Slot Distribution

Background

In Indiana's 2013 legislative session significant changes were made to the Gambling Games at the Racetrack Act (slot legislation). Generally, the prior versions of the slot legislation allocated 15% of the revenues from the slot machines at the two Indiana race tracks to horse racing interests. Prior versions of the slot legislation also included statutory caps on those revenues to horse racing, after a cost-of-living increase, with any revenues above the caps going directly toward Indiana's general fund instead of horse racing. Many legislators considered the revenues to horse racing as state-mandated funds which could be redirected elsewhere within Indiana's budget to meet shortfalls or for other projects and programs. Therefore, there were many attempts over the years to reduce funding to horse racing.

In 2013, the slot legislation was modified to establish a protocol whereby the race tracks and the authorized horsemen's associations could negotiate the revenue to horse racing interests (i.e. purses, breed development funds, backside benevolence, equine welfare and promotion, and horsemen's association's administrative expenses). Any negotiated agreement was required to have at least 10% but not more than 12% of the slot revenues toward those horse racing interests. The expectation was that a negotiated agreement would be less likely to be considered state-mandated funds which in turn would eliminate the constant targeting of these funds for other purposes or programs.

Slot Distribution For 2014

The changes in the slot legislation allowed for an Initial Distribution Agreement (IDA) to be negotiated between the two race tracks (Centaur) and the three horsemen's associations that held contracts with the tracks; Indiana Standardbred Association (ISA), the Indiana Horsemen's Benevolence and Protective Association (INHBPA), and the Quarter Horse Racing Association of Indiana (QHRAI). As a result of those negotiations, the IDA set the slot revenue distribution percentage at the maximum of 12% with a term of one year (2014) with a condition that the agreement would automatically renew each year unless cancelled in writing by one of the parties. (While the prior versions of the slot legislation allowed for 15% of the slot revenues to horse racing interests, the statutory caps kept those revenues to horse racing at approximately 12%. So, a negotiated amount at 12% does not have significant impact on the slot revenues available to horse racing considering that the statutory caps have been eliminated.)

In agreeing to a long-term contract, the IDA also provides for immediate investments and capital improvement at the tracks, many of which have already been completed with others being completed no later than the start of the 2015 race meets. In addition, if certain conditions of the IDA were met, the agreement would extend for an additional seven year term that would also trigger additional capital expenditures of up to $31.5 million to improve the race tracks as well as trigger additional operational obligations that would be for the benefit of racing.

To see the capital expenditures and the timing of those capital expenditures, click here:
http://freepdfhosting.com/1e3f7322dc.pdf

To see the operational obligations that would be for the benefit of horse racing, click here:
http://freepdfhosting.com/59f1ddf1d3.pdf

The condition in the IDA that was designed to extend the maximum 12% revenue for another seven years and trigger the $31.5 million of capital expenditures was somewhat controversial. That controversial provision required the ISA, INHBPA, and QHRAI to agree to subordinate all of the horse racing revenues ($56 million) in favor of the debt holders (lenders) of Centaur which could be used as a condition of their attempts to refinance their debt. Refinancing to a lower interest rate on their debt would allow for freeing up cash flow for the promised capital expenditures. Refinancing with subordination of the horse racing revenues could be used as a tool for further lowering Centaur's interest rate(s) on any new loans. The risk to the horse racing revenues can be summed up with the definition of 'subordinate:'

sub·or·din·ate
1) of lesser rank: lower than somebody in rank or status
2) of less importance: secondary in importance
3) modifying: acting as a modifying noun, adjective, or adverb within a sentence
Synonyms: secondary, lesser, minor, subsidiary, inferior, lower, outranked, subservient

In other words, subordinated slot revenues would be able to be redirected to pay Centaur's debt holders (lenders) should a default occur which, in turn, could leave no revenues flowing to horse racing. Effectively, a subordination agreement, upon a triggering event, would allow Centaur to use the millions from the 12% as their cash flow to repay their debt holders, not horse racing. Given this potential risk of loss of all revenues to horse racing, both then Chairman Bill Diener and then Vice-Chairman Steve Schaefer voted against the IDA. With only four commissioner at the time (October, 2013), the vote was deadlocked. At a rehearing of the IDA in December, 2013, with five commissioners, the IDA was approved 4 -0 with Chairman Diener abstaining based upon his belief that the subordination was too much of a risk to horse racing in Indiana.

With the IDA approved for 2014, horse racing interests are currently receiving the 12% maximum revenue flow from the slots as required in the IDA. Also, many of the first and second year capital projects have been completed and/or started.

Slot Distribution For 2015

In 2014, Centaur was able to refinance their existing first lien debt with the approval of the Indiana Horse Racing Commission. According to Centaur, their annual interest savings is approximately $8 million due to the refinancing. As a part of the refinancing, Centaur DID NOT utilize their option to subordinate the 12% revenue to horse racing in favor of their new lenders. In other words, Centaur was able to satisfactorily refinance without designating those funds as potential collateral for the new loans. So, the ISA, INHBPA, and the QHRAI were not asked to sign an agreement to subordinate horse racing's allocation from slot revenues in favor of Centaur's new lenders in the event of a default.

Considering that the deadline has passed for a party to submit their request to renegotiate the distribution agreement moving forward, the current agreement stands at the maximum of 12% of the slot revenues for 2015.

Relevant Indiana Law Regarding Slot Revenues and a Negotiated Distribution Agreement

IC 4-35-7-16
Negotiation of distribution agreement

Sec. 16. (a) The amount of slot machine revenue that must be distributed under section 12(b)(2) of this chapter must be determined
in a distribution agreement entered into by negotiation committees representing all licensees and the horsemen's associations having contracts with licensees that have been approved by the Indiana horse racing commission.
(b) Each horsemen's association shall appoint a representative to a negotiation committee to negotiate the distribution agreement
required by subsection (a). If there are an even number of horsemen's associations appointing representatives to the committee, the
members appointed by each horsemen's association shall jointly appoint an at-large member of the negotiation committee to represent
the interests of all of the horsemen's associations. The at-large member is entitled to the same rights and privileges of the members
appointed by the horsemen's associations.
(c) Each licensee shall appoint a representative to a negotiation committee to negotiate the distribution agreement required by
subsection (a). If there are an even number of licensees, the members appointed by each licensee shall jointly appoint an at-large member of the negotiation committee to represent the interests of all of the licensees. The at-large member is entitled to the same rights and privileges of the members appointed by the licensees.
(d) If a majority of the members of each negotiation committee are present, the negotiation committees may negotiate and enter into
a distribution agreement binding all horsemen's associations and all licensees as required by subsection (a).
(e) The initial distribution agreement entered into by the negotiation committees:
--(1) must be in writing;
--(2) must be submitted to the Indiana horse racing commission before October 1, 2013;
--(3) must be approved by the Indiana horse racing commission before January 1, 2014; and
--(4) may contain any terms determined to be necessary and appropriate by the negotiation committees, subject to subsection(f) and section 12 of this chapter.
(f) A distribution agreement must provide that at least ten percent (10%) and not more than twelve percent (12%) of a licensee's
adjusted gross receipts must be distributed under section 12(b)(2) of this chapter. A distribution agreement applies to adjusted gross receipts received by the licensee after December 31 of the calendar year in which the distribution agreement is approved by the Indiana horse racing commission.
(g) A distribution agreement may expire on December 31 of a particular calendar year if a subsequent distribution agreement will
take effect on January 1 of the following calendar year. A subsequent distribution agreement:
--(1) is subject to the approval of the Indiana horse racing commission; and
--(2) must be submitted to the Indiana horse racing commission before October 1 of the calendar year preceding the calendar year in which the distribution agreement will take effect.
(h) The Indiana horse racing commission shall annually report to the budget committee on the effect of each distribution agreement on the Indiana horse racing industry before January 1 of the following calendar year.
As added by P.L.210-2013, SEC.15.

IC 4-35-7-17
Approval of distribution agreement; commission determined distribution amount in absence of a distribution agreement

Sec. 17. (a) Subject to subsection (b), if:
--(1) a distribution agreement is not submitted to the Indiana horse racing commission before the deadlines imposed by section 16 of this chapter; or
--(2) the Indiana horse racing commission is unable to approve a distribution agreement; the Indiana horse racing commission shall determine the percentage of a licensee's adjusted gross receipts that must be distributed under section 12(b)(2) of this chapter.
(b) The Indiana horse racing commission shall give the negotiation committees an opportunity to correct any deficiencies in a proposed distribution agreement before making a determination of the applicable percentage under subsection (a).
(c) The Indiana horse racing commission shall consider the factors used to evaluate a distribution agreement under section 18 of this
chapter when making a determination under subsection (a).
As added by P.L.210-2013, SEC.16.

IC 4-35-7-18
Criteria for evaluating distribution agreement or for establishing a distribution amount

Sec. 18. The Indiana horse racing commission shall evaluate any proposed distribution agreement submitted under section 16 of this
chapter using the following criteria:
(1) The best interests of pari-mutuel horse racing in Indiana.
(2) Maintenance of the highest standards and greatest level of integrity.
(3) Fairness to all parties.
(4) The financial stability of licensees.
(5) Any other factor considered relevant by the Indiana horse racing commission.
As added by P.L.210-2013, SEC.17.

IC 4-35-7-12
Mandatory support for the horse racing industry; allocation among breeds; regulatory oversight

Sec. 12. (a) The Indiana horse racing commission shall enforce the requirements of this section.
(b) A licensee shall before the fifteenth day of each month distribute the following amounts for the support of the Indiana horse
racing industry:
--(1) An amount equal to fifteen percent (15%) of the adjusted gross receipts of the slot machine wagering from the previous month at each casino operated by the licensee with respect to adjusted gross receipts received after June 30, 2013, and before January 1, 2014.
--(2) The percentage of the adjusted gross receipts of the slot machine wagering from the previous month at each casino operated by the licensee that is determined under section 16 or 17 of this chapter with respect to adjusted gross receipts received after December 31, 2013.
(c) The Indiana horse racing commission may not use any of the money distributed under this section for any administrative purpose
or other purpose of the Indiana horse racing commission.
(d) A licensee shall distribute the money devoted to horse racing purses and to horsemen's associations under this subsection as
follows:
--(1) Five-tenths percent (0.5%) shall be transferred to horsemen's associations for equine promotion or welfare according to the
ratios specified in subsection (g).
--(2) Two and five-tenths percent (2.5%) shall be transferred to horsemen's associations for backside benevolence according to the ratios specified in subsection (g).
--(3) Ninety-seven percent (97%) shall be distributed to promote horses and horse racing as provided in subsection (f).
(e) A horsemen's association shall expend the amounts distributed to the horsemen's association under subsection (d)(1) through (d)(2) for a purpose promoting the equine industry or equine welfare or for a benevolent purpose that the horsemen's association determines is in the best interests of horse racing in Indiana for the breed represented by the horsemen's association. Expenditures under this subsection are subject to the regulatory requirements of subsection (h).
(f) A licensee shall distribute the amounts described in subsection (d)(3) as follows:
--(1) Forty-six percent (46%) for thoroughbred purposes as follows:
----(A) Sixty percent (60%) for the following purposes:
------(i) Ninety-seven percent (97%) for thoroughbred purses.
------(ii) Two and four-tenths percent (2.4%) to the horsemen's association representing thoroughbred owners and trainers.
------(iii) Six-tenths percent (0.6%) to the horsemen's association representing thoroughbred owners and breeders.
----(B) Forty percent (40%) to the breed development fund established for thoroughbreds under IC 4-31-11-10.
--(2) Forty-six percent (46%) for standardbred purposes as follows:
----(A) Three hundred seventy-five thousand dollars ($375,000) to the state fair commission to be used by the state fair commission to support standardbred racing and facilities at the state fairgrounds.
----(B) One hundred twenty-five thousand dollars ($125,000) to the state fair commission to be used by the state fair commission to make grants to county fairs to support standardbred racing and facilities at county fair tracks. The state fair commission shall establish a review committee to include the standardbred association board, the Indiana horse racing commission, and the Indiana county fair association to make recommendations to the state fair commission on grants under this clause.
----(C) Fifty percent (50%) of the amount remaining after the distributions under clauses (A) and (B) for the following purposes:
------(i) Ninety-six and five-tenths percent (96.5%) for standardbred purses.
------(ii) Three and five-tenths percent (3.5%) to the horsemen's association representing standardbred owners and trainers.
----(D) Fifty percent (50%) of the amount remaining after the distributions under clauses (A) and (B) to the breed development fund established for standardbreds under IC 4-31-11-10.
--(3) Eight percent (8%) for quarter horse purposes as follows:
----(A) Seventy percent (70%) for the following purposes:
------(i) Ninety-five percent (95%) for quarter horse purses.
------(ii) Five percent (5%) to the horsemen's association representing quarter horse owners and trainers.
----(B) Thirty percent (30%) to the breed development fund established for quarter horses under IC 4-31-11-10.
Expenditures under this subsection are subject to the regulatory requirements of subsection (h).
(g) Money distributed under subsection (d)(1) and (d)(2) shall be allocated as follows:
--(1) Forty-six percent (46%) to the horsemen's association representing thoroughbred owners and trainers.
--(2) Forty-six percent (46%) to the horsemen's association representing standardbred owners and trainers.
--(3) Eight percent (8%) to the horsemen's association representing quarter horse owners and trainers.
(h) Money distributed under this section may not be expended unless the expenditure is for a purpose authorized in this section and
is either for a purpose promoting the equine industry or equine welfare or is for a benevolent purpose that is in the best interests of horse racing in Indiana or the necessary expenditures for the operations of the horsemen's association required to implement and
fulfill the purposes of this section. The Indiana horse racing commission may review any expenditure of money distributed under this section to ensure that the requirements of this section are satisfied. The Indiana horse racing commission shall adopt rules
concerning the review and oversight of money distributed under this section and shall adopt rules concerning the enforcement of this
section. The following apply to a horsemen's association receiving a distribution of money under this section:
--(1) The horsemen's association must annually file a report with the Indiana horse racing commission concerning the use of the money by the horsemen's association. The report must include information as required by the commission.
--(2) The horsemen's association must register with the Indiana horse racing commission.
The state board of accounts shall annually audit the accounts, books, and records of the Indiana horse racing commission, each horsemen's association, a licensee, and any association for backside benevolence containing any information relating to the distribution of money under this section.
(i) The commission shall provide the Indiana horse racing commission with the information necessary to enforce this section.
(j) The Indiana horse racing commission shall investigate any complaint that a licensee has failed to comply with the horse racing
purse requirements set forth in this section. If, after notice and a hearing, the Indiana horse racing commission finds that a licensee has failed to comply with the purse requirements set forth in this section, the Indiana horse racing commission may:
--(1) issue a warning to the licensee;
--(2) impose a civil penalty that may not exceed one million dollars ($1,000,000); or
--(3) suspend a meeting permit issued under IC 4-31-5 to conduct a pari-mutuel wagering horse racing meeting in Indiana.
(k) A civil penalty collected under this section must be deposited in the state general fund.
As added by P.L.233-2007, SEC.21. Amended by P.L.146-2008, SEC.21; P.L.142-2009, SEC.25; P.L.229-2011, SEC.60; P.L.210-2013, SEC.13.

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