Indiana Horse Racing Commission Meeting Notes

Date: February 27, 2007

Please note: These are NOT official minutes of the IHRC meeting.  They are notes developed by our representative attending the meeting.

The Indiana Horse Racing Commission (IHRC) met on Tuesday, February 27, 2007, at the Indiana State Library.  While the agenda contained only five succinct items to be addressed, the meeting lasted a little over 2 hours.  Chairman Sarah McNaught called the meeting to order at 9:00 a.m.  Minutes from the January 16, 2007 meeting were approved by the Commissioners.  The meeting then progressed to the other items included on the agenda.

The first item on the agenda was presentation of the results if Indiana University’s Horseman’ survey.  This item was presented by Chairman Sarah McNaught.  Her comments included a rave review of the survey and its results.  Copies of the survey results were available to those in attendance at the meeting.  It was also noted to be available on the IHRC Web site.  In addition, a letter from Chairman McNaught has been drafted to be sent to all those issued a survey.  The letter gives a brief review of the survey and presents some options for those interested in obtaining a copy.

The next item on the agenda was presentation of Standardbred Breed Development’s 2007 Harness Racing Calendar.  The calendar was presented by Jessica Barnes, Director of Standardbred Racing with the Indiana Horse Racing Commission.  Barnes noted the calendar as showcasing the accomplishments of Indiana-sired horses.  She went on to state that the products of our Indiana breeding program can be seen racing nearly any night of the week at our nation’s premier track, The Meadowlands.  The goal of producing the calendar was to create a tool to make the things easier and more organized for those involved in the industry.  In closing, Barnes told the commission the calendars were mailed to approximately 4,200 individuals, along with the Indiana Nomination Booklet.

By far the most time consuming part of the meeting was the third item on the agenda, a hearing before the commission on the application of Hoosier Park, L.P. and Centaur, Inc. and its subsidiaries for transfer of ownership of a pari-mutuel racing permit.  If successful, the result of the hearing would be a transfer of Churchill Downs Inc. (CDI) 62% interest in ownership of Hoosier Park (HoP) to Centaur.  Since the commission would be acting as Administrative Law Judge in the hearing, all witnesses before the commission were sworn in prior to testifying.  As a matter of house-keeping, Chairman McNaught also requested that each individual testifying be required to state their full name and include exact spelling, if necessary.

IHRC Attorney, Robin Babbitt, opened the hearing with a brief synopsis covering the procedures required and met so far in the transfer process.  He then requested to have all documents previously supplied to be noted as testimony.  Babbitt then turned the floor over to Robert Hagemier, legal counsel for Centaur & Anderson Park, Inc.  Hagemier then proceeded to call his witnesses in the hearing.

The first witness called was Rod Ratcliff, Chairman of Centaur.  Ratcliff had previously answered questions for the hearing and indicated no change today in the answers he had given.  Ratcliff stated the purchase price for CDI’s portion of HoP was set at $8.2 million.  This figure, he explained, included purchase of the existing facility and working capital.  Ratcliff then gave a brief history of Centaur and its involvement with racing in Indiana.  Formed in 1991, Centaur was first comprised of a group of agricultural people, 90% of whom are Indiana based.  Today, Centaur’s owners are primarily involved in agriculture, but they have taken other investors on board.  It is a privately owned company.  Centaur chose to invest in Indiana horse racing because it has been involved with the legislative process surrounding racing since the early 1990s.  With their experience, those involved in Centaur feel they are in touch with the needs of the industry.  To explain why the commission should entertain the idea of the sale, Ratcliff stated those involved in Centaur had worked a long time to get racing to its current state and it has been a lifelong dream of the partners.

The next witness was Jeff Smith, CEO of Racing with Centaur.  Smith noted no changes to his pre-filed testimony.  He used a printed presentation of slides to depict the percentages involved in the current ownership structure for HoP, as well as those for the new structure to exist if the sale was approved.  With the change, Centaur would effectively purchase CDI’s share in HoP.  Smith then gave a detailed explanation of the workings of the purchase and how it included handling any existing debt of the track.  As part of the sale agreement, CDI agreed to write-off $10 million of the track’s existing debt to reduce the price associated with the sale.  Including funds from notes, loans, and other capital contributions, a total of $5 million is being invested by Centaur.  After the $4.2 million purchase price, the additional $800,000 is slated for transition expenses and operational costs.  Smith noted the most important part of their purchase arrangement is the placement of HoP in a better financial position, meaning less debt for the track and a revolving line of credit.  One item setting this sale apart from normal purchases was the agreement by the shareholders of Centaur to be directly responsible for the bank notes secured for the sale.  If, for some unforeseen reason, the company did not generate the revenue to repay the notes, those specific shareholders would be responsible for their repayment.  Smith assured the commission those individuals were consistent shareholders in Centaur over its history.

Smith then referenced the forecasted financials for the company.  He noted those financials are projections as of today, implying no slots in the future of the track.  Smith also explained the balance sheet, noting the cash balance dated 12/31/06 was very close to the actual figures today.  His comments included an explanation of the figures and any related changes moving forward.

Smith also shared the three ways CDI will continue to be involved with HoP.  First, CDI has agreed to sell and market HoP for up to 10 years.  This is a 5-year contract, renewable for another 5 years.  It allows packaging of the HoP signal with other CDI tracks to get it into various markets.  HoP will also have world-wide rights, which gives it the ability to sell their own signal in other venues.  Secondly, CDI has agreed to continue assisting with simulcast productions, including audiovisual production at the track.  The new owners will be purchasing the equipment, but CDI will provide assistance and software needed to create the product.  This arrangement allows HoP to continue to put out a quality product for its patrons.  Finally, CDI is anticipated to develop its own account wagering platform.  If and when this occurs, HoP will have that option of distribution available for use.

When asked the goals and expectations for HoP moving forward, Smith mentioned a few key items.  Of considerable importance is creating a solid financial footing for HoP in the future.  In addition, developing a plan for future growth is necessary.  With this plan needed, Smith expressed being pleased with the decision to keep Rick Moore on board.  He cited Moore’s experience as giving them the latitude needed to improve over time.  In closing, Smith made a point to state Indiana racing owes CDI a great deal of gratitude for their role in getting pari-mutuel racing started and “out of the gate” in the state.

Commissioner Grimes then asked questions relating to Centaurs plans for a center of operation.  Smith stated the corporate offices would remain in downtown Indianapolis, while the operations offices would stay at HoP.  He concluded his answer by stating, “The team is excited about this opportunity.”

The next witness in the hearing was Kurt Wilson, Chief Financial Officer and an executive with Centaur.  He offered a further explanation of the money transition involved in the purchase to answer some questions posed by Commissioner Grimes.  Wilson explained, “As the agreement exists, it is effectively a note between 3 specific shareholders and CDI, not ALL of Centaur.”  The idea behind this arrangement is to buy time to work on the product at the track.  To ensure he was clear on the answer, Commissioner Grimes posed a question, “So, those specific shareholders are ultimately responsible for the financial support?”  Wilson noted that is a correct statement and it is Main Source Bank (based in Crawfordsville) which will be the lender.  They are set to provide credit for the next 3 years.

Rick Moore, President & General Manager for HoP, was also called as a witness in the hearing.  As with the other witness, he had filed a pre-hearing statement, which had no changes.  Attorney Hagemier described Moore’s involvement as offering a unique perspective on the sale, as he is a part of HoP now and will remain a part moving on if the purchase is approved.  The transition allows Moore to become an employee of Centaur, who is very happy to see him stay.  Moore stated he has worked 16 years with CDI.  He reiterated the idea Indiana owes CDI gratitude for helping get things started, but is happy to continue his involvement with HoP moving forward.  Moore stressed the fact Centaur is not a new owner in the track.  They have been a part of HoP for years and been totally supportive when needed.  The shareholders have never balked on any matters, including money issues.

Moore went on to describe a few changes which would come to HoP after the sale.  The track will take on a new logo, dropping the CDI branding currently utilized.  Additionally, the Twin Spires Club would end, but be replaced by a new HoP Rewards Program.  No physical changes to HoP are planned; however, there are plans to use money for improvements at the track and OTBs.  Moore added the news of the sale has found support throughout the industry.

Commissioner Armstrong expressed concerns with any plans to decrease money earmarked for marketing.  Moore responded to his queries by stating they intend to use a more direct, focused approach.  He stated, “The overall result would be less expenditures, but more targeted.”  Commissioner Grimes then made inquires into ways to promote growth.  He specifically asked if concepts like those in the Integrity ’06 program would help.  Moore’s reply included describing Indiana as being modeled to help the horsemen.  He noted Indiana is viewed as attempting to establish a level playing field.

Anderson Park, Inc. witnesses were then called.  Steve Sexton, Executive Vice President CDI & President of Churchill Downs racetrack was introduced.  His pre-filed testimony contained no changes and was entered into the proceedings.  As part of the exchange with Sexton, Commissioner Armstrong, Chairman McNaught, and Joe Gorajec echoed the gratitude to CDI mentioned earlier.  It was noted that HoP was CDI’s first venture outside of Kentucky, which was a huge benefit our industry.  Gorajec stated, “CDI helped make Indiana racing what it is today.  They always ran things in a first class manner.”  Sexton gave credit to Tom Meeker for the decision to venture into Indiana and invest in HoP.  He added that he feels the sale would leave the operation in good hands and racing would be okay moving forward.  In summary, he felt good news in the racing industry means good news for all involved in it.  He also thanked the commission for recognizing the efforts of CDI.

The remainder of the hearing shifted to input from the IHRC Staff.  Gorajec shared his concern when he first learned of the possible sale of the track.  His basic question was, “Who will run the racetrack?”  He felt ownership was an important factor.  Moreover, he felt management may be more important because it impacts everyone involved with the track, from the stable employees to the commission.  The fact Rick Moore is remaining on board, along with his staff being left in tact, helped with any reservations Gorajec had with the transfer.  He shared feeling CDI had always dealt with the commission in good faith, so he was glad to see many of the same people remaining.

Charlene Sullivan, Commission Consultant, was then introduced.  She is an Associate with the School of Management at Purdue University.  Sullivan has performed other analyses for the commission in the past.  Her work included two feasibility studies relating to Indiana Downs, one for a Lawrence location and another for the current location in Shelbyville.  She has also worked with the Indiana Gaming Commission to prepare reports for financial advice.  Basically, her role was to establish whether the transaction considered was in the public interest and in the best interest of racing in Indiana.  She shared financial tools used in her analysis, noting the personal guarantee of specific shareholders to ensure success of the venture was a major factor in her recommendations.  She indicated having an overall opinion that the management team has a focus on the long term.  They accept the fact that owning a racetrack is a tough market.  No one within the group has attempted to paint a rosy picture of the landscape and try to make it appear otherwise.  Her report concluded by making a recommendation for approval of the sale by the commission.  As a gesture of appreciation for her work, Chairman McNaught complimented Sullivan on her synopsis to the commission.  She noted the use of simple statements to explain a complex issue.

To close the hearing, the commission then asked for any other public input.  Other than input previously filed from outside parties, nothing new was offered as evidence.  The IHRC Attorney, Robin Babbitt, asked that all those materials be submitted as part of the record.  With no more input offered, Chairman McNaught asked for a motion.  The motion was made by Commissioner Armstrong and seconded by Commissioner Grimes.  The commission then voted unanimously to approve the sale of HoP to Centaur.

Returning to the items included on the meeting agenda, the commission then focused attention to considering a petition from Centaur, LLC for selling shares of ownership to specific individuals.  As with all such transfer requests, background information on all potential investors is requested by the commission.  Having met these requirements, the commission voted unanimously to approve the request for transferring the shares.

The final item on the agenda was approval of Hoosier Park’s standardbred racing officials for the upcoming meet.  This item was presented by Joe Gorajec, Executive Director of the Indiana Horse Racing Commission.  Gorajec noted no new individuals were involved from previous years, making the process more routine.  The commission voted unanimously to approve the officials for the meet.

With no further Old Business pending, and no New Business to consider, the meeting was adjourned.

The next meeting date was set for Friday, March 16, 2007.