ITEM 1. BUSINESS
A. INTRODUCTION
Churchill Downs Incorporated (the "Company") primarily conducts pari-mutuel wagering on Thoroughbred and Standardbred horse racing at its facilities in Kentucky and Indiana. The Company owns and operates Churchill Downs racetrack in Louisville, Kentucky ("Churchill Downs"). Churchill Downs has conducted Thoroughbred racing continuously since 1875, and is internationally known as home of the Kentucky Derby. Through its subsidiary, Hoosier Park, L.P., the Company is majority owner and operator of Hoosier Park in Anderson, Indiana ("Hoosier Park"), which conducts both Thoroughbred and Standardbred racing. The Company conducts simulcast wagering on horse racing year-round at its four Churchill Downs Sports Spectrum facilities ("Sports Spectrum"), as well as its racetracks, in Kentucky and Indiana.
The Company was organized as a Kentucky corporation in 1928. Its principal executive offices are located at Churchill Downs, 700 Central Avenue, Louisville, Kentucky 40208.
B. KENTUCKY OPERATIONS
In Kentucky, the Company conducts Thoroughbred horse racing, accepts pari-mutuel wagering on such races, and conducts related business operations at Churchill Downs. The Company also owns and operates the Churchill Downs Sports Spectrum, its flagship simulcast wagering facility. Both facilities are located in Louisville, Kentucky.
CHURCHILL DOWNS
RACING
The Company owns and operates Churchill Downs, a legendary sports venue and one of the premier racetracks in the world. The racetrack was founded by Col. M. Lewis Clark as the Louisville Jockey Club in 1874, and began conducting Thoroughbred racing the following year. Churchill Downs rose to prominence during the first half of this century as the Kentucky Derby became an internationally renowned classic. Churchill Downs has also hosted the Breeders' Cup Championship an unprecedented three times, in 1988, 1991 and 1994. Discussions are currently under way for the Company to be the host site of the 1998 Breeders' Cup Championship Day.
The Kentucky Derby and Kentucky Oaks, both annually run the first weekend in May, continue to be the Company's outstanding events. In 1996, the Company increased the purse for the Kentucky Derby to $1 million, and raised the Kentucky Oaks purse to $500,000,
making the Kentucky Oaks the country's richest three-year-old filly race. Kentucky Derby weekend accounted for approximately 30% of total on-track pari-mutuel wagering and 34% of total on-track attendance for the 1996 Spring Meet.
Record wagering was recorded on 1996 Kentucky Oaks Day, when more than 90,000 fans -- the largest racing crowd ever in North America outside of Kentucky Derby Day -- were at Churchill Downs. More than 142,000 people attended the 1996 Derby, and contributed to the record $75 million wagered on Derby Day races at Churchill Downs and almost 1,000 domestic and international simulcast sites.
The Company annually holds two live Thoroughbred race meetings at Churchill Downs, a Spring Meet (late April through June) and a Fall Meet (late October to late November). The Company conducted live racing on 78 days during the year ended December 31, 1996. For 1997, the Company has received a license to conduct live racing for a total of 77 racing days on approximately the same dates as the prior year's Spring and Fall race meetings.
Based on average daily purse levels and average number of starters per race, Churchill Downs' 1996 Spring and Fall race meets ranked among the most competitive racing programs in the country. The Company believes that a quality live racing product will enable it to continue the growth in sales of Churchill Downs' race signal to out-of-state simulcast markets.
RACETRACK FACILITY
The Company owns its racetrack site and improvements located at or adjacent to 700 Central Avenue, Louisville, Kentucky (the "racetrack facility"). The racetrack facility consists of approximately 157 acres of land with a one-mile oval dirt track, a seven-eighths (7/8) mile turf track, permanent grandstands and a 1,400-stall stable area. The physical plant includes clubhouse and grandstand seating for approximately 48,500 persons, a general admission area, and food and beverage facilities ranging from fast food to full service restaurants. The site also has a saddling paddock, infield accommodations for groups and special events, parking areas for the public, and the Company's office facilities. The backside stable area has sprinkled barns sufficient to accommodate approximately 1,400 horses, and other facilities for backstretch personnel.
The Company has made numerous capital improvements to the racetrack facility during the past ten years in order to better serve its horsemen and patrons. The dirt and turf tracks provide excellent venues for live Thoroughbred racing. The Company's ability to provide stabling facilities and a training track for horses at the racetrack facility is limited, but additional facilities have been developed, as discussed below. The Company's physical plant, including grandstands, restaurant facilities, parking, etc., is fully utilized only on Kentucky Derby weekend or when it hosts the Breeders' Cup Day races.
CHURCHILL DOWNS SPORTS SPECTRUM
The Company also owns the real property and improvements known as the Churchill Downs Sports Spectrum (the "Louisville Sports Spectrum"), located at 4520 Poplar Level Road, Louisville, Kentucky. Formerly a Standardbred racetrack, this property was acquired by the Company in 1992, and converted into a simulcast wagering facility and Thoroughbred training annex. The Louisville Sports Spectrum is located on approximately 90 acres of land, about seven miles from the Company's racetrack facility.
The grandstand/clubhouse was renovated and converted for use as a simulcast and pari- mutuel wagering facility. Seven separate areas were created within the structure to accommodate the needs of a variety of patrons, from the seasoned player to the novice handicapper. The Louisville Sports Spectrum provides state-of-the art audio/visual technology, seating for approximately 3,000 persons, parking, offices and related facilities. While the Company still has the option to conduct simulcasting at its racetrack facility, the Company plans to conduct most of its Louisville simulcast operations at the Louisville Sports Spectrum.
The Company has renovated the racetrack portion of the property for use as a Thoroughbred stabling and training annex. As part of the renovation of the facility, the Company converted the former Standardbred track into a three-quarter (3/4) mile dirt track which is used for training Thoroughbreds. The existing barns on the property were demolished, and the Company constructed enough new barns to accommodate approximately 500 horses. The additional stalls and training track provide a year-round base of operation for many horsemen, and have enabled the Company to accommodate new horsemen who desire to race at Churchill Downs.
The Company does not intend to conduct live horse racing at the Louisville Sports Spectrum at this time. The Louisville Sports Spectrum also was used as the site of the Company's Thoroughbred "horses in training" sale in 1996 and 1995.
LICENSING
Kentucky's racetracks, including the Company, are subject to the licensing and regulation of the Kentucky Racing Commission ("KRC"), which consists of 11 members appointed by the governor of Kentucky. Licenses to conduct live Thoroughbred race meetings and to participate in simulcasting (discussed below) are approved annually by the KRC based upon applications submitted by the racetracks in Kentucky, including the Company. Although to some extent the Company competes with other racetracks in Kentucky for the award of racing dates, the KRC is required by state law to consider and seek to preserve each track's usual and customary live racing dates. Generally, there is no substantial change from year to
year in the racing dates awarded to each track. A substantial change in the allocation of live racing days could impact the Company's operations and earnings.
PARI-MUTUEL WAGERING
GENERAL
Total wagering (also referred to as "handle") on Churchill Downs' racing product increased from $351.7 million in 1995 to $489.1 million in 1996. The most significant growth was experienced in the exportation of its live race signal to out-of-state simulcast markets. The Company believes that both simulcast sending and receiving will continue to be a revenue growth area for Churchill Downs in 1997.
INTERTRACK SIMULCASTING
In November 1988, the Company began sending its televised live races ("intertrack simulcasting"), to other locations in Kentucky. Patrons wagering at these locations participate in the same pari-mutuel pool payouts as patrons at Churchill Downs. Since fiscal year 1991, Churchill Downs has conducted intertrack simulcasting in Kentucky as a host track for all of its live racing days except Kentucky Derby Day. Churchill Downs offered the simulcast of its Kentucky Derby Day races to racetracks within the State beginning in 1995.
In 1989, the Company began receiving intertrack simulcast signals from other Kentucky tracks. During the year ended December 31, 1996, Churchill Downs conducted intertrack simulcasting as a receiving track in Kentucky for a total of 200 days. In 1997, Churchill Downs has been licensed as a receiving track for any and all possible dates from January 1, 1997 through December 31, 1997.
INTERSTATE SIMULCASTING
The Company participates in interstate simulcasting by sending its Churchill Downs live race signal to racetracks and off-track betting facilities located in other states and in foreign countries. Depending upon the format permitted at each facility, patrons may either participate in the same pari-mutuel pool payouts as those patrons at Churchill Downs, known as a commingled pool, or participate in a separate pari-mutuel pool generated by wagering on Churchill Downs races at the respective facility.
Interstate simulcasting operations increased by 62 percent in Kentucky in 1996, and now represents approximately 60 percent of the Company's pari-mutuel revenue base in Kentucky. Churchill Downs plans to increase the interstate and international exportation of its live race signal in fiscal year 1997.
WHOLECARD SIMULCASTING
Churchill Downs also receives simulcasts of live race signals from tracks outside Kentucky and accepts pari-mutuel wagers on such races (referred to as "wholecard simulcasting"). In July 1994, Kentucky authorized licensed racetracks and simulcast wagering facilities located in the state to conduct wholecard simulcasting. Wholecard simulcasting allows the Company to conduct interstate wagering daily on multiple race programs from around the country, permitting maximum use of the Louisville Sports Spectrum asset. In 1996, wholecard simulcasting was conducted for 200 days at the Louisville Sports Spectrum, and on a limited basis during Churchill Downs' live race meets, generating approximately $127 million in total wagering. Wholecard simulcasting also helps Churchill Downs access new markets for exporting its simulcast race signal by enabling the Company to reciprocate by importing out-of-state simulcast signals.
IN-HOME WAGERING
Churchill Downs, in conjunction with On Demand Services and TKR Cable of Greater Louisville, continues to develop its in-home interactive television wagering system, the first such system in the country. Testing of the nation's first in-home system began in July 1995, and has expanded to 675 homes in Jefferson County, Kentucky as of December 31, 1996. The Company believes development of such in-home technology can be used as a tool to attract new segments of the market to the racetrack.
KENTUCKY OFF-TRACK BETTING, INC.
As a result of changes made to Kentucky law in 1992, the Company and three other Kentucky Thoroughbred racetracks formed Kentucky Off-Track Betting, Inc. ("KOTB"). The Company is a 25% shareholder in 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 ("simulcast facilities"). A simulcast facility may be located no closer than 75 miles from an existing racetrack without the track's consent and in no event closer than 50 miles to an existing track. Each simulcast facility must first be approved by the KRC. Once approved, the simulcast facility may then be established unless the local government where the facility is to be located votes to disapprove its establishment. KOTB currently owns and operates simulcast facilities in Corbin, Maysville and Jamestown, Kentucky, all of which were opened in 1993, and a simulcast facility in Pineville, Kentucky, which opened in September 1995.
The Company anticipates that simulcast facilities developed by KOTB will provide additional markets for intertrack simulcasting of the Company's live races. By statute, of the amount retained by KOTB on wagers (net of taxes) placed at a simulcast facility on the Company's races, 30% is paid to the Company, 30% is set aside for the Company's horsemen, 6% is
retained by KOTB to cover its operating expenses and 34% is paid to a Breeders Award Fund administered by the KRC. Any KOTB expenses not covered by its 6% are funded by the Company during the period of time KOTB takes the Company's races. In addition, the Company funds its share of annual administrative expenses and may also receive dividends from KOTB. KOTB is not expected to have a significant impact on operations of the Company.
C. INDIANA OPERATIONS
GENERAL
In Indiana, the Company conducts both Thoroughbred and Standardbred horse races, accepts pari-mutuel wagering on such races and conducts related business operations at Hoosier Park in Anderson, Indiana ("Hoosier Park"). The Company conducts simulcasting operations at Hoosier Park and also at its Churchill Downs Sports Spectrum ("Indiana Sports Spectrums") facilities in Merrillville, Fort Wayne and Indianapolis, Indiana.
OWNERSHIP
Hoosier Park is owned by Hoosier Park, L.P. ("HPLP"), an Indiana limited partnership formed in 1994. The Company currently owns a 77% interest in HPLP through Anderson Park, Inc. ("Anderson"). Anderson is a wholly-owned subsidiary of Churchill Downs Management Company ("CDMC"). CDMC is a wholly-owned subsidiary of the Company. The remaining 23% of HPLP is held by unrelated third parties, Pegasus Group, Inc. ("Pegasus"), and Conseco HPLP, L.L.C. ("Conseco"). Anderson is HPLP's sole general partner. CDMC has entered into a management agreement with HPLP pursuant to which CDMC has operational control of the day-to-day affairs of Hoosier Park and its related simulcast operations. The Company, through CDMC, has loaned, and committed to advance, up to 90% of $28.7 million in loans and capital contributions to HPLP for the development of the racetrack and related satellite wagering facilities. Conseco assumed 10% of the obligation for loans and capital contributions to HPLP upon purchase of their 10% partnership interest. As of December 31, 1996, HPLP has a total loan balance of approximately $26.0 million. The loan requires interest of prime plus 2% (10.25% at December 31, 1996).
On December 20, 1995, the Company entered into a Partnership Interest Purchase Agreement with Conseco for the sale of 10% of the Company's partnership interest in HPLP to Conseco. This sale was closed on May 31, 1996. The purchase price for the 10% partnership interest was $218,390 and the transaction also included a payment of $2,603,514 for a 10% interest in the debt owed by HPLP to CDMC at face value of debt at the date of the closing. Conseco and Pegasus are limited partners of HPLP and Anderson continues to be the sole general partner of HPLP.
From May 31, 1996 through December 31, 1998, Conseco has an option to purchase from Anderson an additional 47% partnership interest in HPLP and an additional 47% interest in the debt owed by HPLP to CDMC. The purchase price of the additional partnership interest will be approximately $6,222,000 and the purchase price of the additional debt will be approximately $15,934,000. This purchase would be subject to the approval of the Indiana Horse Racing Commission. If this transaction occurs, Conseco will be the sole general partner of HPLP, and Anderson and Pegasus will be limited partners of HPLP with partnership interests of 30% and 13%, respectively. CDMC would continue to have a long-term management agreement with HPLP pursuant to which CDMC would have operational control of the day-to-day affairs of HPLP and its related simulcast facilities.
HOOSIER PARK
RACING
Through its subsidiary, Anderson, the Company is majority owner of Indiana's only pari-mutuel racetrack, Hoosier Park in Anderson, Indiana. Hoosier Park conducts both live Standardbred racing (late April to late August) and Thoroughbred racing (mid-September to late November). The Company began live Standardbred racing at Hoosier Park on September 1, 1994, and conducted Indiana's inaugural Thoroughbred meet in the Fall of 1995. In 1996, the Company conducted 132 days of live racing, including 80 days of Standardbred racing and 52 days of Thoroughbred racing. The Company has received a license to conduct live racing in 1997 for a total of 143 racing days, including 85 days of Standardbred racing, and 58 days of Thoroughbred racing.
RACETRACK FACILITY
Hoosier Park is located in Anderson, Indiana, about 40 miles northeast of Indianapolis. The Company leases the site under a long-term lease with the city of Anderson and owns the improvements located at or adjacent to 4500 Dan Patch Circle in Anderson, Indiana. The racetrack facility consists of approximately 110 acres of leased land with a seven-eighths (7/8th) mile oval dirt track, permanent grandstands, and a 780-stall stable area. The racetrack surface accommodates both Thoroughbred racing and Standardbred racing. The physical plant includes seating for approximately 2,400 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, parking areas for the public, and office facilities. The stable area has barns sufficient to accommodate 780 horses, and other facilities for backstretch personnel.
CHURCHILL DOWNS SPORTS SPECTRUMS
Through its subsidiary, Anderson, the Company is majority owner of three simulcast wagering facilities in Indiana which are branded with the Churchill Downs Sports Spectrum name. These simulcast wagering facilities provide a statewide distribution system for Hoosier Park's racing signal, and additional simulcast markets for Churchill Downs' product. The Sports Spectrum at Merrillville, located about 30 miles southeast of Chicago, consists of approximately 27,300 square feet of space. The Sports Spectrum at Fort Wayne consists of approximately 15,750 square feet of space. Hoosier Park also leases approximately 17,800 square feet of space in the Claypool Courts Building in downtown Indianapolis where it operates the Sports Spectrum at Indianapolis. All three Sports Spectrum facilities were opened in 1995. The license for the fourth Sports Spectrum facility in Jeffersonville, Indiana was surrendered in July 1995 because ownership of the tentative site was in question and resolution was not expected in the near future. The Company is continuing to evaluate sites for the location of a fourth Sports Spectrum facility.
The State of Indiana has enacted legislation which requires a county fiscal body to adopt an ordinance permitting simulcast wagering facilities before such a facility can be located in that county. The county fiscal body may require in the ordinance that the voters of the county must approve the operation of a simulcast wagering facility in that county. This legislation may affect the Company's ability to locate a facility in certain counties.
LICENSING
In Indiana, licenses to conduct live Standardbred and Thoroughbred race meetings and to participate in simulcasting are approved annually by the Indiana Horse Racing Commission ("IHRC") based upon applications submitted by the Company. Currently, the Company is the only facility in Indiana licensed to conduct live Standardbred or Thoroughbred race meetings and to participate in simulcasting.
PARI-MUTUEL WAGERING
GENERAL
In 1996, total wagering at Hoosier Park and the three Sports Spectrum facilities totaled approximately $176.4 million, an increase of 34 percent over 1995.
INTERSTATE SIMULCASTING
Hoosier Park participates in interstate simulcasting sending its live race signal to racetracks and off-track betting facilities located in other states and foreign countries. Depending upon the format permitted at each facility, patrons may either participate in the same pari-mutuel
pool payouts as those patrons at Hoosier Park, known as a commingled pool, or participate in a separate pari-mutuel pool generated by wagering on Hoosier Park races at the respective facility.
In 1996, approximately $27.2 million was wagered on Hoosier Park's race signal at out-of-state locations. Interstate wagering on Hoosier Park's Thoroughbred race meet experienced the most significant growth in 1996. The Company believes that interstate simulcasting will continue to be a revenue growth area for Hoosier Park in 1997.
WHOLECARD SIMULCASTING
In Indiana, the Company participates in wholecard simulcasting at Hoosier Park and its Sports Spectrum facilities. Indiana law provides that as long as Hoosier Park conducts live racing for a total of not less than 120 days per year, wholecard simulcasting can be conducted year round at Hoosier Park and each of the Sports Spectrum facilities.
D. SOURCES OF INCOME
The Company's principal sources of income are commissions from on-track pari-mutuel wagers, commissions from intertrack and fees from interstate simulcast wagers, admissions and seating, concession commissions (primarily for sale of food and beverages), and license, rights, broadcast and sponsorship fees.
The Company's primary source of income is pari-mutuel wagering which accounts for 70% of revenue. The Company retains the following average amounts on specific revenue streams as a percentage of handle:
KENTUCKY INDIANA
On-track pari-mutuel wagers 15% 19% Intertrack host 9% -- Interstate/simulcast host 5% 3% Intertrack/simulcast receiving 7% 18%
The Company's next major source of income is admission and seating revenue, which was 12% of net revenues for the year ended December 31, 1996. Average daily on-track attendance at Churchill Downs has declined since 1989; however, during the same period increases in intertrack and interstate simulcast revenues in Kentucky have substantially offset the related decline in admission and seating revenue. In addition, declines in daily average attendance do not impact upon Churchill Downs' admission and seating revenue proportionately since Churchill Downs receives approximately 50% of its admission and seating revenue from the Kentucky Derby weekend.
The Company holds federal servicemark registrations on the names "Kentucky Derby", "Churchill Downs", "Churchill Downs Sports Spectrum", "Kentucky Oaks" and the Twin Spires design in various categories including entertainment business, apparel, paper goods, printed matter and housewares and glass. The Company licenses the use of the servicemarks and derives revenue from such license agreements; during the year ended December 31, 1996, gross revenue derived from such licensing was less than 6% of total revenues. Hoosier Park has applied for federal servicemark registration of the name "Indiana Derby."
The Company hosted a Thoroughbred "horses in training" sale in 1996 and 1995. These sales did not contribute significantly to operations and a sale is not scheduled in 1997.
E. OTHER FACTORS AFFECTING THE COMPANY'S BUSINESS
From 1986 through 1996, the Thoroughbred industry as a whole has seen depressed prices for the sale of Thoroughbreds at all stages of their career. Although prices continue to be significantly below peak prices of the mid-eighties, 1993-1996 sales have shown improvement. There have also been numerous bankruptcies or other financial failures of Thoroughbred farms since the mid-eighties. As a result, the number of Thoroughbred foals born has decreased each year until 1995 which showed a 1.4% increase. This long-term trend has lead to an industry-wide decline in the number of Thoroughbreds available to run in races. Racetracks may be competing for horses to participate in live racing and some racetracks now offering live racing may be forced to curtail or eliminate live events and rely more heavily or exclusively on simulcast receiving for revenue. The Company believes that because of the significant Thoroughbred industry infrastructure in the Commonwealth of Kentucky, the Company's live racing product will not be as heavily impacted by the decline in Thoroughbreds. Moreover, the Company is well positioned to provide live racing products to the emerging simulcast market in other states and internationally.
The Company generally does not directly compete with other racetracks or simulcast facilities for patrons due to geographic separation of such facilities. However, the Company competes with other entertainment options for patrons for both live racing and simulcasting. The Company also competes with other sports and other entertainment and wagering options available to consumers including riverboat gaming and lotteries. The Company attempts to attract patrons by providing the highest quality racing products in attractive entertainment facilities with well-priced, appealing concession services. The Company is the premier racetrack in Kentucky for both live racing and simulcasting, based upon total handle and attendance, and the only facility in Indiana providing live and simulcast racing.
The development of riverboat gaming facilities began in Indiana pursuant to authorizing legislation passed by the State of Indiana in 1993. In 1996, there were three riverboats in operation along the Ohio River. By 1998, as many as five Indiana riverboats may be operating along the Ohio River, with one of the nation's largest complexes proposed to be located 10 miles from Louisville in Harrison County, Indiana. Direct competition with three newly opened riverboats have negatively impacted wagering at racetracks in Western and Northern Kentucky. Decreases in intertrack wagering, and to some extent on-track wagering, during Churchill Downs' 1996 Fall Meet was a result of riverboat competition in these
markets. The Company believes that competition from Indiana riverboat gaming facilities will have a negative impact on the Company's operations, which could be material.
In response to the riverboat threat, the Company's Board of Directors passed a resolution at its June 13, 1996 meeting instructing the Company's management to aggressively pursue the operation of video lottery machines through the Kentucky Lottery at its racetrack facilities in Louisville. The integration of such alternative gaming products at the racetrack is one of four core business strategies developed by the Company to grow its live racing program. Management has been positioning the Company to compete in the changing business environment for the past several years by strengthening its flagship operations, increasing its share of the interstate simulcast market, and geographically expanding its racing operations. The Company is currently working to build a consensus within Kentucky's horse industry for a plan to offer alternative gaming products exclusively at state racetracks.
In addition, licenses to conduct riverboat casinos on Lake Michigan near the Company's Merrillville, Indiana, Sports Spectrum facility have been granted by the Indiana Gaming Commission. Indiana law allows up to five riverboat casino licenses to be issued on Lake Michigan. The Potawatomi Indian Tribe has expressed an interest in establishing a land-based casino operation in southwestern Michigan and northeastern Indiana, while the Miami Indian Tribe has expressed an interest in establishing a land-based casino near the Company's Merrillville Sports Spectrum. The Company anticipates that the commencement of such operations will have a negative impact upon the Company's wagering activities, although the extent of the impact is unknown at this time due in part, to the uncertain geographic distances between the Company's operations and the number of potential casino sites.
The Company is pursuing legislative initiatives in both Kentucky and Indiana which would allow alternative gaming operations at its racetrack facilities. Alternative gaming in the form of video lottery and slot machines would enable Churchill Downs and Hoosier Park to effectively compete with Indiana riverboat casinos, and provide new revenue for capital investment and purse money.
In Kentucky, the Company is working to build a consensus within the Commonwealth's horse industry for a plan to operate video lottery terminals exclusively at racetracks in conjunction with the Kentucky Lottery Corporation. Legislation may be included by the Governor in a special session of the Kentucky General Assembly in May 1997, or introduced during the legislature's regular session in 1998.
Indiana House Bill 1799, which would allow for installation of slot machines at Hoosier Park, was introduced during the current legislative session. This bill did not make it out of committee.
The horse industry in Indiana presently receives $.65 per $3 admission to riverboats in the state. From the money generated by this tax in 1996, $1.8 million went directly to Hoosier Park operating expenses, $2.5 million funded purse increases at the track, and over $1 million went to breeders' incentives. House Bill 1135, which has already passed the Indiana House of Representatives, seeks to reduce the $.65 admission tax of which Hoosier Park receives $.195. Hoosier Park's share of the tax would be reduced to $.10 from $.195 per admission. Such a reduction in revenue would significantly impact funding for operating
expenditures and cause the Company to reevaluate its investment in Indiana's pari-mutuel industry. The Company is prohibited from selling its interest in Hoosier Park, L.P., prior to 1998 without the consent of Conseco.
F. ENVIRONMENTAL MATTERS
On January 22, 1992, the Company acquired certain assets of Louisville Downs, Incorporated for $5,000,000 including the site of the Louisville Sports Spectrum. In conjunction with this purchase, the Company withheld $1,000,000 from the amount due to the sellers to offset certain costs related to the remediation of environmental contamination associated with underground storage tanks at the site. All of the $1,000,000 hold back had been utilized as of December 31, 1995. It is not anticipated that the Company will have any liability as a result of compliance with environmental laws with respect to any of the Company's property.
In January 1995, Hoosier Park opened the Churchill Downs Sports Spectrum in Merrillville, Indiana. The 27,300 square foot facility is designed exclusively for the simulcast of horse races and the conducting of pari-mutuel wagering. The Merrillville, Indiana facility is also subject to contamination related to prior business operations adjacent to the property. The contamination on the property is being remediated under the State of Indiana's voluntary remediation program. The State of Indiana approved the remediation plan in May of 1995. The Company has obtained an indemnity concerning the cost of remediation from the prior owner of the property. The cost of remediation could be up to $50,000. Except as discussed herein and with respect to the Louisville Sports Spectrum, compliance with environmental laws has not affected the ability to develop and operate the Company's properties and the Company is not otherwise subject to any material compliance costs in connection with federal or state environmental laws.
G. EMPLOYEES
Because the Company's live racing business is seasonal, the number of persons employed will vary throughout the year. As of December 31, 1996, approximately 600 individuals are employed on a permanent year-round basis. During the live racing meetings, as many as 2,600 persons are employed.
ITEM 2.
ITEM 2. PROPERTIES
Information concerning property owned by Churchill Downs Incorporated required by this Item is incorporated by reference to the information contained in Item 1. "Business" of this Report.
The Kentucky Derby Museum is operated on property adjacent to the Company's racetrack facility. The Museum is owned and operated by the Kentucky Derby Museum Corporation, a tax-exempt organization under Section 501(c)(3) of the Internal Revenue Code of 1986.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business of the Company, to which it is a party or of which any of its property is the subject and no such proceedings are known to be contemplated by governmental authorities.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's stockholders during the fourth quarter of the fiscal year covered by this Report.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market. As of March 29, 1993, the Company's common stock was listed on the National Association of Securities Dealers, Inc.'s Small Cap Market automated quotation system ("NASDAQ"). As of March 27, 1997, there were approximately 3,100 stockholders of record.
The following table sets forth the high and low bid quotations (as reported by NASDAQ) and dividend payment information for the Company's Common Stock during its last two years:
Quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not necessarily reflect actual transactions.
The Company presently expects that comparable annual cash dividends (adjusted for any stock splits or other similar transactions) will continue to be paid in the future.
In 1993, the Company changed to a calendar year from a fiscal year ending January 31. The change of fiscal year resulted in a transition period of eleven months which began February 1, 1993 and ended December 31, 1993.
CHURCHILL DOWNS INCORPORATED ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL INFORMATION
This discussion and analysis contains both historical and forward-looking information. The forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be significantly impacted by certain risks and uncertainties described herein, and in the Company's annual report on Form 10-K for the year ended December 31, 1996.
The Company's principal business is conducting pari-mutuel wagering on Thoroughbred and Standardbred horse races. For many years, the Company has conducted live Spring and Fall race meetings for Thoroughbred horses in Kentucky. In 1988, the Company began in-state simulcasting ("intertrack") of its live races, except those run on Kentucky Derby Day, by sending its video signal to other locations in Kentucky for purposes of pari-mutuel wagering into the Company's mutuel pool. In 1989, the Company commenced operations as a receiving track for intertrack simulcasting. During November 1991, the Company began interstate simulcasting for all of the live races with the receiving locations participating in the Company's mutuel pool. The Kentucky Derby and Kentucky Oaks, which are run on the first weekend in May of each year, continue to be the Company's outstanding attractions. In 1995, for the first time, Churchill Downs offered the simulcast of its races on Kentucky Derby Day to racetracks within Kentucky and continued the practice in 1996. In 1996, Derby weekend accounted for approximately 30% of total on-track pari-mutuel wagering and 35% of total on-track attendance for the 1996 Spring Meet at Churchill Downs. In July 1994, the Company began whole card simulcasting whereby the Company imports a full program or race card from host tracks located outside the state for pari-mutuel wagering purposes. Whole card simulcasting has created a major new wagering opportunity for patrons of the Company in both Kentucky and Indiana.
The Company, through its subsidiary, HPLP, is majority owner and operator of Indiana's only pari-mutuel racetrack, Hoosier Park at Anderson. Hoosier Park conducted two Harness race meets, as well as simulcast wagering, during its first 16 months of operation. During 1995 improvements were made to Hoosier Park for the track's inaugural Thoroughbred meet. From January 1995 through October 1995, the Company opened off-track wagering facilities in Merrillville, Fort Wayne and downtown Indianapolis, Indiana. The license for the fourth facility in Jeffersonville, Indiana was surrendered in July 1995 because ownership of the tentative site was in question and resolution was not expected in the near future. The Company is continuing to evaluate sites for the location of a fourth satellite wagering facility.
CHURCHILL DOWNS INCORPORATED ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The Company's principal sources of income are commissions from on-track pari-mutuel wagers, commissions from intertrack and fees from interstate simulcast wagers, admissions and seating, concession commissions (primarily for the sale of food and beverages), and license, rights, broadcast and sponsorship fees. The Company's primary source of income is pari-mutuel wagering.
In Kentucky, licenses to conduct Thoroughbred race meetings and to participate in simulcasting are approved annually by the Kentucky Racing Commission based upon applications submitted by the racetracks in Kentucky, including the Company. Based on gross figures for on-track pari-mutuel wagering and attendance, the Company is the leading Thoroughbred racetrack in Kentucky. In Kentucky, the Company conducted racing during the period from April 27, 1996, through June 30, 1996, and from October 27, 1996, through November 30, 1996, for a total of 78 racing days. For 1997, the Company has been granted a license to conduct live racing during the period from April 26 through June 29, 1997, and from October 26 through November 29, 1997 for a total of 77 racing days.
In Indiana, licenses to conduct live Standardbred and Thoroughbred race meetings and to participate in simulcasting are approved annually by the Indiana Horse Racing Commission based upon applications submitted by the Company. Currently, the Company is the only facility in Indiana licensed to conduct live Standardbred or Thoroughbred race meetings and to participate in simulcasting. In Indiana, the Company conducted live racing for a total of 132 racing days, including 80 days of Standardbred racing from April 25, 1996 through September 2, 1996, and 52 days of Thoroughbred racing from September 20, 1996 through November 30, 1996. The Company has been granted a license to conduct live racing in 1997 for a total of 140 racing days, including 85 days of Standardbred racing from April 24 through August 24, 1997, and 55 days of Thoroughbred racing from September 12 through November 29, 1997.
CHURCHILL DOWNS INCORPORATED ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
The Company operated two live racing facilities and conducted simulcast wagering at four other locations during the year ended December 31, 1996. The Company began its operations in Indiana on September 1, 1994. The chart below summarizes the results of these operations.
* Includes common/commingle pools only. ** The Company's Indiana operations include four separate wagering facilities. *** Attendance figures are not kept for the separate wagering facilities in Indiana.
CHURCHILL DOWNS INCORPORATED ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
With the advent of whole card simulcasting, the Company conducts interstate simulcasting virtually year-round on multiple racing programs each day from around the nation. The number of receiving days has increased in 1996 when compared to 1995 because of the Indiana off-track wagering facilities being open throughout 1996. During 1995, simulcast wagering was being conducted at Hoosier Park in Anderson, Indiana and beginning January 25, 1995 at Merrillville, Indiana. Two additional simulcast facilities were opened during 1995, one in Ft. Wayne, Indiana on April 25, 1995, and the other in Indianapolis, Indiana in October 25, 1995. Simulcast wagering was conducted at all four facilities throughout the year ended December 31, 1996. For 1997, the Company has been granted a license to operate simulcast receiving locations in Kentucky and Indiana for any and all possible dates from January 1 through December 31 and intends to receive simulcasting on all possible days. Hoosier Park may ultimately be supported by a fourth whole card simulcasting facility. An increase in the number of days or facilities would be expected to enhance operating results.
Because the business of the Company is seasonal, the number of persons employed will vary throughout the year. Approximately 600 individuals are employed on a permanent year-round basis. During the live race meetings, as many as 2,600 persons are employed.
In 1996, there were four riverboats in operation along the Ohio River, three in Indiana and one at Metropolis, Illinois. By 1998, as many as five Indiana riverboats may be operating along the Ohio River, with one of the nation's largest complexes proposed to be located 10 miles from Louisville in Harrison County, Indiana. Direct competition with three newly opened riverboats has negatively impacted wagering at racetracks in Western and Northern Kentucky. Decreases in intertrack wagering, and to some extent on-track wagering, during Churchill Downs' 1996 Fall Meet were the result of riverboat competition in these markets. The Company believes that competition from Indiana riverboat gaming facilities will have a negative impact on the Company's operations, which could be material.
In addition, licenses allowing up to five riverboat casinos on Lake Michigan near the Company's Merrillville, Indiana, Sports Spectrum facility have been granted by the Indiana Gaming Commission. The Potawatomi Indian Tribe has expressed an interest in establishing a land-based casino operation in southwestern Michigan and northeastern Indiana, while the Miami Indian Tribe has expressed an interest in establishing a land-based casino near the Company's Merrillville Sports Spectrum. The Company anticipates that the commencement of such operations will have a negative impact upon the Company's wagering activities. The extent of the impact is unknown at this time due, in part, to the uncertain geographic distances between the Company's operations and the number of potential casino sites.
CHURCHILL DOWNS INCORPORATED ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Studies project that direct competition with these boats could result in as much as a 30% decline in on-track wagering at Churchill Downs and a 20% decline in Sports Spectrum business. In response, the Company's Board of Directors passed a resolution at its June 13, 1996 meeting instructing the Company's management to aggressively pursue alternative forms of gaming at its racetrack facilities in Louisville. The integration of alternative gaming products at the racetrack is one of four core business strategies developed by the Company to grow its live racing program. Management has been positioning the Company to compete in this changing environment for the past several years by strengthening its flagship operations, increasing its share of the interstate simulcast market, and geographically expanding its racing operations into Indiana.
The Company is pursuing legislative initiatives in both Kentucky and Indiana which would allow alternative gaming operations at its racetrack facilities. Alternative gaming in the form of video lottery and slot machines would enable Churchill Downs and Hoosier Park to effectively compete with Indiana riverboat casinos, and provide new revenue for capital investment and purse money.
COMPARISON OF YEAR ENDED DECEMBER 31, 1996 TO 1995
REVENUES
Net revenue during the year ended December 31, 1996 increased $15.4 million to $107.9 million. Kentucky operations contributed 37%, or $5.7 million to the total increase, with Interstate-Host showing the largest increase at $3.1 million. Interstate-Host represents revenues generated by transmitting the Company's live races at Churchill Downs outside the state of Kentucky to outlets across the nation. The number of outlets receiving Churchill Downs' live race signal increased from 844 in 1995 to 996 in 1996.
Indiana operations contributed $9.7 million, or 63%, to the revenue increase. All of the Indiana wagering facilities were fully operational in 1996 which led to a $6.8 million increase in Simulcast Receiving revenues. In 1995, not all of the off-track facilities were open for the full reporting period. On-track revenue decreased at Hoosier Park by $2.0 million when compared to 1995 due to the Standardbred live racing meet starting three weeks later and having one less race day per week in 1996. The Thoroughbred race meet started one month later in 1996 but gained 10 racing days. The net effect of the date changes caused a loss of 14 on track racing days. Net revenue also increased by $4.8 million in 1996 due to riverboat admissions taxes from Indiana riverboat gaming. In accordance with riverboat casino legislation, a riverboat admissions tax is assessed at three dollars per person, of which 65 cents is utilized to supplement the horse racing industry in Indiana. As determined by the Indiana Horse Racing Commission, 20%, or 13 cents, of the 65 cent supplement goes directly to Breed Development Funds and does not directly impact the Partnership. The remaining balance of the supplement (52 cents) is distributed, 30%, or 19.5 cents to the
CHURCHILL DOWNS INCORPORATED ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Partnership, 40% or 26 cents, is restricted for use as additional racing purses and 10%, or 6.5 cents, is restricted for promotional expenses.
House Bill 1135, which has already passed the Indiana House of Representatives, seeks to reduce the $.65 admission tax of which Hoosier Park receives $.25. Hoosier Park's share of the tax would be reduced to $.10 from $.25 per admission. Such a reduction in revenue would significantly impact funding for capital improvements and operating expenditures and cause the Company to reevaluate its investment in Indiana's pari-mutuel industry. The Company is prohibited from selling its interest in Hoosier Park, L.P., prior to 1998 without the consent of Conseco.
Following is a summary of Revenues:
CHURCHILL DOWNS INCORPORATED ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
OPERATING EXPENSES
Operating expenses increased $13.0 million during the twelve month period. Gross profit remained relatively flat, decreasing from 20.2% to 19.5% through December 31, 1996. Changes in specific expense categories follow.
Purse expense increased $6.8 million in 1996 when compared to 1995. In Kentucky and Indiana, purse expense varies directly with pari-mutuel revenues and is calculated as a percentage of the related revenue and may change from year to year pursuant to contract or statute. Simulcast Receiving in Indiana produced a $2.0 million increase in purse expense as a result of the increased number receiving locations in operation. Both Kentucky and Indiana handle increases in Simulcast Host led to a combined $2.0 million increase in purse expense. Riverboat Admissions Revenues in Indiana designated to purses contributed $2.5 million to the increase.
Wages and Contract Labor decreased from 22% of total operating expenses in 1995 to 20% in 1996 despite increases of $1.3 million primarily due to staff expansion in Kentucky and meet related payroll increases. Churchill Downs conducted four extra racing days in 1996 and the Churchill Downs Sports Spectrum was open on Kentucky Derby weekend, which in the past had been closed on both days.
The increase of approximately $800,000 in Advertising, Marketing and Publicity is due largely to the marketing of the satellite wagering facilities in Indiana. Approximately $150,000 was spent in each of the Ft. Wayne and Anderson, Indiana areas as part of an intensive marketing campaign in Indiana. In Kentucky, new marketing programs such as Twin Spires Club and Winners Circle Sponsorship, along with expenses incurred in conjunction with ESPN's Derby Week coverage, caused increases during the twelve month period.
Totalisator and Simulcast Host Fee expenses increased approximately $410,000 and $1.7 million respectively. Totalisator expenses are based on total wagers taken at the facilities while Simulcast Host Fees are paid to the track whose live races are being simulcast at the facilities. As total wagers increase, these expenses, along with purses, increase accordingly.
Program expenses increased approximately $430,000 in 1996. This is attributed to higher paper costs in Kentucky, the addition of the third Indiana satellite wagering facility.
Increases in Depreciation and Amortization are related to the Thoroughbred improvements at Hoosier Park and depreciation on the Ft. Wayne property for a full year. Insurance, Taxes and License Fees decreased approximately $300,000 as a new property insurance carrier was selected and general liability rates declined.
CHURCHILL DOWNS INCORPORATED ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Facility rent increased approximately $840,000 due to lease expense on the Indianapolis, Indiana off-track wagering facility operating for a full year in 1996.
Other Expense decreased slightly in 1996. Manure Removal is the largest component of this category with expenses of approximately $620,000. Expenses related to the Kentucky Off-Track Betting facilities were approximately $580,000.
Following is a summary of Operating Expenses:
CHURCHILL DOWNS INCORPORATED ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, General and Administrative Expenses totaled $8.7 million in 1996 which represents an increase of $388,000, or 4.6%, over 1995. Higher equipment lease expenses and development costs related to legislative initiatives were partially offset by reduced spending on other development projects.
OTHER INCOME AND EXPENSE
Interest expense was reduced approximately $235,000 as positive cash flow from operations has allowed the Company to pay down its line of credit. Interest income increased $160,000 in 1996 as additional cash was available for short-term investing.
COMPARISON OF YEAR ENDED DECEMBER 31, 1995 TO 1994
REVENUES
Pari-mutuel revenue during the twelve months ended December 31, 1995 increased $23,674,752. The Company's subsidiary Hoosier Park generated 74 percent, or $17,321,012, of the increase in pari-mutuel revenue which when combined with admissions, concessions, programs, and other revenue totaled $18,783,355 in revenues. This revenue increase is due largely to the 821 operating days of whole card simulcasting offered beginning January 1, 1995 at Hoosier Park, January 25 in Merrillville, Indiana, April 26 in Ft. Wayne, Indiana and October 25 in Indianapolis, Indiana. Simulcasting has been well received in Indiana with an average daily handle of $112,966.
The advent of whole card simulcasting helped increase simulcast receiving revenue by $2,881,470 in the Commonwealth of Kentucky, with Simulcast Host revenue increasing by $1,860,632 due largely to marketing of the Churchill Downs live racing product to a record number of interstate simulcast outlets. Whole card simulcasting was also largely responsible for the increase in program revenue due to two or more programs and racing forms being sold per day. License and rights revenues were up 12% or $610,000 primarily due to increased race sponsorships and souvenir licensing at Churchill Downs. Revenues from the Derby Expansion Area, referred to as Marquee Village, were up 19% largely due to the addition of a covered seating area near the racetrack's first turn. The backside of the Churchill Downs racetrack facility was closed during the first quarter of 1994 for maintenance and repair for the first time in several years which reduced other revenue. Other revenue was higher in 1994 primarily due to hosting the Breeders' Cup Day Event.
Following is a summary of Revenues:
CHURCHILL DOWNS INCORPORATED ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
CHURCHILL DOWNS INCORPORATED ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
OPERATING EXPENSES
Operating expenses increased $24,431,384 during the twelve month period. This increase is primarily due to the live and simulcasting operations at Hoosier Park combined with the opening of the Indiana off-track wagering facilities. The largest single increase in meet expenses are the higher purses which are a direct result of increased handle from whole card simulcasting in Kentucky and Indiana. Purse expense varies directly with pari-mutuel revenues and is calculated as a percentage of the related handle revenue and may change from year to year pursuant to contract or statute. Whole card simulcasting and Hoosier Park operations were also primarily responsible for increased wages, advertising and marketing, audio, video, totalisator, program expenses and other. Wages and contract labor increased due to additional days and hours of operation related to whole card simulcasting at Sports Spectrum and Hoosier Park. The simulcast host fee is the amount paid to the host track in exchange for receiving the tracks' races. This expense is based on handle, and is directly related to the $18 million increase in simulcasting revenue.
Depreciation and amortization increases are attributed to the addition of the Indiana facilities of which 77%, or $921,909 of the total expense is related to Hoosier Park. Indiana operations contributed 84%, or $782,200 to the total increase in utilities and 55%, or $537,225 to insurance, taxes and license fees.
Following is a summary of Operating Expenses:
CHURCHILL DOWNS INCORPORATED ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
CHURCHILL DOWNS INCORPORATED ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $1,139,248. The increase was primarily related to increases in wages and benefits of $506,491 and professional fees of $404,083, most of which were related to Indiana operations.
OTHER INCOME AND EXPENSE
Interest expense increased by $397,245 largely due to the borrowings necessary to fund the construction of three satellite wagering facilities and Thoroughbred improvements in Indiana. Interest income was lower due to less cash available for short-term investment.
SIGNIFICANT CHANGES IN THE BALANCE SHEET DECEMBER 31, 1996 TO DECEMBER 31, 1995
The cash balances at December 31, 1996 were $2.4 million higher than December 31, 1995 due primarily to declining cash requirements from the Company's Indiana operations. In 1995 the Company opened satellite wagering facilities and made improvements for the inaugural Indiana Thoroughbred horse meet in Indiana.
Accounts receivable at December 31, 1996 were $3.1 million higher than December 31, 1995 due primarily to the Indiana Riverboat Admission tax which had not been received as of December 31, 1996. The first riverboat opened in December 1995.
Plant & equipment increased by $2.5 million as a result of routine capital spending throughout the Company, offset by $4.0 million of depreciation expense.
Accounts payable and accrued expenses have increased by $3.5 million mostly due to increases in purses payable related to the increase in simulcast revenue.
Income taxes payable increased $1.5 million at December 31, 1996 relate to the estimated expense due for the twelve month period, less any estimated tax payments. The increase in earnings has resulted in a corresponding increase in income taxes payable.
Notes payable were $3.4 million lower at December 31, 1996 as positive cash flow has allowed the Company to eliminate its outstanding bank debt.
Dividends payable increased by $500,000 due to the special dividend declaration in 1996.
CHURCHILL DOWNS INCORPORATED ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
On May 7, 1996 the Company purchased 58,650 shares of common stock at a total cost of $2,346,001. On August 2, 1996 the Company issued 3,909 shares of it common stock to employees under its Stock Purchase Plan for total proceeds of $112,970. Additionally, on September 27, 1996 the Company purchased 75,600 shares of common stock at a total cost of $2,608,192. These purchases had a positive effect on earnings per share, adding $.03 to earnings per share for the year ended December 31, 1996.
SIGNIFICANT CHANGES IN THE BALANCE SHEET DECEMBER 31, 1995 TO DECEMBER 31, 1994
The increase in cash and cash equivalents in 1995 is the result of declining cash requirements from the Company's Indiana operations. In 1994 the Company was preparing to open satellite wagering facilities in Merrillville and Fort Wayne, Indiana.
Racing plant and equipment increased by $7,913,762 during 1995. The Company's Indiana operations received $6,468,000 of these additions, primarily in the form of three satellite wagering facilities in the state and three million dollars in improvements at Hoosier Park that were necessary for the Thoroughbred race meet.
Accounts payable and accrued expenses have increased by $2,913,430 mostly due to increases in purses payable related to the increase in simulcast revenue, and due to the normal increase in operating payables related to three additional simulcast facilities in Indiana. The increase in income taxes payable is due to the timing of the Company's fourth quarter payments which were made in January for 1995, versus December in 1994.
Notes payable have decreased as the Company continues to retire debt incurred with the acquisition and construction of its Indiana operations. Outstanding mutuel tickets have increased in relation to the increase in business due to whole card simulcasting in Kentucky and the opening of the three additional simulcast wagering facilities in Indiana.
CHURCHILL DOWNS INCORPORATED ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of December 31, 1996, 1995 and 1994 follows:
1996 1995 1994 ------------ ------------ -------------
Deficiency in working $(10,742,606) $(10,433,929) $(10,131,254) capital Working Capital ratio .57 to 1 .45 to 1 .35 to 1
The working capital deficiency results from the nature and seasonality of the Company's business. Cash flows from operations were $15,079,531, $16,540,123 and $11,399,973 for the years ended December 31, 1996, 1995 and 1994, respectively. Management believes cash flows from operations during 1997 and funds available under the Company's unsecured line of credit will be sufficient to fund dividend payments and additions and improvements to the plant and equipment.
During 1994 cash flow from operations funded $850,000 of the Anderson Park, Inc. stock purchase in January 1994. Similarly, cash flow from operations and, as necessary, funds available under the unsecured line of credit were used to fund up to $14 million for construction of the Hoosier Park racing facility in Anderson, Indiana. In 1995, Churchill Downs also funded an additional $6.5 million to construct three satellite wagering facilities in Indiana and improvements which allowed for Thoroughbred racing at Hoosier Park.
The Company has a $20,000,000 unsecured line-of-credit all of which is available at December 31, 1996 to meet working capital and other short-term requirements. Management believes that the Company has the ability to obtain additional long-term financing should the need arise.
CHURCHILL DOWNS INCORPORATED ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation". This Statement requires that the Company's financial statements include certain disclosures about stock-based employee compensation arrangements in accordance with a fair value based method of accounting. The footnotes to the financial statements contain the required disclosures.
In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). SFAS 128 is designed to improve the EPS information provided in financial statements by simplifying the existing computational guidelines. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997. The Company does not expect adoption of this standard will have a material impact on its financial statements.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors Churchill Downs Incorporated
We have audited the accompanying consolidated balance sheets of Churchill Downs Incorporated and subsidiaries as of December 31, 1996, 1995 and 1994 and the related consolidated statements of earnings, stockholders' equity and cash flows, and the consolidated financial statement schedule, for each of the three years then ended as listed in Item 14 of this Form 10-K. These consolidated financial statements and financial statement schedule are the responsibility of management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Churchill Downs Incorporated and subsidiaries as of December 31, 1996, 1995 and 1994 and the results of their operations and cash flows for each of the three years then ended in conformity with generally accepted accounting principles. In addition, in our opinion, the consolidated financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects, the information required to be included therein for the years ended December 31, 1996, 1995 and 1994.
/S/COOPERS & LYBRAND L.L.P. Coopers & Lybrand L.L.P.
Louisville, Kentucky March 7, 1997
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
CHURCHILL DOWNS INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1996, 1995 and 1994
The accompanying notes are an integral part of the consolidated financial statements.
Noncash investing and financing activities: During 1994, $460,000 of notes payable was paid by the issuance of common stock.
The accompanying notes are an integral part of the consolidated financial statements.
CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
Churchill Downs Incorporated (the "Company") conducts Spring and Fall live race meetings for Thoroughbred horses and participates in intertrack and interstate simulcast wagering as a host track and as a receiving track in Kentucky. In Indiana, the Company, through its subsidiary, Hoosier Park L.P. (Hoosier Park), conducts live Thoroughbred and Standardbred race meetings and participates in simulcast wagering. Both its Kentucky and Indiana operations are subject to regulation by the racing commissions of the respective states.
The accompanying consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, Churchill Downs Management Company and Anderson Park Inc. and its majority owned subsidiary, Hoosier Park, L.P. All significant intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FOLLOWS:
CASH EQUIVALENTS:
The Company considers investments with original maturities of three months or less to be cash equivalents. The Company has, from time to time, cash in the bank in excess of federally insured limits.
PLANT AND EQUIPMENT:
Plant and equipment are recorded at cost. Depreciation is provided by accelerated and straight-line methods over the estimated useful lives of the related assets.
DEFERRED REVENUE:
Deferred revenue includes advance sales of tickets.
CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (cont'd)
OTHER ASSETS:
Amortization on a racing license is provided over forty years using the straight-line method. Organizational costs and preopening costs are amortized over 24 months. Amortization expense was $775,979, $688,916 and $264,753 for the years ended December 31, 1996, 1995 and 1994.
STOCK-BASED COMPENSATION:
The Company accounts for stock based compensation in accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees". In accordance with Statement of Financial Accounting Standards No. 123 (SFAS 123) "Accounting for Stock-based Compensation" proforma disclosure of net income and earnings per share are presented in Note 7 as if SFAS 123 had been applied.
RECLASSIFICATION:
Certain prior year accounts have been reclassified to conform to the current year presentation.
EARNINGS PER SHARE:
Earnings per share has been computed by dividing net earnings by the weighted average number of common shares and equivalents outstanding. Common share equivalents included in the computation represent shares issuable upon assumed exercise of stock options which would have a dilutive effect on earnings. Such equivalents had no material effect on the computation for the periods ended December 31, 1996, 1995 and 1994.
In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). SFAS 128 is designed to improve the EPS information provided in financial statements by simplifying the existing computational guidelines. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997. The Company does not expect adoption of this standard will have a material impact on its financial statements.
CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. PLANT AND EQUIPMENT:
Plant and equipment are summarized as follows:
December 31, December 31, December 31, 1996 1995 1994 ------------ ------------ ------------ Land $ 5,879,994 $ 5,930,242 $ 5,864,863 Grandstands and buildings 56,154,054 55,946,326 48,749,083 Equipment 2,936,129 2,685,026 2,110,793 Furniture and fixtures 3,603,276 3,435,761 3,586,659 Tracks and other improvements 31,377,753 29,332,188 28,364,732 Construction in process 74,206 121,920 861,571 ------------ ------------ ----------- $100,025,412 $97,451,463 $89,537,701 ============ ============ ===========
Depreciation expense was $4,038,135, $3,817,511 and $3,062,978 for the years ended December 31, 1996, 1995 and 1994.
3. INCOME TAXES:
Components of the provision for income taxes follow:
Income taxes: 1996 1995 1994 ---- ---- ---- Currently payable $5,431,000 $3,883,500 $3,856,700 Deferred income taxes (461,000) 167,500 129,000 ----------- ---------- ---------- $4,970,000 $4,051,000 $3,985,700 ========== ========== ==========
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:
1996 1995 1994 ---- ---- ---- Federal statutory tax on Earnings before income tax $4,464,000 $3,486,000 $3,452,000
State income taxes, net of federal income tax benefit 537,000 552,400 533,700
Other (31,000) (12,600) - ---------- ---------- ---------- $4,970,000 $4,051,000 $3,985,700 ========== ========== ==========
CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. INCOME TAXES: (cont'd)
At December 31, 1996, the Company has operating loss carryforwards of approximately $5,200,000 for Indiana State income tax purposes expiring from 2009 through 2011. Based on the weight of evidence, both negative and positive, including the lack of historical earnings in the state of Indiana, the Company has provided a valuation allowance because it is unable to assert that it is more likely than not to realize some portion or all of the deferred tax asset attributable to the Indiana state income tax net operating loss carryforwards.
Significant components of the Company's deferred tax assets and liabilities at December 31 follows:
CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
4. EMPLOYEE BENEFIT PLANS:
The Company has a profit-sharing plan which covers all full-time employees with one year or more of service. The Company will match contributions made by the employee up to 2% of the employee's annual compensation and contribute a discretionary amount determined annually by the Board of Directors. The cost of the plan for the years ended December 31, 1996, 1995 and 1994 was $402,000, $280,000 and $276,000, respectively.
The estimated present value of future payments under a supplemental benefit plan is charged to expense over the period of active employment of the employees covered under the plan. Supplemental benefit plan expense for the years ended December 31, 1996, 1995 and 1994 was $51,000, $57,000 and $49,000, respectively.
The Company is a member of a noncontributory defined benefit multi-employer retirement plan for all members of the Pari-mutuel Clerk's Union of Kentucky. Contributions are made in accordance with negotiated labor contracts. Retirement plan expense for the year ended December 31, 1996, 1995 and 1994 was $183,246, $193,774 and $190,626, respectively. The Company's policy is to fund this expense as accrued.
5. LONG-TERM DEBT:
The Company has an unsecured $20,000,000 bank line of credit with various options for the interest rate, none of which are greater than the bank's prime rate. The line of credit expires January 31, 1998. The prime rate as of December 31, 1996 was 8.25%. No borrowings were outstanding at December 31, 1996. There was $6.0 million outstanding at December 31, 1995 and $7.5 million outstanding at December 31, 1994.
The Company also has two non-interest bearing notes payable in the aggregate face amount of $900,000 relating to the purchase of an intertrack wagering license from the former owners of the Sports Spectrum property. Interest has been imputed at 8%. The balance of these notes net of unamortized discount was $350,000, $420,000 and $481,000 at December 31, 1996, 1995 and 1994, respectively. The notes require aggregate annual payments of $110,000. As described in the contingency footnote (Note 10) any remediation costs for environmental cleanup can be offset against any amounts due under these notes payable.
On May 31, 1996, the Company entered into a Partnership Interest Purchase Agreement with Conseco HPLP, L.L.C. ("Conseco") for the sale of 10% of the Company's partnership interest in Hoosier Park to Conseco. The transaction also included a loan by Conseco of approximately $2,600,000. The loan requires interest of prime plus 2% (10.25% at December 31, 1996) payable monthly with principal due November, 2004. The note is collateralized by 10% of the assets of Hoosier Park.
CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. LONG-TERM DEBT: (cont'd)
Maturities of all notes payable for the five years following December 31, 1996 follow:
PRINCIPLE AMOUNT 1997 - $ 74,000 1998 - 80,000 1999 - 86,000 2000 - 93,000 2001 - 17,000 Thereafter - 2,649,000 6. OPERATING LEASES:
The Company contracts for totalisator equipment and service. A contract with a new vendor was entered into on November 1, 1993 and extends through October, 1998. The contract provides for rentals based on a percentage of pari-mutuel wagers registered by the totalisator equipment. Hoosier Park entered into a separate contract with the same vendor for totalisator equipment and service under an agreement which expires in 2001 and provides for variable rentals based on the level of activity. Rental expense for the years ended December 31 1996, 1995 and 1994 was $1,257,000, $1,093,000 and $577,000, respectively.
Hoosier Park leases land in Anderson, Indiana under an operating lease agreement with the City of Anderson. Under the agreement, Hoosier Park pays an annual rent of $128,520 or one-half of one percent of the total annual handle wagered at the racetrack facility and at the three Indiana simulcast facilities on live races at the track, whichever is greater. The original term of the lease expires April 22, 2003. Hoosier Park has options to renew the lease for three additional ten-year periods subject to the same terms and conditions. Rent expense during 1996, 1995 and 1994 was $218,821, $308,037 and $100,882, respectively, which included $90,301 and $179,517 of contingent rentals in 1996 and 1995, respectively.
In November 1995, Hoosier Park entered into an operating lease agreement which expires November 25, 2005 to lease property for the Indianapolis off-track betting facility. Under this agreement, Hoosier Park pays an annual minimum rent of $200,000, plus additional rent contingent upon annual gross revenues. Hoosier Park has an option to renew the lease for an additional five-year period. Under the terms of the renewal lease, Hoosier Park pays an annual minimum rent of $300,000, plus additional rent contingent upon annual gross revenues. Rent expense under this agreement during 1996 and 1995 was $619,646 and $113,568, respectively.
CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. OPERATING LEASES: (cont'd)
Hoosier Park contracts for audio/video equipment and service under an agreement which expires on the last day of racing in the year 2001. The agreement provides for daily fees, which vary based on the level of programming provided. Expense under this agreement during 1996, 1995 and 1994 was $800,841, $794,351 and $99,363, respectively.
A summary of future minimum operating lease payments follows:
Year Ending Minimum Lease December 31 Payment ($) 1997 $ 328,520 1998 328,520 1999 328,520 2000 328,520 2001 328,520 Later Years 954,693 Total minimum lease payments $2,597,293
7. STOCK-BASED COMPENSATION PLANS:
The Company sponsors the "Churchill Downs Incorporated 1993 Stock Option Plan" (the "Plan"), a stock-based incentive compensation plan which is described below. The Company applies APB Opinion 25 and related interpretations in accounting for the Plan. In 1995, the FASB issued FASB Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") which, if fully adopted by the Company, would change the methods the Company applies in recognizing the cost of the Plan. Adoption of the cost recognition provisions of SFAS 123 is optional and the Company has decided not to elect these provisions of SFAS 123. However, pro forma disclosures as if the Company adopted the cost recognition provisions of SFAS 123 in 1995 are required by SFAS 123 and are presented below.
Under the Plan, the Company is authorized to issue up to 200,000 shares of common stock pursuant to "Awards" granted in the form of incentive stock options (intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended) and non-qualified stock options. Awards may be granted to selected employees and directors of the Company or any subsidiary.
CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. STOCK-BASED COMPENSATION PLANS: (cont'd)
Employee Stock Options:
The Plan provides 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 Plan. The Company granted stock options in 1996, 1995 and 1994. The stock options granted in those years have contractual terms of 10 years and varying vesting dates, ranging from one to three years following the date of grant. In accordance with APB 25, the Company has not recognized any compensation cost for these stock options.
A summary of the status of the Company's stock options as of December 31, 1996, 1995 and 1994 and the changes during the year ended on those dates is presented below:
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 1996 and 1995, respectively: dividend yield of 2.1% in 1995 and ranging from 1.3% to 1.6% in 1996; risk-free interest rates are different for each grant and range from 5.39% to 6.74%; and the expected lives of options are different for each grant and range from approximately 5.5 to 6.5 years, and a volatility of 18.75% for all grants.
CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. STOCK-BASED COMPENSATION PLANS: (cont'd)
The following table summarizes information about stock options outstanding at December 31, 1996:
Employee Stock Purchase Plan:
Under the Company's Employee Stock Purchase Plan (the "Employee Stock Purchase Plan"), the Company is authorized to sell, pursuant to short-term stock options, shares of its common stock to its full-time (or part-time for at least 20 hours per week and at least five months per year) employees at a discount from the common stock's fair market value through payroll deductions. The Employee Stock Purchase Plan operates on the basis of recurring, consecutive one-year periods. Each period commences on August 1 and ends on the next following July 31.
On the first day of each 12 month period, July 1, the Company will offer to each eligible employee the opportunity to purchase common stock. Employees may elect to participate for a period by electing to have a designated percentage of their compensation withheld (after-tax) and applied to purchase shares of common stock on the last day of the period, July 31. The Employee Stock Purchase Plan allows withdrawals, terminations and reductions on the amounts being deducted. The purchase price for the common stock will be 85% of the lesser of the fair market value of the common stock on (I) the first day of the period, or (ii) the last day of the period. No employee may purchase common stock under the Employee Stock Purchase Plan valued at more than $25,000 for each calendar year.
Under the Employee Stock Purchase Plan, the Company sold 3,909 shares of common stock to 109 employees pursuant to options granted on August 1, 1995 and exercised on July 31, 1996. Because the plan year overlaps the company's fiscal year, the number of shares sold pursuant to options granted on July 1, 1996 can only be estimated because the 1996 plan year is not yet complete. The Company's estimate of options granted in 1996 under the Plan is based on the number of shares sold to employees under the Plan for the 1995 plan year, adjusted to reflect the change in the number of employees participating in the Plan in 1996.
In accordance with APB 25, the Company has not recognized any compensation cost for the Employee Stock Purchase Plan for 1996 or 1995 (or any other prior year).
CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. 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, 1996 and 1995 and the changes during the year ended on those dates is presented below:
Had the compensation cost for the Company's stock-based compensation plans been determined consistent with SFAS 123, the Company's net income and net income per common share for 1996 and 1995 would approximate the pro forma amounts below:
1996 1995 ---------- ---------- Net income: As reported $8,071,526 $6,203,135 Pro-forma 7,530,000 6,153,000
Net income per common share: As reported $2.17 $1.64 Pro-forma 2.02 1.63
The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to 1995, and the Company anticipates making awards in the future under its stock-based compensation plans.
CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. FAIR VALUES OF FINANCIAL INSTRUMENTS:
Financial Accounting Standards Board ("FASB") Statement No. 107, "Disclosure about Fair Value of Financial Instruments," is a part of a continuing process by the FASB to improve information on financial instruments. The following methods and assumptions were used by the Company in estimating its fair value disclosures for such financial instruments as defined by the Statement:
Cash and Cash Equivalents - The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value.
Long-Term Debt - The carrying amounts of the Company's borrowings under its line of credit agreements and other long-term debt approximates fair value, based upon current interest rates.
9. ACQUISITION:
On January 26, 1994 the Company purchased Anderson Park, Inc. ("API") for approximately $1,950,000. API owned an Indiana Standardbred racing license and was in the process of constructing a racing facility in Anderson, Indiana. Subsequently, the facility was completed and contemporaneously with the commencement of operations on September 1, 1994, the net assets of API were contributed to a newly formed partnership, Hoosier Park, L.P. in return for an 87% general partnership interest.
10. CONTINGENCIES:
On January 22, 1992, the company acquired certain assets of Louisville Downs, Incorporated for $5,000,000. In conjunction with this purchase, the Company withheld $1,000,000 from the amount due to the sellers to offset certain costs related to the remediation of environmental contamination associated with underground storage tanks at the site. Substantially all of the $1,000,000 hold back had been utilized as of December 31, 1995. In addition, the Company may offset any additional costs against additional amounts payable to the sellers for the acquisition of the property.
It is not anticipated that the Company will have any liability as a result of compliance with environmental laws with respect to the property. Compliance with environmental laws has not otherwise affected development and operation the property and the Company is not otherwise subject to any material compliance costs in connection with federal or state environmental laws.
CHURCHILL DOWNS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. SALE OF 10% OF HOOSIER PARK:
On December 20, 1995, the Company entered into a Partnership Interest Purchase Agreement with Conseco HPLP, L.L.C. ("Conseco") for the sale of 10% of the Company's partnership interest in HPLP to Conseco. This sale was closed on May 31, 1996. The purchase price for the 10% partnership interest was $218,390 and the transaction also included a payment of $2,603,514 for a 10% interest in the debt owed by HPLP to a subsidiary of the Company. Conseco and Pegasus Group, Inc. ("Pegasus") are limited partners of HPLP and Anderson Park, Inc. ("API"), a subsidiary of the Company, continues to be the sole general partner of HPLP.
Through December 31, 1998, Conseco has an option to purchase from API an additional 47% partnership interest in HPLP including payment for 47% interest in the debt owed by HPLP to a subsidiary of the Company. The purchase price of the additional partnership interest will be approximately $6,222,000 and the payment for the debt will be approximately $15,934,000. This purchase is subject to the approval of the Indiana Horse Racing Commission. Upon exercise of the option, Conseco would be the sole general partner of HPLP, and API and Pegasus will be limited partners of HPLP with partnership interests of 30% and 13%, respectively. The Company will continue to have a long-term management agreement with HPLP pursuant to which the Company has operational control of the day-to-day affairs of HPLP and its related simulcast facilities.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10.
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 "Elections 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.
ITEM 11. EXECUTIVE COMPENSATION.
The information required herein is incorporated by reference from sections of the Company's Proxy Statement titled "Elections of Directors - Compensation and Committees of the Board of Directors" 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.
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.
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.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
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.
(b) Reports on Form 8-K:
None
(c) Exhibits
See exhibit index.
(d) All financial statements and schedules except those items listed under items 14(a)l and (a)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.