 session of the Kentucky General Assembly. First, an excise tax credit for racetracks was included in the 2000-2002 Kentucky state budget. The measure results in an ultimate credit of nearly $1.4 million in new revenue, and is earmarked for horsemen's incentives and necessary capital improvements at Churchill Downs racetrack over the next two years. The Kentucky General Assembly also enacted legislation that eliminates the excise tax on Breeders' Cup Championship Day wagering at any Kentucky track that hosts the event. This legislation is aimed at attracting the Breeders' Cup to Kentucky, and Churchill Downs, on a more frequent basis. On-track wagering for the 2000 Breeders' Cup Day at Churchill Downs totaled $13.6 million and generated excise taxes of approximately $475,000. This tax exemption will became effective January 1, 2001, and therefore did not apply to the 2000 Breeders' Cup at Churchill Downs. The 12 exemption will continue if the Breeders' Cup returns to Kentucky within three years of the previously held event. In 1999, the state of Illinois enacted legislation that provides for pari-mutuel tax relief and related tax credits for Illinois racetracks, as well as legislation providing for subsidies to Illinois horse racing tracks from revenues generated by the relocation of a license to operate a riverboat casino gaming facility. Arlington's share of subsidies from the proposed Rosemont casino under the 1999 legislation would range from $4.6 million to $8.0 million annually, based on publicly available sources. In the event Arlington Park receives such subsidies, additional shares of common stock would be issued to Duchossois Industries, Inc., to a maximum of 1.25 million shares. In January 2001, the Illinois Gaming Board ("IGB") denied a license application of Emerald Casino, Inc. to operate the Rosemont casino. The group has the option to appeal the decision. The IGB may also award the license to other applicants in the future. Effective July 1, 2000, the Florida legislature passed a bill that provides the state's Thoroughbred industry approximately $4.5 million in annual pari-mutuel tax relief. Calder Race Course received approximately $1.8 million in additional revenues during 2000, of which two-thirds was allocated to the horsemen. These new monies provide resources for purse increases and enhancement of Florida-bred races. The legislation also allows the DPW to enter into compacts with other states for uniform licensing. H. ENVIRONMENTAL MATTERS Hollywood Park received cease and desist orders from the California Regional Water Quality Control Board addressing storm water runoff and dry weather discharge issues. We retained an engineering firm to develop a plan for compliance and to construct certain drainage and waste disposal systems. The construction of the system is complete. As part of the 1999 asset acquisition of Hollywood Park, the seller agreed to indemnify us in the amount of $5.0 million for costs incurred in relation to the waste water runoff issue. Amounts under the indemnification have been expended and the ultimate cost to the Company was $1.7 million, which was incurred during 2000. The septic system at our Ellis Park facility must be replaced with hook-up to city sewers. The cost of the hook-up is estimated by the City of Henderson, Kentucky to be $1.2 million. Ellis Park will seek partial reimbursement from the state of Kentucky. The project is estimated to be completed by November 2001. In 1992, we acquired certain assets of Louisville Downs Incorporated for $5.0 million including the site of the Louisville Sports Spectrum. In conjunction with this purchase, we withheld $1.0 million 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 $1.0 million hold back had been utilized as of December 31, 2000 and additional costs of remediation have not yet been conclusively determined. The sellers have now received a reimbursement from the Commonwealth of Kentucky of $1.0 million 13 for remediation costs, and that amount is now being held in an escrow account to pay further costs of remediation. Approximately $1.2 million, including interest on the escrow principal, remains in the account. The seller has submitted a Corrective Action Plan to the state and has reported to the state that all wells, with the exception of one, are "below action."Well-testing continues and the Kentucky Natural Resources and Environmental Protection Cabinet will consider the course of action to take. In addition to the hold back, we have obtained an indemnity to cover the full cost of remediation from the prior owner of the property. We do not believe the cost of further investigation and remediation will exceed the amount of funds in the escrow. It is not anticipated that we will have any material liability as a result of compliance with environmental laws with respect to any of our properties. Compliance with environmental laws has not materially affected the ability to develop and operate our properties and we are not otherwise subject to any material compliance costs in connection with federal or state environmental laws. I. SERVICE MARKS We hold numerous state and federal service mark registrations on specific names and designs in various categories including entertainment business, apparel, paper goods, printed matter and housewares and glass. We license the use of these service marks and derive revenue from such license agreements. J. EMPLOYEES As of December 31, 2000, we employed approximately 1,500 full-time employees Company-wide. Due to the seasonal nature of our live racing business, the number of seasonal and part-time persons employed will vary throughout the year. During 2000, average full-time and seasonal employment per pay period was approximately 3,500 individuals Company-wide. 14 ITEM 2. PROPERTIES Information concerning property owned by us required by this Item is incorporated by reference to the information contained in Item 1. "Business" of this Report. Our real and personal property (but not including the property of Hoosier Park, KOTB or Charlson) is encumbered by liens securing our $250 million line of credit facility. The shares of stock of certain of our subsidiaries are also pledged to secure this facility. The Kentucky Derby Museum is located on property which is adjacent to, but not owned by, Churchill Downs. The Museum is owned and operated by the Kentucky Derby Museum Corporation, a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code of 1986. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings, other than ordinary routine litigation incidental to our business, to which we are a party or of which any of our property is the subject and no such proceedings are known to be contemplated by governmental authorities. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of our shareholders during the fourth quarter of the fiscal year covered by this report. 15 PART II ITEM 6. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock is traded on the National Association of Securities Dealers, Inc.'s National Market automated quotation system ("Nasdaq") under the symbol CHDN. As of March 14, 2001, there were approximately 3,420 shareholders of record. The following table sets forth the high and low sale prices, as reported by Nasdaq, and dividend payment information for our common stock during the last two years: 2000 - By Quarter 1999 - By Quarter ----------------- ----------------- 1st 2nd 3rd 4th 1st 2nd 3rd 4th -------------------------------------------------------------------- High Sale $29.00 $26.44 $26.00 $36.13 $40.88 $37.00 $34.50 $27.50 Low Sale $21.00 $21.75 $21.50 $24.75 $25.00 $26.50 $21.19 $20.00 Dividend per share: $.50 $.50 In July 1999, we issued 2,300,000 shares of common stock at a public offering price of $29 a share. In September 2000, we issued 3,150,000 shares of common stock at a price of $16.28 related to the Arlington Park merger. We presently expect that comparable annual cash dividends (adjusted for any stock splits or other similar transactions) will continue to be paid in the future. 16 ITEM 6. CONSOLIDATED SELECTED FINANCIAL DATA (In thousands, expect per share data) Years ended December 31, 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- Operations: Net revenues $362,016 $258,427 $147,300 $118,907 $107,859 Operating income $46,578 $32,513 $17,143 $14,405 $12,315 Net earnings $19,164 $14,976 $10,518 $9,148 $8,072 Basic net earnings per share $1.77 $1.74 $1.41 $1.25 $1.08 Diluted net earnings per share $1.75 $1.72 $1.40 $1.25 $1.08 Dividend paid per share Annual $.50 $.50 $.50 $.25 $.25 Special - - - $.25 $.08 Balance Sheet Data at Period End: Total assets $470,004 $398,046 $114,651 $85,849 $80,729 Working capital surplus (deficiency) $(31,507) $800 $(7,791) $(8,032) $(10,789) Long-term debt $158,040 $181,450 $13,665 $2,713 $2,953 Other Data: Shareholders' equity $202,485 $138,121 $65,231 $53,393 $47,781 Shareholders' equity per share $15.55 $14.02 $8.67 $7.30 $6.54 Additions to racing plant and equipment, exclusive of business acquisitions $22,419 $12,083 $3,524 $4,568 $2,571 Earnings, dividend and shareholders' equity per share amounts have been retroactively adjusted for the 2-for-1 stock split with a record date of March 30, 1998. 17 CHURCHILL DOWNS INCORPORATED ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Information set forth in this discussion and analysis contain various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Private Securities Litigation Reform Act of 1995 ( the "Act") provides certain "safe harbor" provisions for forward-looking statements. All forward-looking statements made in this Annual Report on Form 10-K are made pursuant to the Act. These statements represent our judgment concerning the future and are subject to risks and uncertainties that could cause our actual operating results and financial condition to differ materially. Forward-looking statements are typically identified by the use of terms such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "might," "plan," "predict," "project," "should," "will," and similar words, although some forward-looking statements are expressed differently. Although we believe that the expectations reflected in such forward-looking statements are reasonable we can give no assurance that such expectations will prove to be correct. Important factors that could cause actual results to differ materially from our expectations include: the financial performance of our racing operations; the impact of gaming competition (including lotteries and riverboat, cruise ship and land- based casinos) and other sports and entertainment options in those markets in which we operate; a substantial change in law or regulations affecting our pari-mutuel activities; a substantial change in allocation of live racing days; litigation surrounding the Rosemont, Illinois, riverboat casino; changes in Illinois law that impact revenues of racing operatons in Illinois; a decrease in riverboat admissions subsidy revenue from our Indiana operations; the impact of an additional racetrack near our Indiana operations; our continued ability to effectively compete for the country's top horses and trainers necessary to field high-quality horse racing; our continued ability to grow our share of the interstate simulcast market; the impact of interest rate fluctuations; our ability to execute our acquisition strategy and to complete or successfully operate planned expansion projects; the economic environment; our ability to adequately integrate acquired businesses; market reaction to our expansion projects; the loss of our totalisator companies or their inability to keep their technology current; our accountability for environmental contamination; the loss of key personnel and the volatility of our stock price. You should read this discussion together with the financial statements and other financial information included in the report. General Information About Our Business We conduct pari-mutuel wagering on live Thoroughbred, Quarter Horse and Standardbred horse racing and simulcast signals of races. Additionally, we offer racing services through our other interests. We own and operate the Churchill Downs racetrack in Louisville, Kentucky, which has conducted Thoroughbred racing since 1875 and is internationally known as the home of the Kentucky Derby. We also own and operate Hollywood Park, a Thoroughbred racetrack in Inglewood, California, Arlington Park, a pari-mutuel horse racing operation in Arlington Heights, Illinois, Calder Race 18 CHURCHILL DOWNS INCORPORATED ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Course, a Thoroughbred racetrack in Miami, Florida, and Ellis Park, a Thoroughbred racetrack in Henderson, Kentucky. Additionally, we are the majority owner and operator of Hoosier Park in Anderson, Indiana, which conducts Thoroughbred, Quarter Horse and Standardbred horse racing. We conduct simulcast wagering on horse racing at nine simulcast wagering facilities in Kentucky, Indiana and Illinois, as well as at our six racetracks. Because of the seasonal nature of our business and recent acquisitions and merger activity, revenues and operating results for any interim quarter are likely not indicative of the revenues and operating results for the year and are not necessarily comparable with results for the corresponding period of the previous year. We normally earn a substantial portion of our net earnings in the second and third quarters of each year during which all our operations are open for some or all of this period and the Kentucky Derby and the Kentucky Oaks are run. Our revenues are generated from commissions on pari-mutuel wagering at our racetracks and off-track betting facilities, plus simulcast fees, Indiana riverboat admissions subsidy revenue, admissions, concessions revenue, sponsorship revenues, licensing rights and broadcast fees, lease income and other sources. 19 CHURCHILL DOWNS INCORPORATED ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Pari-mutuel wagering information, including intercompany transactions, for our six live racing facilities and nine separate OTBs, which are included in their respective racetracks, during the years ended December 31, 2000 and 1999 is as follows ($ in thousands):
Churchill Calder Downs Hollywood Race Arlington Hoosier Ellis Racetrack Park* Course* Park* Park Park --------- ---------- -------- --------- -------- -------- Live racing 2000 handle $129,618 $203,593 $186,439 $ 65,679 $15,505 $16,686 2000 no. of days 76 100 174 103 166 41 1999 handle $125,258 $198,683 $183,439 - $15,888 $19,790 1999 no. of days 71 97 169 - 167 61 Export simulcasting 2000 handle $537,704 $756,400 $523,140 $267,432 $91,670 $102,512 2000 no. of days 76 100 174 103 166 41 1999 handle $459,545 $730,479 $489,519 - $68,994 $159,964 1999 no. of days 71 97 169 - 167 61 Import simulcasting 2000 handle $105,419 $234,956 - $410,751 $136,620 $38,281 2000 no. of days 227 175 - 1,820 1,218 316 1999 handle $121,160 $228,556 - $285,893 $139,379 $38,040 1999 no. of days 234 175 - 1,820 1,205 290 Number of OTBs 1 - - 5 3 - Totals 2000 handle $772,741 $1,194,949 $709,579 $743,862 $243,795 $157,479 1999 handle $705,963 $1,157,718 $672,958 $285,893 $224,261 $217,794
* Pari-mutuel wagering information is provided for years ended December 31, 2000 and 1999. Although the summary reflects handle for the full year, only revenues generated since the subsidiaries' acquisition and merger dates have been included in the Company's results of operations. Arlington Park did not open for live racing during 1999, however, off-track betting facilities remained open for import simulcasting. 20 CHURCHILL DOWNS INCORPORATED ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Net Revenues Net revenues increased $103.6 million (40%) from $258.4 million in 1999 to $362.0 million in 2000. Churchill Downs racetrack revenues increased $7.1 million due primarily to $4.4 million of increased pari-mutuel wagering as a result of having an additional week of live racing, which was transferred from Ellis Park. In addition, Churchill Downs racetrack had increases in corporate sponsor event ticket prices, admissions and seat revenue as a result of record attendance on Kentucky Oaks and Kentucky Derby days. Arlington Park contributed $14.8 million to 2000 net revenues. Hollywood Park revenues increased $75.1 million to $105.6 million in 2000 from $30.5 million in 1999 and Calder Race Course revenues increased $5.1 million to $77.5 million in 2000 from $72.4 million in 1999 due to the timing of the 1999 acquisitions. The Arlington Park merger was completed in the third quarter of 2000, Hollywood Park was acquired in the third quarter of 1999 and Calder Race Course was acquired in the second quarter of 1999. The remaining increase recorded in other investments represents the $5.8 million Arlington Park management contract that was in effect from July 1 through the closing of the Arlington Park merger on September 8, 2000. Operating Expenses Operating expenses increased $80.2 million (39%) from $207.4 million in 1999 to $287.6 million in 2000 primarily as a result of $13.1 million of operating expenses of Arlington Park, incurred subsequent to the merger, and increases in Hollywood Park and Calder Race Course operating expenses of $60.2 million and $6.0 million, respectively, due to the timing of the acquisitions. Gross Profit Gross profit increased $23.3 million (46%) from $51.1 million in 1999 to $74.4 million in 2000. The increase in gross profit was primarily the result of the acquisition of Hollywood Park, the merger with Arlington Park and the increase in gross profit for Churchill Downs racetrack due to an increase in the number of live race days and record attendance on Kentucky Oaks and Kentucky Derby days. The Arlington Park management fee also contributed to the increased gross profit for 2000. Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses increased by $9.3 million (50%) from $18.5 million in 1999 to $27.8 million in 2000. SG&A expenses at Churchill Downs corporate increased $3.3 million due primarily to increased corporate staffing and compensation expenses reflecting the Company's strengthened corporate services to meet the needs of new business units. The 1999 21 CHURCHILL DOWNS INCORPORATED ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS acquisitions of Calder Race Course and Hollywood Park resulted in increases of $1.3 million and $3.1 million, respectively. In addition, Arlington Park had expenses of $2.8 million during 2000. Other Income and Expense Interest expense increased $7.0 million from $7.8 million in 1999 to $14.8 million in 2000 primarily as a result of borrowings to finance the acquisitions of Calder Race Course and Hollywood Park during 1999 resulting in a full year of interest expense on the borrowings during 2000. We received $2.5 million as a result of Centaur Racing, LLC's performance under an agreement to sell an additional 26% interest in Hoosier Park. These funds were subsequently expensed to set up Churchill Downs Foundation, Inc., a non-profit private charitable foundation pursuant to section 501(c)(3) of the Internal Revenue Code for the purpose of funding future contributions to qualifying charitable, civic and community causes in locations where we do business. Income Tax Provision The Company's effective income tax rate declined from 42.1% in 1999 to 41.2% in 2000 primarily as a result of the reduced impact of non-deductible expenses. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Net Revenues Net revenues increased $111.1 million (75%) from $147.3 million in 1998 to $258.4 million in 1999. Calder Race Course contributed $72.4 million and Hollywood Park contributed $30.5 million to the increase in 1999 net revenues. Churchill Downs revenues increased $1.5 million due primarily to an increase in corporate sponsor event ticket prices, admissions and seat revenue, concessions, and program revenue as a result of record attendance on Kentucky Oaks and Kentucky Derby days. Hoosier Park revenues increased $3.5 million primarily due to increased simulcasting revenues and a $2.0 million increase in the riverboat gross admissions subsidy of which a portion was required to be spent on purses and marketing expenses. Net revenues for Ellis Park for 1999 increased $2.3 million primarily due to the timing of the 1998 acquisition and increased pari-mutuel wagering revenue for 1999. Other operations, which include Charlson Broadcast Technologies, LLC ("CBT") and Kentucky Horse Center, comprised the remaining $0.9 million of the increase. Operating Expenses Operating expenses increased $88.4 million (74%) from $119.0 million in 1998 to $207.4 million in 1999, including Calder Race Course and Hollywood Park operating expenses of $54.4 million and $26.5 million, respectively. Churchill Downs operating expenses increased $1.9 million. Hoosier Park operating expenses increased $2.8 million due primarily to increases in purses payable consistent with the increase in pari-mutuel revenue and an increase in required purses and marketing expenses related to the riverboat admissions subsidy. Ellis Park operating expenses increased $2.8 million during 1999 as compared to expenses after the acquisition date of April 21, 1998 for the prior year. 22 CHURCHILL DOWNS INCORPORATED ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Gross Profit Gross profit increased $22.7 million (80%) from $28.3 million in 1998 to $51.0 million in 1999. The increase was primarily due to a $18.0 million and $4.0 million increase in gross profit from Calder Race Course and Hollywood Park, respectively. Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses increased by $7.4 million (66%) from $11.2 million in 1998 to $18.6 million in 1999. Calder Race Course and Hollywood Park added $2.4 million and $1.5 million, respectively, and the inclusion of Ellis Park during all of 1999 contributed $0.2 million of the increase. SG&A expenses at Churchill Downs racetrack and corporate expenses increased $1.7 million due primarily to increased corporate staffing and compensation expenses reflecting the Company's strengthened corporate services to meet the needs of new business units. Other operations accounted for the remaining $1.6 million of the increase in SG&A expenses. Other Income and Expense Interest expense increased $6.9 million from $0.9 million in 1998 to $7.8 million in 1999 primarily as a result of borrowings to finance the acquisitions of Calder Race Course, Hollywood Park and CBT during 1999 and the acquisition of Ellis Park in April 1998. Income Tax Provision Our income tax provision increased by $4.1 million during 1999 as compared to 1998 as a result of increased pre-tax earnings and an increase in the estimated effective tax rate from 39.1% in 1998 to 42.1% in 1999 due primarily to non-deductible goodwill amortization expense related to the acquisitions of Calder Race Course and CBT. Significant Changes in the Balance Sheet December 31, 2000 to December 31, 1999 Restricted cash increased $9.0 million due to the current period separate classification of restricted assets. Restricted cash represents refundable deposits and amounts due to horsemen for purses, stakes and awards. 23 CHURCHILL DOWNS INCORPORATED ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net plant and equipment increased $67.9 million primarily as a result of the merger with Arlington Park. Additional increases were due to routine capital spending at our operating units offset by current year depreciation expense and the sale of the Kentucky Horse Center assets during the second quarter of 2000. Accounts payable increased $15.4 million primarily due to the merger with Arlington Park. In addition, there were increases in purses payable and other expenses related to simulcast wagering for Churchill Downs racetrack and Hoosier Park. Accrued expenses increased $11.5 million primarily due to the merger with Arlngton Park. Internally generated funds in 2000 enabled us to reduce our long-term debt by $25.2 million, from $180.9 million to $155.7 million. Common stock increased by $51.6 million primarily due to the issuance of 3.15 million shares of common stock to complete the merger with Arlington Park during the third quarter of 2000. Significant Changes in the Balance Sheet December 31, 1999 to December 31, 1998 The net plant and equipment increase of $191.8 million during 1999 included $189.2 million for the acquisitions of Hollywood Park, Calder Race Course and CBT. The remaining increase was due to routine capital spending at our operating units offset by current year depreciation expense. Intangible assets increased $54.0 million primarily a result of the addition of approximately $52.0 million of goodwill due to the acquisitions of Calder Race Course and CBT. In addition, deferred financing costs of $3.1 million related to our new $250 million revolving loan facility are included. These increases were partially offset by current year amortization expense. The long-term debt increase of $167.4 million was the result of additional borrowings on our bank line of credit during 1999 used to fund the 1999 acquisitions of Hollywood Park, Calder Race Course and CBT. Deferred income tax liabilities increased by $8.5 million primarily as a result of the Calder Race Course acquisition during the second quarter of 1999. Common stock increased by $62.7 million primarily due to $62.1 million in net proceeds received from our public offering during the third quarter of 1999. 24 CHURCHILL DOWNS INCORPORATED ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources The change in working capital between December 31, 2000 and 1999 is a result of the Arlington merger as well as the use of internally generated funds to reduce long term debt. Cash flows provided by operations were $27.2 million, $39.7 million and $10.8 million for years ended December 31, 2000, 1999 and 1998, respectively. The net decrease in cash provided by operations as compared to 1999 was primarily a result of current period separate classification of restricted assets which represent refundable deposits and amounts due to horsemen for purses, stakes and awards. The increase in depreciation and amortization is primarily due to the timing of the acquisitions of Calder Race Course and Hollywood Park and the merger of Arlington Park. Management believes cash flows from operations and available borrowings during 2001 will be sufficient to fund our cash requirements for the year. Cash flows used in investing activities were $17.5 million, $240.4 million and $20.8 million for the years ended December 31, 2000, 1999 and 1998, respectively. We used $22.4 million during 2000 for capital spending at our facilities including $3.0 million for completion of the expansion of Churchill Downs' main entrance and corporate offices. Cash used for 1999 business acquisitions consisted of $142.5 million for the acquisition of Hollywood Park during the third quarter, $82.4 million net of cash acquired for the acquisition of Calder Race Course during the second quarter and $2.9 million net of cash acquired for the acquisition of Charlson Broadcast Technologies, LLC during the first quarter. Cash flows (used in) provided by financing activities were $(28.0) million, $223.3 million and $7.0 million for the years ended December 31, 2000, 1999 and 1998, respectively. Cash flows from operations were used to reduce borrowings on our line of credit in 2000. Cash provided by financing activities in 1999 and 1998 were used to finance the aforementioned acquisitions. We have a $250 million line of credit under a revolving loan facility, of which $153.2 million was outstanding at December 31, 2000. This line of credit is secured by substantially all of our assets and matures in 2004. This credit facility is intended to meet working capital and other short-term requirements and to provide funding for future acquisitions. 25 CHURCHILL DOWNS INCORPORATED ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Significant Accounting Pronouncements In June 1998 the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivatives and Hedging Activities (SFAS 133), as amended by SFAS 137 and SFAS 138, which established accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities. The only derivatives typically used by the Company are interest rate swaps. Management anticipates that the adoption of SFAS 133 will not have a material effect on the Company's results of operations or financial position. 26 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At December 31, 2000, we had $153.2 million of debt outstanding under our revolving loan facility, which bears interest at LIBOR based variable rates. We are exposed to market risk on variable rate debt due to potential adverse changes in the LIBOR rate. Assuming the outstanding balance on the revolving loan facility remains constant, a one percentage point increase in the LIBOR rate would reduce annual pre-tax earnings and cash flows by $1.5 million. In order to mitigate a portion of the market risk associated with our variable rate debt, we have entered into interest rate swap contracts with major financial institutions. Under terms of these separate contracts we receive a LIBOR based variable interest rate and pay a fixed interest rate of 7.015% and 7.30% on notional amounts of $35.0 million each which mature in March 2003 and May 2002, respectively. We have also entered into a contract in which we pay a fixed interest rate of 6.40% on a notional amount of $30.0 million which matures in November 2002. Assuming the December 31, 2000, notional amounts under the interest rate swap contracts remain constant, a one percentage point increase in the LIBOR rate would increase annual pre-tax earnings and cash flows by $1.0 million. 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors Churchill Downs Incorporated In our opinion, the consolidated financial statements listed in the index appearing under Item 14 (a) (1), present fairly, in all material respects, the financial position of Churchill Downs Incorporated and its subsidiaries as of December 31, 2000, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14 (a) (2), presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. \s\ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Louisville, Kentucky February 27, 2001 28 CHURCHILL DOWNS INCORPORATED CONSOLIDATED BALANCE SHEETS December 31, (in thousands) ASSETS 2000 1999 1998 ---- ---- ---- Current assets: Cash and cash equivalents $ 10,807 $ 29,060 $ 6,380 Restricted cash 9,006 - - Accounts receivable 32,535 24,279 11,968 Other current assets 2,932 2,751 1,049 --------- --------- --------- Total current assets 55,280 56,090 19,397 Other assets 8,116 4,740 3,796 Plant and equipment, net 342,767 274,882 83,088 Intangible assets, net 63,841 62,334 8,370 --------- --------- --------- $470,004 $398,046 $114,651 ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 38,396 $ 23,012 $ 6,381 Accrued expenses 27,115 15,603 8,248 Dividends payable 6,508 4,927 3,762 Income taxes payable 1,091 336 258 Deferred revenue 11,353 10,860 8,412 Long-term debt, current portion 2,324 552 127 --------- --------- --------- Total current liabilities 86,787 55,290 27,188 Long-term debt 155,716 180,898 13,538 Other liabilities 9,837 8,263 1,756 Deferred income taxes 15,179 15,474 6,938 Commitments and contingencies - - - Shareholders' equity: Preferred stock, no par value; 250 shares authorized; no shares issued - - - Common stock, no par value; 50,000 shares authorized; issued: 13,019 shares in 2000; 9,854 shares in 1999; and 7,525 shares in 1998 123,227 71,634 8,927 Retained earnings 79,323 66,667 56,599 Note receivable for common stock (65) (65) (65) Deferred compensation costs - (115) (230) --------- --------- --------- 202,485 138,121 65,231 --------- --------- --------- $470,004 $398,046 $114,651 ========= ========= --------- The accompanying notes are an integral part of the consolidated financial statements. 29 CHURCHILL DOWNS INCORPORATED CONSOLIDATED STATEMENTS OF EARNINGS Years ended December 31, (in thousands, except per share data) 2000 1999 1998 ---- ---- ---- Net revenues $362,016 $258,427 $147,300 Operating expenses: Purses 128,982 97,585 50,193 Other direct expenses 158,624 109,783 68,788 --------- --------- --------- 287,606 207,368 118,981 --------- --------- --------- Gross profit 74,410 51,059 28,319 Selling, general and administrative expenses 27,832 18,546 11,176 --------- --------- --------- Operating income 46,578 32,513 17,143 --------- --------- --------- Other income (expense): Interest income 1,023 847 680 Interest expense (14,848) (7,839) (896) Miscellaneous, net (166) 334 342 --------- --------- --------- (13,991) (6,658) 126 --------- --------- --------- Earnings before provision for income taxes 32,587 25,855 17,269 Provision for income taxes (13,423) (10,879) (6,751) --------- --------- --------- Net earnings $ 19,164 $ 14,976 $ 10,518 ========= ========= ========= Earnings per common share data: Basic $1.77 $1.74 $1.41 Diluted $1.75 $1.72 $1.40 Weighted average shares outstanding: Basic 10,849 8,598 7,460 Diluted 10,940 8,718 7,539 The accompanying notes are an integral part of the consolidated financial statements. 30 CHURCHILL DOWNS INCORPORATED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years ended December 31, 2000, 1999 and 1998 (in thousands, except per share data)
Note Deferred Common Stock Retained Receivable Compensation Shares Amount Earnings Common Stock Costs Total Balances December 31, 1997 7,317 $ 3,615 $49,843 $ (65) - $ 53,393 Net earnings 10,518 10,518 Deferred compensation 344 $ (344) - Deferred compensation amortization 114 114 Issuance of common stock at $24.25 per share in conjunction with RCA acquisition 200 4,850 4,850 Issuance of common stock for employee benefit plans 8 118 118 Cash dividends, $.50 per share (3,762) (3,762) ------ -------- -------- ---------- ------------ --------- Balances December 31, 1998 7,525 8,927 56,599 (65) (230) 65,231 Net earnings 14,976 14,976 Deferred compensation amortization 115 115 Issuance of common stock at $29.00 per share 2,300 62,122 62,122 Issuance of common stock for employee benefit plans 29 585 19 604 Cash dividends, $.50 per share (4,927) (4,927) ------ -------- -------- ---------- ------------ --------- Balances December 31, 1999 9,854 71,634 66,667 (65) (115) 138,121 Net earnings 19,164 19,164 Deferred compensation amortization 115 115 Issuance of common stock at $16.28 per share in conjunction with Arlington merger 3,150 51,290 51,290 Issuance of common stock for employee benefit plans 15 303 303 Cash dividends, $.50 per share (6,508) (6,508) ------ -------- -------- ---------- ------------ --------- Balances December 31, 2000 13,019 $123,227 $79,323 $ (65) $ - $202,485 ====== ======== ======== ========== ============ =========
The accompanying notes are an integral part of the consolidated financial statements. 31 CHURCHILL DOWNS INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, (in thousands) 2000 1999 1998 --------- --------- -------- Cash flows from operating activities: Net earnings $ 19,164 $ 14,976 $ 10,518 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization, includes amortization of loan origination costs classified as interest expense of $609 in 2000 and $463 in 1999 17,286 11,306 5,744 Deferred income taxes (275) (502) (121) Deferred compensation 115 115 114 Increase (decrease) in cash resulting from changes in operating assets and liabilities: Restricted cash (9,006) - - Accounts receivable 9,312 (8,971) (2,973) Other current assets (32) (1,119) (293) Accounts payable (2,474) 15,837 (2,211) Accrued expenses (2,220) 2,932 386 Income taxes payable 755 98 71 Deferred revenue (4,631) (231) 758 Other assets and liabilities (783) 5,291 (1,177) ---------- ---------- --------- Net cash provided by operating activities 27,231 39,732 10,816 ---------- ---------- --------- Cash flows from investing activities: Acquisition of businesses, net of cash acquired of $4,200 in 1999 and $517 in 1998 - (228,303) (17,232) Proceeds from the sale of Training Facility assets 4,969 - - Additions to plant and equipment, net (22,419) (12,083) (3,524) ---------- ---------- --------- Net cash used in investing activities (17,450) (240,386) (20,756) ---------- ---------- --------- Cash flows from financing activities: Increase (decrease) in long-term debt, net 2,487 (1,295) (140) Borrowings on bank line of credit 146,618 269,500 22,000 Repayments of bank line of credit (172,515) (102,500) (11,000) Payment of loan origination costs - (2,867) (280) Payment of dividends (4,927) (3,762) (3,658) Capital contribution by minority interest in subsidiary - 1,551 - Common stock issued 303 62,707 118 ---------- ---------- --------- Net cash (used in) provided by financing activities (28,034) 223,334 7,040 ---------- ---------- --------- Net (decrease) increase in cash and cash equivalents (18,253) 22,680 (2,900) Cash and cash equivalents, beginning of period 29,060 6,380 9,280 ---------- ---------- --------- Cash and cash equivalents, end of period $ 10,807 $ 29,060 $ 6,380 ========== ========== ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 13,794 $ 6,858 $ 497 Income taxes $ 13,117 $ 10,796 $ 7,130 Schedule of Non-cash Activities: Issuance of common stock related to merger with Arlington Park $ 51,291 - - Issuance of common stock related to the acquisition of RCA - - $ 4,850 Invoicing for future events $ 4,706 $ 2,678 $ 678 Plant & equipment additions included in accounts payable $ 292 $ 502 $ 95 Compensation expense - - $ 344 The accompanying notes are an integral part of the consolidated financial statements. 32 CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except per share data) 1. Basis of Presentation and Summary of Significant Accounting Policies -------------------------------------------------------------------- Basis of Presentation Churchill Downs Incorporated (the "Company") conducts pari-mutuel wagering on live race meetings for Thoroughbred horses and participates in intrastate and interstate simulcast wagering at its racetracks in Kentucky, California, Florida and Illinois. In addition, the Company, through its subsidiary Hoosier Park L.P. ("Hoosier Park"), conducts pari-mutuel wagering on live Thoroughbred, Quarter Horse and Standardbred horse races and participates in interstate simulcast wagering. The Company's Kentucky, California, Florida, Illinois 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 California Company d/b/a Hollywood Park("Hollywood Park"), Calder Race Course, Inc. and Tropical Park, Inc. which hold licenses to conduct horse racing at Calder Race Course ("Calder Race Course"), Arlington International Racecourse, Inc., Arlington Management Services, Inc. and Turf Club of Illinois, Inc.(collectively referred to as "Arlington Park"), Ellis Park Race Course, Inc. ("Ellis Park"), Churchill Downs Management Company ("CDMC"), Churchill Downs Investment Company ("CDIC") and Anderson Park Inc. ("Anderson"), and its majority-owned subsidiary, Hoosier Park, and Charlson Broadcast Technologies, LLC ("CBT"). All significant intercompany balances and transactions have been eliminated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 Followed 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. Restricted Cash Restricted cash represents refundable deposits and amounts due to horsemen for purses, stakes and awards. 33 CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except per share data) 1. Basis of Presentation and Summary of Significant Accounting ----------------------------------------------------------- Policies(cont'd) --------- Plant and Equipment Plant and equipment are recorded at cost. Depreciation is calculated using the straight-line and accelerated methods over the estimated useful lives of the related assets as follows: 10 to 40 years for grandstands and buildings, 3 to 18 years for equipment, 5 to 10 years for furniture and fixtures and 10 to 20 years for tracks and other improvements. Intangible Assets Amortization of the cost of acquisitions in excess of fair value of assets acquired, the Indiana racing license and the Arlington Park trademarks are provided over 40 years using the straight-line method. Loan origination costs on the Company's line of credit are being amortized under the effective interest method over 60 months, the term of the loan. The intangible asset relating to the Illinois Horse Race Equity fund will not be amortized until revenues relating to the intangible are recongnized. Long-lived Assets In the event thatfacts and circumstances indicate that the carrying amount of tangible or intangible long-lived assets or groups of assets may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the assets would be compared to the assets' carrying amount to determine if a write-down to market value or discounted cash flow value is required. Interest Rate Swaps The Company utilizes interest rate swap contracts to hedge exposure to interest rate fluctuations on its variable rate debt. The differential between the fixed interest rate paid and the variable interest rate received under the interest rate swap contracts is recognized as an adjustment to interest expense in the period in which the differential occurs. Differential amounts incurred under the rate swap contracts but not settled in cash at the end of a reporting period are recorded as receivables or payables in the balance sheet. Any gains or losses realized on the early termination of interest rate swap contracts are deferred and amortized as an adjustment to interest expense over the emaining term of the underlying debt instrument. Deferred Revenue Deferred revenue includes primarily advance sales related to the Kentucky Derby and Oaks races in Kentucky and other advanced billings on racing events. 34 CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except per share data) 1. Basis of Presentation and Summary of Significant Accounting ----------------------------------------------------------- Policies (cont'd) --------- Stock-Based Compensation The Company accounts or stock-based compensation in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees". In accordance with Statement of Financial Accounting Standards (SFAS) No. 123 "Accounting for Stock-based Compensation" pro forma disclosure of net earnings and earnings per share are presented in Note 10 as if SFAS No. 123 had been applied. Reclassifications Certain financial statement amounts have been reclassified in the prior years to conform to current year presentation. 2. Acquisitions and Other Transactions ----------------------------------- On September 8, 2000, three of the Company's wholly owned subsidiaries merged with Arlington International Racecourse, Inc., Arlington Management Services, Inc. and Turf Club of Illinois, Inc. (collectively referred to as "Arlington Park"). The Company issued 3.15 million shares of its common stock, with a fair value of $51.3 million, to Duchossois Industries, Inc. ("DII") and could issue up to an additional 1.25 million shares of common stock dependent upon the opening of the riverboat casino at Rosemont, Illinois, and the amount of subsidies received by Arlington as a result thereof. For this purpose, the purchase price was recorded based upon the fair value of shares issued to DII at the announcement of the mergers on June 23, 2000, plus approximately $2.2 million in merger-related costs. The acquired tangible and intangible assets of $87.7 million and assumed liabilities of $34.1 million of Arlington Park were recorded at their estimated fair values on the merger date. The allocation of the purchase price may require adjustment in the Company's future financial statements based on a final determination of the fair value of certain liabilities assumed in the merger. The Company also received $5.8 million in management fees related to the Arlington Park management contract that was in effect from July 1 through the closing of the Arlington Park merger on September 8,2000. The merger was accounted for by the Company as an asset purchase and, accordingly, the financial position and results of operations of Arlington Park have been included in the Company's consolidated financial statements since the date of merger. On April 21, 2000, Keeneland Association, Inc. purchased the Company's Thoroughbred training and boarding facility known as Kentucky Horse Center for a cash payment of $5.0 million, which approximated its carrying value. 35 CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except per share data) 2. Acquisitions and Other Transactions (cont'd) ----------------------------------- On September 10, 1999, the Company acquired the assets of the Hollywood Park and the Hollywood Park Casino in Inglewood, California, including approximately 240 acres of land upon which the racetrack and casino are located, for a purchase price of $140.0 million plus approximately $2.5 million in transaction costs. The Company leases the Hollywood Park Casino to the seller under a 10-year lease with one 10-year renewal option. The lease provides for annual rent of $3.0 million, subject to adjustment during the renewal period. The entire purchase price of $142.5 million was allocated to the acquired assets and liabilities based on their fair values on the acquisition date. The acquisition was accounted for by the Company as an asset purchase and, accordingly, the financial position and results of operations of Hollywood Park have been included in the Company's consolidated financial statements since the date of acquisition. On April 23, 1999, the Company acquired all of the outstanding stock of Calder Race Course, Inc. and Tropical Park, Inc. from KE Acquisition Corp. for a purchase price of $86 million cash plus a closing net working capital adjustment of approximately $2.9 million cash and $0.6 million in transaction costs. The purchase included Calder Race Course in Miami and the licenses held by Calder Race Course, Inc. and Tropical Park, Inc. to conduct horse racing at Calder Race Course. The purchase price, including additional costs, of $89.5 million was allocated to the acquired tangible and intangible assets of $103.9 million and assumed liabilities of $14.4 million based on their fair values on the acquisition date with the excess of $49.4 million being recorded as goodwill, which is being amortized over 40 years. The acquisition was accounted for by the Company under the purchase method of accounting and, accordingly, the financial position and results of operations of Calder Race Course, Inc. and Tropical Park, Inc. have been included in the Company's consolidated financial statements since the date of acquisition. On April 21, 1998, the Company acquired from TVI Corp. ("TVI") all of the outstanding stock of Racing Corporation of America ("RCA"). As part of the transaction, TVI received 0.2 million shares of the Company's common stock valued at $4.9 million with the remaining balance of $17.1 million paid from cash on hand and a draw on the Company's bank line of credit. The purchase price of $22.6 million, including $0.6 million in transaction costs was allocated to acquired tangible and intangible assets of $23.8 million and assumed liabilities of $7.9 million based on their fair values on the acquisition date with the excess of $6.7 million being recorded as goodwill which is being amortized over 40 years. The acquisition was accounted for by the Company under the purchase method of accounting and, accordingly, the results of operations of RCA subsequent to April 20, 1998, are included in the Company's consolidated results of operations. 36 CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except per share data) 2. Acquisitions and Other Transactions (cont'd) ----------------------------------- Following are the unaudited pro forma results of operations as if the September 8, 2000 merger with Arlington Park, the September 10, 1999 acquisition of Hollywood Park, the July 20, 1999 stock issuance and the April 23, 1999 acquisition of Calder Race Course all had occurred on January 1,1999: December 31, 2000 1999 ---- ---- Net revenues $425,077 $357,284 Net earnings $18,556 $14,222 Earnings per common share: Basic $1.43 $1.10 Diluted $1.42 $1.09 Weighted average shares outstanding: Basic 13,015 12,983 Diluted 13,106 13,103 This unaudited pro forma financial information is not necessarily indicative of the operating results that would have occurred had the transactions been consummated as of January 1, 1999, nor is it necessarily indicative of future operating results. 3. Plant and Equipment ------------------- Plant and equipment is comprised of the following: 2000 1999 1998 ---- ---- ---- Land $132,034 $ 98,445 $ 7,632 Grandstands and buildings 191,172 167,648 73,377 Equipment 23,703 15,845 4,979 Furniture and fixtures 20,342 8,057 5,341 Tracks and other improvements 44,927 40,271 37,998 Construction in process 2,439 2,411 249 --------- --------- -------- 414,617 332,677 129,576 Accumulated depreciation (71,850) (57,795) (46,488) --------- --------- -------- $342,767 $274,882 $83,088 ========= ========= ======== Depreciation expense was approximately $14,917, $9,506, and $5,490 for the years ended December 31, 2000, 1999 and 1998. 37 CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except per share data) 4. Intangibles assets ------------------ The Company's intangible assets are comprised of the following: 2000 1999 1998 ---- ---- ---- Cost of acquisitions in excess of fair value of net assets acquired $59,433 $59,433 $6,449 Illinois Horse Race Equity Fund 3,307 - - Arlington Park trademarks 494 - - Indiana racing license 2,085 2,085 2,085 Loan origination costs 3,076 3,076 280 --------- -------- ------- 68,395 64,594 8,814 Accumulated amortization (4,554) (2,260) (444) -------- -------- ------- $63,841 $62,334 $8,370 ======== ======== ======= Amortization expense related to the loan origination costs of $609 and $463 for the years ended December 31, 2000 and 1999 is classified as interest expense. Amortization expense for other intangibles of approximately $1,760, $1,353 and $253 for the years ended December 31, 2000, 1999 and 1998 is classified in operating expenses. 5. Income Taxes ------------ Components of the provision for income taxes are as follows: 2000 1999 1998 ---- ---- ---- Currently payable: Federal $11,347 $ 9,528 $5,795 State & local 2,374 1,853 1,077 -------- -------- ------- 13,721 11,381 6,872 -------- -------- ------- Deferred: Federal (246) (439) 46 State & local (52) (63) 6 -------- -------- ------- (298) (502) 52 -------- -------- ------- Reversal of valuation allowance - - (173) -------- -------- ------- $13,423 $10,879 $6,751 ======== ======== ======= 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: 2000 1999 1998 ---- ---- ---- Federal statutory tax on earnings before income tax $11,405 $9,049 $5,942 State income taxes, net of federal income tax benefit 1,502 1,154 747 Permanent differences and other 516 676 235 Reversal of valuation allowance - - (173) ------- ------- ------- $13,423 $10,879 $6,751 ======= ======= ======= 38 CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except per share data) 5. Income Taxes (cont'd) ------------ Components of the Company's deferred tax assets and liabilities are as follows: 2000 1999 1998 ---- ---- ---- Deferred tax liabilities: Property & equipment in excess of tax basis $15,419 $16,288 $7,805 Racing license in excess of tax basis 650 650 650 Other 189 66 - ------- ------- ------ Deferred tax liabilities 16,258 17,004 8,455 ------- ------- ------ Deferred tax assets: Supplemental benefit plan 372 337 316 State net operating loss carryforwards - 638 857 Allowance for uncollectible receivables 404 345 87 Other 926 830 437 ------- ------- ------ Deferred tax assets 1,702 2,150 1,697 ------- ------- ------ Net deferred tax liability $14,556 $14,854 $6,758 ======= ======= ====== Income taxes are classified in the balance sheet as follows: Net non-current deferred tax liability $15,179 $15,474 $6,938 Net current deferred tax asset (623) (620) (180) -------- -------- ------- $14,556 $14,854 $6,758 ======== ======== ======= 6. Shareholders' Equity -------------------- On September 8, 2000, the Company issued 3.15 million shares of the Company's common stock to DII in conjunction with the Arlington Park merger. On July 20, 1999 the Company issued 2.3 million shares of the Company's common stock at a price of $29 per share. The total proceeds net of offering expenses was $62.1 million, and was used for the repayment of bank borrowings. On March 19, 1998, the Company's Board of Directors authorized a 2-for-1 stock split of its common stock effective March 30, 1998. All share and per share amounts in the accompanying consolidated financial statements have been restated to give effect to the stock split. On March 19,1998, the Company's Board of Directors approved a stockholder rights plan, 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. This plan expires on March 19, 2008. 39 CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except per share data) 7. Employee Benefit Plans ---------------------- The Company has a profit-sharing plan that covers all employees with one year or more of service and one thousand or more worked hours. The Company will match contributions made by the employee up to 3% of the employee's annual compensation. The Company will also match at 50%, contributions made by the employee up to an additional 2%. The Company may also contribute a discretionary amount determined annually by the Board of Directors as well as a year end discretionary match not to exceed 4%. The Company's contribution to the plan for the years ended December 31, 2000, 1999 and 1998 was approximately $840, $819 and $806 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 and several other collectively-bargained retirement plans which are administered by unions. Contributions are made in accordance with negotiated labor contracts. Retirement plan expense for the years ended December 31, 2000, 1999 and 1998 was approximately $1,706, $665 and $258, respectively. The Company's policy is to fund this expense as accrued. The estimated present value of future payments under a supplemental benefit plan is charged to expense over the period of active employment of the employees covered under the plan. Supplemental benefit plan expense for the years ended December 31, 2000, 1999 and 1998 was approximately $87, $55 and $55, respectively. 8. Long-Term Debt -------------- The Company has a $250 million line of credit under a revolving loan facility through a syndicate of banks to meet working capital and other short-term requirements and to provide funding for acquisitions. The interest rate on the borrowing is based upon LIBOR plus 75 to 250 additional basis points, which is determined by certain Company financial ratios. The weighted average interest rate was 7.94% on the outstanding balance at December 31, 2000. There was $153.2 million outstanding on the line of credit at December 31, 2000 compared to $178.0 million and $11.0 million outstanding at December 31, 1999 and 1998, respectively. The line of credit is collateralized by substantially all of the assets of the Company and its wholly owned subsidiaries, and matures in 2004. The Company has entered into interest rate swap contracts with major financial institutions. Under terms of these separate contracts we receive a LIBOR based variable interest rate and pay a fixed interest rate of 7.015% and 7.30% on notional amounts of $35.0 million each which mature in March 2003 and May 2002, respectively. The Company has also entered into a contract which pays a fixed interest rate of 6.40% on a notional amount of $30.0 million and matures in November 2002. The variable interest rate paid on the contracts is determined based on LIBOR on the last day of each month, which is consistent with the variable rate determination on the underlying debt. 40 CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except per share data) 8. Long-Term Debt (cont'd) -------------- On May 31, 1996, the Company entered into a Partnership Interest Purchase Agreement with Conseco, LLC ("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 $2.6 million, of which the balance is $2.4 million at December 31, 2000. The loan requires interest of prime plus 2% (11.5% at December 31, 2000) payable monthly with principal due November 2004. The note is collateralized by 10% of the assets of Hoosier Park. During 2000 the Company entered into a short-term note payable which expires in April 2001, bears interest at approximately prime, and is secured by a blanket lien on CBT's assets. There was $2.0 million outstanding on the note payable at December 31, 2000. Future aggregate maturities of long-term debt are as follows: 2001 $ 2,324 2002 157 2003 17 2004 155,542 -------- $158,040 9. Operating Leases ---------------- The Company has a long-term operating lease for the land in Anderson, Indiana on which its Hoosier Park facility is located and an operating lease for the Indianapolis off-track betting facility ("OTB"). The Anderson lease expires in 2003, with an option to extend the lease for three additional ten year terms. The Indianapolis lease expires in 2009, with an option to extend the lease for two additional five year terms. The leases include provisions for minimum lease payments as well as contingent lease payments based on handle or revenues. The Company also has a long term operating lease agreement for land in Arlington Heights, Illinois on which the backside facilities of Arlington Park are located and two operating lease agreements for Arlington Park OTBs. The Arlington lease expires in 2010 with an option to purchase, the Mud Bug OTB lease expires in 2006 with an option to extend the lease for an additional five years and the Waukegan OTB lease expires in 2003, with an option to purchase. The Company also leases certain totalisator and audio/visual equipment and services as well as land and facilities. The Company's total rent expense for all operating leases was approximately $7,629, $6,832 and $4,022 for the years ended December 31, 2000, 1999 and 1998. Total annual rent expense for contingent lease payments was approximately $6,991, $6,287 and $3,942 for the years ended December 31, 2000, 1999 and 1998. 41 CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except per share data) 9. Operating Leases (cont'd) ---------------- Future minimum operating lease payments are as follows: Minimum Lease Payment ------- 2001 $ 1,856 2002 1,725 2003 1,485 2004 1,270 2005 1,251 Thereafter 4,082 ------- $11,669 10. Stock-Based Compensation Plans ------------------------------ Employee Stock Options: 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 are as if the Company adopted the cost recognition provisions of SFAS 123 are presented below. The Company is authorized to issue up to 600 shares and 400 shares of common stock (as adjusted for the stock split) under the 97 Plan and 93 Plan, respectively, pursuant to "Awards" granted in the form of incentive stock options (intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended) and non-qualified stock options. Awards may be granted to selected employees of the Company or any subsidiary. 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 2000, 1999 and 1998. 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. 42 CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except per share data) 10. Stock-Based Compensation Plans (cont'd) ------------------------------ A summary of the status of the Company's stock options as of December 31, 2000, 1999 and 1998 and the changes during the year ended on those dates is presented below:
2000 1999 1998 ---------------------- ---------------------- ---------------------- Weighted Weighted Weighted # of Shares Average # of Shares Average # of Shares Average Underlying Exercise Underlying Exercise Underlying Exercise Options Prices Options Prices Options Prices Outstanding at beginning of the year 600 $21.62 478 $20.86 426 $19.45 Granted 179 $27.60 154 $23.70 52 $32.50 Exercised 4 $19.56 22 $19.30 - - Canceled - - - - - - Forfeited 2 $30.24 10 $22.53 - - Expired - - - - - - Outstanding at end of year 773 $22.98 600 $21.62 478 $20.86 Exercisable at end of year 393 $19.46 311 $19.09 248 $21.02 Weighted-average fair value per share of options granted during the year $15.32 $12.01 $10.42
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 2000, 1999 and 1998, respectively: dividend yields ranging from 1.40% to 1.83%; risk- free interest rates are different for each grant and range from 5.05% to 6.76%; and the expected lives of options are different for each grant and range from approximately 6.5 to 9.3 years, and expected volatility rates of 55.23%, 43.74%, and 24.86% for years ending December 31, 2000, 1999 and 1998. The following table summarizes information about stock options outstanding at December 31, 2000:
Options Outstanding Options Exercisable ---------------------------------------------- ---------------------------- Number Weighted Average Weighted Number Weighted Range of Outstanding Remaining Average Exercisable Average Exercise Prices at 12/31/00 Contributing Life Exercise Price at 12/31/00 Exercise Price ---------------- ------------ ----------------- -------------- ------------ -------------- $13.40 to $16.75 18 4.5 $15.75 18 $15.75 $16.76 to $20.10 273 5.2 $18.93 273 $18.93 $20.11 to $23.45 238 7.4 $22.17 102 $21.54 $23.46 to $26.80 8 9.1 $24.13 - - $26.81 to $30.15 178 9.8 $27.84 - - $30.16 to $33.50 58 8.0 $32.67 - - ---- --- ------ --- ------ TOTAL 773 7.2 $22.98 393 $19.09
43 CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except per share data) 10. Stock-Based Compensation Plans (cont'd) ------------------------------ Employee Stock Purchase Plan: Under the Company's Employee Stock Purchase Plan (the "Employee Stock Purchase Plan"), the Company is authorized to sell, pursuant to short-term stock options, shares of its common stock to its full-time (or part-time for at least 20 hours per week and at least five months per year) employees at a discount from the common stock's fair market value. The Employee Stock Purchase Plan operates on the basis of recurring, consecutive one-year periods. Each period commences on August 1 and ends on the next following July 31. On the first day of each 12-month period, August 1, the Company offers to each eligible employee the opportunity to purchase common stock. Employees elect to participate for each period to have a designated percentage of their compensation withheld (after-tax) and applied to the purchase of shares of common stock on the last day of the period, July 31. The Employee Stock Purchase Plan allows withdrawals, terminations and reductions on the amounts being deducted. The purchase price for the common stock is 85% of the lesser of the fair market value of the common stock on (i) the first day of the period, or (ii) the last day of the period. No employee may purchase common stock under the Employee Stock Purchase Plan valued at more than $25 for each calendar year. Under the Employee Stock Purchase Plan, the Company sold 12 shares of common stock to 173 employees pursuant to options granted on August 1, 1999, and exercised on July 30, 2000. Because the plan year overlaps the Company's fiscal year, the number of shares to be sold pursuant to options granted on August 1, 2000, can only be estimated because the 2000 plan year is not yet complete. The Company's estimate of options granted in 2000 under the Plan is based on the number of shares sold to employees under the Plan for the 1999 plan year, adjusted to reflect the change in the number of employees participating in the Plan in 2000. 44 CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except per share data) 10. Stock-Based Compensation Plans (cont'd) ------------------------------ A summary of the status of the Company's stock options under the Employee Stock Purchase Plan as of December 31, 2000, 1999 and 1998 and the changes during the year ended on those dates is presented below:
2000 1999 1998 -------------------- --------------------- --------------------- Weighted Weighted Weighted # of Shares Average # of Shares Average # of Shares Average Underlying Exercise Underlying Exercise Underlying Exercise Options Prices Options Prices Options Prices Outstanding at beginning of the year 9 $19.00 5 $24.00 8 $14.60 Adjustment to prior year estimated grants 3 $19.00 2 $24.00 0 $14.60 Granted 16 $19.50 9 $23.90 5 $31.45 Exercised 12 $19.00 7 $24.00 8 $14.60 Forfeited - - - - - - Expired - - - - - - Outstanding at end of year 16 $19.50 9 $23.90 5 $31.45 Exercisable at end of year - - - - - - Weighted-average Fair value per share of options granted during the year $7.79 $8.67 $12.16
Had the compensation cost for the Company's stock-based compensation plans been determined consistent with SFAS 123, the Company's net earnings and earnings per common share for 2000, 1999 and 1998 would approximate the pro forma amounts presented below: 2000 1999 1998 -------- ------- ------- Net earnings: As reported .............. $19,164 $14,976 $10,518 Pro-forma ................ $18,286 $14,451 $10,087 Earnings per common share: As reported Basic ................ $1.77 $ 1.74 $1.41 Diluted .............. $1.75 $ 1.72 $1.40 Pro-forma Basic ................ $1.69 $ 1.68 $1.35 Diluted .............. $1.67 $ 1.66 $1.34 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. 45 CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except per share data) 11. Fair Values of Financial Instruments ------------------------------------ The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: 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. Interest Rate Swaps - The carrying amounts of the Company's interest rate swaps are a payable of an approximate mark-to-market value of $558 and $77, at December 31, 2000 and 1999, respectively, using current interest rates. 12. Commitments and contingencies ----------------------------- Hollywood Park received cease and desist orders from the California Regional Water Quality Control Board addressing storm water runoff and dry weather discharge issues. We retained an engineering firm to develop a plan for compliance and to construct certain drainage and waste disposal systems. The construction of the system has been completed. As part of the 1999 asset acquisition of Hollywood Park, the seller agreed to indemnify our Company in the amount of $5.0 million for costs incurred in relation to the waste water runoff issue. Amounts under the indemnification have been expended and the ultimate cost to the Company was $1.7 million, incurred during 2000. The septic system at the Ellis Park facility must be replaced with hook-up to city sewers. The cost of the hook-up is estimated by the city of Henderson, Kentucky to be $1.2 million. Ellis Park will seek partial reimbursement from the state of Kentucky. The project is estimated to be completed by November 2001. It is not anticipated that the Company will have any material 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. 46 CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except per share data) 13. Earnings Per Common Share Computations -------------------------------------- The following is a reconciliation of the numerator and denominator of the earnings per common share computations: 2000 1999 1998 ---- ---- ---- Net earnings (numerator) amounts used for basic and diluted per share $19,164 $14,976 $10,518 ======= ======= ======= Weighted average shares (denominator) of common stock outstanding per share computations: Basic 10,849 8,598 7,460 Plus dilutive effect of stock options 91 120 79 ------ ----- ----- Diluted 10,940 8,718 7,539 ====== ===== ===== Earnings per common share: Basic $1.77 $1.74 $1.41 Diluted $1.75 $1.72 $1.40 Options to purchase approximately 73, 47 and 41 shares for the years ended December 31, 2000, 1999 and 1998, 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. 47 CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except per share data) 14. Segment Information ------------------- The Company has adopted SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information." The Company has determined that it currently operates in the following seven segments: (1) Churchill Downs racetrack and the Louisville Sports Spectrum simulcast facility (2) Hollywood Park racetrack and its on-site simulcast facility (3) Calder Race Course (4) Arlington Park and its OTBs (5) Ellis Park racetrack and its on- site simulcast facility, (6) Hoosier Park racetrack and its on-site simulcast facility and the other three Indiana simulcast facilities and (7) Other investments, including CBT and the Company's other various equity interests, which are not material. Eliminations include the elimination of management fees and other intersegment transactions. As a result of a reorganization for internal reporting during 2000, the Company's segment disclosures are presented on a new basis to correspond with internal reporting for corporate revenues and expenses which, for the years ended December 31, 2000 and 1999, are now reported separate of Churchill Downs racetrack revenues and expenses. The Company did not track corporate revenues and expenses during 1998, therefore, corporate revenues and expenses for 1998 are not reported separate of Churchill Downs racetrack reveneus and expenses. Most of the Company's revenues are generated from commissions on pari-mutuel wagering at the Company's racetracks and OTBs, plus simulcast fees, Indiana riverboat admissions subsidy revenue, admissions, concessions revenue, sponsorship revenues, licensing rights and broadcast fees, lease income and other sources. The accounting policies of the segments are the same as those described in the "Summary of Significant Accounting Policies" in the Company's annual report to stockholders for the year ended December 31, 2000. Earnings before interest, taxes, depreciation and amortization ("EBITDA") should not be considered as an alternative to, or more meaningful than, net income (as determined in accordance with accounting principles generally accepted in the United States of America) as a measure of our operating results or cash flows (as determined in accordance with accounting principles generally accepted in the United States of America) or as a measure of our liquidity. 48 CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except per share data) 14. Segment Information (cont'd) ------------------- The table below presents information about reported segments for the years ended December 31, 2000, 1999 and 1998: December 31, ------------ 2000 1999 1998 ---- ---- ---- Net revenues: Churchill Downs $ 89,547 $ 82,429 $ 80,925 Hollywood Park 105,628 30,494 - Calder Race Course 77,552 72,418 - Arlington Park 14,781 - - Hoosier Park 51,250 51,280 47,744 Ellis Park 16,119 19,653 17,386 Other investments 13,069 6,151 2,497 -------- --------- --------- 367,946 262,425 148,552 Corporate revenues 778 - - Eliminations (6,708) (3,998) (1,252) --------- --------- --------- $362,016 $258,427 $147,300 ========= ========= ========= EBITDA: Churchill Downs $21,715 $17,789 $14,416 Hollywood Park 18,898 3,842 - Calder Race Course 16,718 17,946 - Arlington Park (427) - - Hoosier Park 5,920 6,423 5,599 Ellis Park 936 2,071 2,305 Other investments 7,815 1,314 909 -------- -------- ------- 71,575 49,385 23,229 Corporate expenses (8,486) (5,679) - -------- -------- ------- $63,089 $43,706 $23,229 ======== ======== ======= Operating income (loss): Churchill Downs $17,857 $14,240 $10,700 Hollywood Park 14,407 2,574 - Calder Race Course 13,397 15,564 - Arlington Park (1,133) - - Hoosier Park 4,538 5,246 4,499 Ellis Park (481) 721 1,422 Other investments 6,252 (153) 522 -------- -------- ------- 54,837 38,192 17,143 Corporate expenses (8,259) (5,679) - -------- -------- ------- $46,578 $32,513 $17,143 ======== ======== ======= 49 CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (in thousands, except per share data) 14. Segment Information (cont'd) ------------------- As of December 31, ----------------- 2000 1999 1998 ---- ---- ---- Total Assets: Churchill Downs $358,081 $345,909 $ 89,427 Hollywood Park 174,232 153,126 - Calder Race Course 127,666 114,396 - Arlington Park 74,554 - - Hoosier Park 32,718 32,559 31,732 Ellis Park 21,381 25,015 23,038 Other investments 45,390 312,272 71,109 --------- --------- --------- 834,022 983,277 215,306 Eliminations (364,018) (585,231) (100,655) --------- --------- --------- $470,004 $398,046 $114,651 ========= ========= ========= Following is a reconciliation of total EBITDA to income before provision for income taxes: December 31, ----------- 2000 1999 1998 ---- ---- ---- Total EBITDA $63,089 $43,706 $23,229 Depreciation and amortization (16,677) (10,859) (5,744) Interest income (expense), net (13,825) (6,992) (216) -------- -------- -------- Earnings before provision for income taxes $32,587 $25,855 $17,269 ======== ======== ======== 50
Supplementary Financial Information(Unaudited) Common Stock Information (In thousands, except per share data) Per Share of Common Stock ------------------------------------------------- Operating Net Basic Diluted Net Income Earnings Earnings Earnings Bid Price Revenues (Loss) (Loss) (Loss) (Loss) Dividends High Low -------- ------- ------- ------ ------ --------- ---- --- 2000 $362,016 $46,578 $19,164 $1.77 $1.75 Fourth Quarter $100,897 $6,806 $2,286 $0.18 $0.17 $0.50 $35.69 $25.25 Third Quarter 103,536 15,824 7,303 0.69 0.68 25.88 21.69 Second Quarter 131,938 35,488 18,340 1.86 1.85 26.00 21.75 First Quarter 25,645 (11,540) (8,765) (0.89) (0.89) 26.25 21.00 -------------------------------------------------------------------------------------------------- 1999 $258,427 $32,513 $14,976 $1.74 $1.72 Fourth Quarter $93,548 $8,784 $3,128 $0.32 $0.31 $0.50 $26.00 $20.13 Third Quarter 63,076 3,635 1,192 0.13 0.12 33.63 22.50 Second Quarter 84,140 24,891 13,666 1.82 1.79 35.75 26.00 First Quarter 17,663 (4,797) (3,010) (0.40) (0.40) 38.75 26.25 -------------------------------------------------------------------------------------------------- 1998 $147,300 $17,143 $10,518 $1.41 $1.40 Fourth Quarter $31,242 $(1,291) $(780) $(0.10) $(0.10) $0.50 $36.44 $27.25 Third Quarter 33,299 (1,016) (655) (0.09) (0.09) 41.44 27.63 Second Quarter 67,374 22,220 13,522 1.81 1.79 43.25 24.00 First Quarter 15,385 (2,770) (1,569) (0.21) (0.21) 25.31 19.31 --------------------------------------------------------------------------------------------------
The Company's Common Stock is traded on the National Association of Securities Dealers, Inc.'s National Market("Nasdaq") under the symbol CHDN. As of March 14, 2001, there were approximately 3,420 shareholders 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. On July 20, 1999 the Company issued 2.3 million shares of common stock at a public offering price of $29 per share. In September 2000, we issued 3.15 million shares of common stock at a price of $16.28 related to the Arlington Park merger. Quarterly earnings (loss) per share figures may not equal total earnings (loss) per share for the year due in part to the fluctuation of the market price of the stock. The above table sets forth the high and low bid quotations (as reported by Nasdaq) and dividend payment information for the Company's Common Stock during its last three years. 51 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. 52 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K Pages (a) (1) Consolidated Financial Statements The following financial statements of Churchill Downs Incorporated for the years ended December 31, 2000, 1999 and 1998 are included in Part II, Item 8: Report of Independent Accountants 28 Consolidated Balance Sheets 29 Consolidated Statements of Earnings 30 Consolidated Statements of Shareholders' Equity 31 Consolidated Statements of Cash Flows 32 Notes to Consolidated Financial Statements 33-50 (2) Schedule VIII - Valuation and Qualifying Accounts 55 All other schedules are omitted because they are not applicable, not significant or not required, or because the required information is included in the financial statement notes thereto. (3) For the list of required exhibits, see exhibit index. (b) Reports on Form 8-K: (1) Churchill Downs Incorporated filed a Current Report on Form 8-K dated Septmeber 30, 2000, amended by Form 8-K/A filed on November 21, 2000, reporting, under Item 2, the closing of the transactions pursuant to the agreement and plan of merger with Duchossois Industries, Inc., Arlington International Racecourse, Inc., Arlington Management Services, Inc., and Turf Club of Illinois, Inc. Pursuant to the Form 8-K/A, financial statements were filed for Arlington International as of December 31, 1999 and June 30,2000, and for the periods ended June 30, 1999 and 2000 and pro foroma financial statements were filed for the six month period ended June 30, 2000 and for the year ended December 31, 1999. (2) Churchill Downs Incorporated filed a Current Report on Form 8-K on October 26, 2000, under Item 5, "Other Events", reporting on Churchill Downs Incorporated third quarter results for 2000. (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. 53 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHURCHILL DOWNS INCORPORATED /s/Thomas H. Meeker ----------------------------- Thomas H. Meeker President and Chief Executive Officer March 16, 2001 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/Thomas H. Meeker /s/Robert L. Decker /s/Michael E. Miller --------------------------------- ---------------------------- ------------------------------ Thomas H. Meeker, President and Robert L. Decker, Michael E. Miller, Chief Executive Officer Executive Vice President and Senior Vice President, Finance March 16, 2001 Chief Financial Officer March 16, 2001 (Director and Principal Executive March 16, 2001 (Principal Accounting Officer) Officer) (Principal Financial Officer) /s/Charles W. Bidwill, Jr. /s/Craig J. Duchossois --------------------------------- ---------------------------- ------------------------------ William S. Farish Charles W. Bidwill, Jr. Craig J. Duchossois March 16, 2001 March 16, 2001 March 16, 2001 (Director) (Director) (Director) /s/Richard L. Duchossois /s/Richard L. Fealy /s/J. David Grissom --------------------------------- ---------------------------- ------------------------------ Richard L. Duchossois Richard L. Fealy J. David Grissom March 16, 2001 March 16, 2001 March 16, 2001 (Director) (Director) (Director) /s/Seth W. Hancock /s/Daniel P. Harrington /s/Frank B. Hower, Jr. --------------------------------- ---------------------------- ------------------------------ Seth W. Hancock Daniel P. Harrington Frank B. Hower, Jr. March 16, 2001 March 16, 2001 March 16, 2001 (Director) (Director) (Director) /s/G. Watts Humphrey, Jr. /s/Brad M. Kelley /s/Carl F. Pollard --------------------------------- ---------------------------- ------------------------------ G. Watts Humphrey, Jr. Brad M. Kelley Carl F. Pollard March 16, 2001 March 16, 2001 March 16, 2001 (Director) (Director) (Director) /s/Darrell R. Wells --------------------------------- ---------------------------- Dennis D. Swanson Darrell R. Wells March 16, 2001 March 16, 2001 (Director) (Director)
54 CHURCHILL DOWNS INCORPORATED SCHEDULE VIII. - VALUATION AND QUALIFYING ACCOUNTS (In thousands) Balance, Charged Balance, Beginning to End Description of Period Expenses Deductions of Period ----------- --------- -------- ---------- --------- Year ended December 31, 2000: Allowance for doubtful account and notes receivable $253 $312 $(25) $540 ==== ==== ===== ==== Year ended December 31, 1999: Allowance for doubtful account and notes receivable $121 $272 $(140) $253 ==== ==== ====== ==== Year ended December 31, 1998: Allowance for doubtful account and notes receivable $176 $ 1 $ (56) $121 Valuation allowance for deferred tax asset * 173 - (173) - ---- ---- ------ ---- $349 $ 1 $(229) $121 ==== ==== ====== ==== * Adjustments taken to income represent reversals of valuation allowance previously established for state net operating loss carryforwards. 55 EXHIBIT INDEX Numbers Description By Reference To ------- ----------- --------------- (2)(a) Stock Purchase Agreement and Joint Escrow Exhibit 2.1 to Report Instructions dated as of January 21, 1999 by on Form 8-K dated and among Churchill Downs Incorporated and KE April 23, 1999 Acquisition Corp. (b) First Amendment to Stock Purchase Agreement Exhibit 2.2 to Report dated as of April 19, 1999 by and between on Form 8-K dated Churchill Downs Incorporated, Churchill Downs April 23, 1999 Management Company and KE Acquisition Corp. (c) Agreement and Plan of Merger and Amendment to Exhibit 2.3 to Report Stock Purchase Agreement dated as of April on Form 8-K dated 22, 1999 by and among Churchill Downs April 23, 1999 Incorporated, Churchill Downs Management Company, CR Acquisition Corp., TP Acquisition Corp., Calder Race Course, Inc., Tropical Park, Inc. and KE Acquisition Corp. (d) Asset Purchase Agreement dated May 5, 1999 Exhibit 2.1 to between Hollywood Park, Inc., a Delaware Registration Corporation, and Churchill Downs Incorporated. Statement on Form S-3 filed May 21, 1999 (No.333-79031) (e) Amendment No. 1 to Asset Purchase Agreement Exhibit 2.2 to Report dated as of August 31, 1999 by and among on Form 8-K dated Churchill Downs Incorporated, Churchill Downs September 10, 1999 California Company and Hollywood Park, Inc. (f) Stock Purchase Agreement dated as of March 28, Exhibit 2.1 to 1998 between Churchill Downs Incorporated and Current Report on TVI Corp. Form 8-K dated April 21, 1998 (g) Agreement and Plan of Merger dated as of Exhibit 2.2 to April 17,1998 by and among TVI Corp., Racing Current Report on Corporation of America, Churchill Downs Form 8-K dated Incorporated and RCA Acquisition Company April 21, 1998 (h) Partnership Interest Purchase Agreement dated Exhibit (2)(h) to as of February 16, 2000 by and among Anderson Report on Form 10-K Park, Inc., Churchill Downs Management for the year ended Company and Centaur, Inc. December 31, 1999 56 (i) Amended and Restated Agreement and Plan of Annex A of the Proxy Merger dated as of June 23, 2000, as amended Statement for a as of July 14, 2000, by and among Churchill Special Meeting of Downs Incorporated, Duchossois Industries, Shareholders of Inc., A. Acquisition Corp., A. Management Churchill Downs AcquisitionCorp., T. Club Acquisition Corp., Incorporated held Arlington International Racecourse, Inc., September 8, 2000 Arlington Management Services, Inc., and Turf Club of Illinois, Inc. (3)(a) Amended and Restated Articles of Exhibit (3)(a) to Incorporation of Churchill Downs Incorporated Report on Form 10-K for the year ended December 31, 1999 (b) Restated Bylaws of Churchill Downs Exhibit (3) to Report Incorporated as amended on Form 10-Q for the fiscal quarter ended September 30, 2000 (4)(a) Rights Agreement dated as of March 19, 1998 Exhibit 4.1 to between Churchill Downs, Inc. and Bank of Current Report on Louisville Form 8-K dated March 19, 1998 (b) Amendment No. 2 to Rights Agreement dated as Exhibit 4.1 to the of June 23, 2000, between Churchill Downs Registrant's Incorporated and Fifth Third Bank, as Rights Registration Agent Statement on Form 8-A/A dated June 30, 2000 (c) Amendment No. 3 to Rights Agreement dated as Exhibit 4.1 to the of September 8, 2000, between Churchill Downs Registrant's Incorporated and Fifth Third Bank, as Rights Registration Agent Statement on Form 8-A/A dated September 13, 2000 (10)(a) $250,000,000 Revolving Credit Facility Credit Exhibit (10)(a) to Agreement between Churchill Downs Report on Form 10-Q Incorporated, and the guarantors party for the fiscal thereto, and the Banks party thereto and PNC quarter ended March Bank, National Association, as Agent, and 31, 1999 CIBC Oppenheimer Corp., as Syndication Agent, and Bank One, Kentucky, N.A., as Documentation Agent, dated as of April 23, 1999 (b) First Amendment to $250,000,000 Revolving Exhibit (10)(b) to Credit Facility Credit Agreement dated Report on Form 10-Q April 30, 1999 for the fiscal quarter ended March 31, 1999 (c) Second Amendment to $250,000,000 Revolving Exhibit (10)(c) to Report on Credit Facility Credit Agreement Form 10-Q for the dated June 14, 1999 fiscal quarter ended June 30, 1999 57 (d) Third Amendment, Waiver and Consent to Exhibit (10)(d) to $250,000,000 Revolving Credit Facility Credit Report on Form 10-K Agreement dated February 23, 2000 for the year ended December 31, 1999 (e) Fourth Amendment to $250,000,000 Revolving Exhibit (10)(a) to Credit Facility Credit Agreement dated Report on Form 10-Q May 12, 2000 for the fiscal quarter ended June 30, 2000 (f) Fifth Amendment to $250,000,000 Revolving Exhibit (10)(b) to Credit Facility Credit Agreement dated Report on Form 10-Q June 19, 2000 for the fiscal quarter ended June 30, 2000 (g) Sixth Amendment to $250,000,000 Revolving Page 60, Report on Credit Facility Credit Agreement dated Form 10-K for the March 15, 2001 year ended December 31, 2000 (h) Underwriting agreement for 2,000,000 shares Exhibit 1.1 to of Churchill Downs Incorporated common stock Registration between Churchill Downs Incorporated and CIBC Statement on Form World Markets Corporation, Lehman Brothers, S-3/A filed Inc.,JC Bradford & Co., J.J.B. Hilliard, W.L. July 15, 1999 Lyons, Inc.on behalf of several underwriters (No. 333-79031) (i) Casino Lease Agreement dated as of September Exhibit 10.1 to 10, 1999 by and between Churchill Downs Report on Form 8-K California Company and Hollywood Park, Inc. dated September 10, 1999 (j) Churchill Downs Incorporated Amended and Exhibit (10)(a) to Restated Supplemental Benefit Plan dated Report on Form 10-K December 1, 1998 * for the year ended December 31, 1998 (k) Employment Agreement dated as of October 1, Exhibit (19)(a) to 1984, with Thomas H. Meeker, President * Report on Form 10-Q for fiscal quarter ended October 31, 1984 (l) Churchill Downs Incorporated Amended and Exhibit (10) to Restated Incentive Compensation Plan (1997) * Report on Form 10-Q for the fiscal quarter ended September 30, 2000 (m) Churchill Downs Incorporated 1993 Stock Exhibit (10)(h) to Option Plan * Report on Form 10-K for the eleven months ended December 31, 1993 (n) Amendment No. 1 to Churchill Downs Exhibit (10)(g) to Incorporated 1993 Stock Option Plan * Report on Form 10-K for the year ended December 31, 1994 (o) Amendment No. 2 to Churchill Downs Exhibit (10)(m) to Incorporated 1993 Stock Option Plan * Report on Form 10-K for the year ended December 31, 1997 58 (p) Amendment of Employment Agreement with Report on Form 10-K Thomas H. Meeker, President, dated for the fiscal year October 1, 1984 * ended January 31, 1986; Report on Form 10-K for the fiscal year ended January 31, 1987; 1988, 1990, 1991, 1992 and 1993 (q) Amended and Restated Lease Agreement dated Exhibit (10)(i) to January 31, 1996 Report on Form 10-K for the year ended December 31, 1995 (r) Partnership Interest Purchase Agreement dated Exhibit (10)(k) to December 20, 1995 among Anderson Park, Inc., Report on Form 10-K Conseco HPLP, LLC, Pegasus Group, Inc. and for the year ended Hoosier Park, L.P. December 31, 1995 (s) Employment Agreement between Churchill Downs Exhibit (10)(l) to Incorporated and Robert L. Decker * Report on Form 10-Q for the fiscal quarter ended March 31, 1997 (t) Churchill Downs Incorporated, Amended and Exhibit (10)(n) to Restated Deferred Compensation Plan for Report on Form 10-K Employees and Directors * for the year ended December 31, 1998 (u) Amended and Restated Churchill Downs Exhibit (99) to Incorporated 1997 Stock Option Plan * Registrants' Registration Statement on Form S-8 dated August 10, 2000 (v) Form of Stockholder's Agreement dated Annex C of the Proxy September 8, 2000 among Churchill Downs Statement for a Incorporated and Duchossois Industries, Inc. Special Meeting of Shareholders of Churchill Downs Incorporated held September 8, 2000 (21) Subsidiaries of the registrant Page 74, Report on Form 10-K for the year ended December 31, 2000 (23) Consent of PricewaterhouseCoopers, LLP Page 75, Report on Independent Accountants Form 10-K for the year ended December 31, 2000 *Management contract or compensatory plan or arrangement. 59