EXHIBIT 10.3


THIS NOTE HAS NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”). THIS NOTE MAY NOT BE
SOLD, OFFERED FOR SALE, TRANSFERRED, ASSIGNED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT. THIS NOTE IS SUBJECT TO
CERTAIN TRANSFER RESTRICTIONS SET FORTH IN SECTION 12 OF THIS NOTE. 




CHURCHILL DOWNS INCORPORATED

CONVERTIBLE PROMISSORY NOTE





		
	$16,669,379.87	Louisville, Kentucky

October 19, 2004
		
		





          Churchill
Downs Incorporated, a Kentucky corporation (the “Company”), the principal office
of which is located at 700 Central Avenue, Louisville, Kentucky 40208, for value received,
hereby promises to pay to the order of Brad M. Kelley, an individual, whose principal
residence is located at 100 Gulf Blvd., Boca Grande, Florida 33921 (“Holder”),
the sum of Sixteen Million Six Hundred Sixty-Nine Thousand Three Hundred Seventy-Nine
Dollars and 87/100 ($16,669,379.87), or such lesser amount as shall then equal the
outstanding principal balance hereof and any unpaid accrued interest hereon, as set forth
below, on the date which is ten (10) years from the date hereof (the “Maturity
Date”). The Company shall have no right to prepay or transfer this note prior to the
Maturity Date without the consent of the Holder. The Company shall, on the Maturity Date,
pay the principal balance hereof and any unpaid accrued interest hereon in any combination
of cash and shares of the Company’s common stock (with shares of the Company’s
common stock to be valued for such purposes at the Conversion Price). 



          Payment
for all amounts due hereunder shall be made by mail to the Holder c/o Holder’s
attorney, Greg Betterton, Esq., 981 Ridgewood Avenue, #101, Venice, Florida 34285. This
Note is issued pursuant to that certain Stock Redemption Agreement dated as of the date
hereof by and among the Company and the Holder, as the same may from time to time be
amended, modified or supplemented (the “Redemption Agreement”). 



          The
following is a statement of the rights of the Holder and the conditions to which this Note
is subject, and to which the Holder, by the acceptance of this Note, agrees: 



               1.    
          Definitions. Unless specifically defined herein, capitalized terms shall have
          the meaning given them in the Redemption Agreement. As used herein, the
          following terms, unless the context otherwise requires, have the following
          meanings: 



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                    (i)    
          The “Company” includes any entity which shall succeed to or assume the
          obligations of the Company under this Note. 



                    (ii)    
          “Holder,” when the context refers to a holder of this Note, shall mean
          any person who shall at the time be the registered holder of this Note. 



                    (iii)    
          “Conversion Price” means $36.83. 



               2.    
          Interest. The Company shall pay interest on the principal amount of the Note on
          an annual basis if, and only if, the Company declares and pays a cash dividend
          on its common stock for such year. Within ten (10) business days of paying any
          cash dividend on its common stock, the Company will pay to the Holder as
          interest an amount equal to what Holder would have received as a dividend on the
          shares of the Company’s common stock redeemed pursuant to the Redemption
          Agreement. All payments made on this Note shall be applied, at the option of the
          Holder, first to collection costs, if any, then to accrued interest and then to
          principal. After maturity or in the event of default, interest shall continue to
          accrue on the Note at the rate set forth above. Notwithstanding anything in this
          Note to the contrary, the interest rate charged hereon shall not exceed the
          maximum rate allowable by applicable law. If any stated interest rate herein
          exceeds the maximum allowable rate, then the interest rate shall be reduced to
          the maximum allowable rate, and any excess payment of interest made by the
          Company at any time shall be applied to the unpaid balance of any outstanding
          principal of this Note. 



               3.    
          Events of Default. If any of the events specified in this Section 3 shall occur
          (herein individually referred to as an “Event of Default”), the Holder
          of the Note may, so long as such condition exists, declare the entire
          outstanding principal of this Note and unpaid accrued interest thereon
          immediately due and payable, by notice in writing to the Company: 



                    (i)    
          Default in the payment of the principal and unpaid accrued interest of this Note
          within fifteen (15) days of when due and payable; or 



                    (ii)    
          The institution by the Company of proceedings to be adjudicated as bankrupt or
          insolvent, or the consent by it to institution of bankruptcy or insolvency
          proceedings against it, or the filing by it of a petition or answer to consent
          seeking reorganization or release under the federal Bankruptcy Act, or any other
          applicable federal or state law, or the consent by it to the filing of any such
          petition or the appointment of a receiver, liquidator, assignee, trustee or
          other similar official of the Company, or of any substantial part of its
          property, or the making by it of an assignment for the benefit of creditors, or
          the taking of corporate action by the Company in furtherance of any such action;
          or 



                    (iii)    
          If, within sixty (60) days after the commencement of an action against the
          Company (and service of process in connection therewith on the Company) seeking
          any bankruptcy, insolvency, reorganization, liquidation, dissolution or similar
          relief under any present or future statute, law or regulation, such action shall
          not have been resolved in favor of the Company or all 



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 orders or proceedings
          thereunder affecting the operations or the business of the Company stayed, or if
          the stay of any such order or proceeding shall thereafter be set aside, or if,
          within sixty (60) days after the appointment without the consent or acquiescence
          of the Company of any trustee, receiver or liquidator of the Company or of all
          or any substantial part of the properties of the Company, such appointment shall
          not have been vacated. 



                    (iv)    
          Failure of Company to convert in accordance with the procedure set forth herein,
          in which case this Note shall accrue interest at the maximum allowable rate
          until the date of conversion. 



               4.    
          Conversion. 



                    (i)    
          Optional Conversion. Upon delivery of the Conversion Notice attached hereto to
          the Company, the Holder has the right, at the Holder’s option, at any time
          prior to payment in full of the principal balance of and accrued interest on
          this Note, to convert this Note, in accordance with the provisions of this
          Section 4, in whole or in part (if in part, in principal amounts of no less than
          $100,000, and in $100,000 increments), into shares of the Company’s common
          stock, which are fully paid, nonassessable, fully registered and immediately
          transferable, subject only to compliance with all applicable securities laws and
          regulations. This Note, or any portion thereof, will be convertible into that
          number of fully paid and nonassessable shares of the Company’s common stock
          equal to (i) the principal amount of the Note being converted, together with all
          accrued but unpaid interest thereon, divided by (ii) the Conversion Price.
          Provided, however, Holder will only be able to convert the Note, or any portion
          thereof, into shares of the Company’s common stock if Holder’s total
          beneficial ownership of the Company’s common stock immediately after such
          conversion would be less than 4.9% of the Company’s then total number of
          issued and outstanding shares of common stock (nothing herein shall prevent
          Holder from entering into an agreement to sell all or a portion of the shares
          into which this Note would convert as long as the closing on any such sale
          occurs simultaneously with the conversion of the Note so that Holder’s
          percentage ownership of Company’s common stock never surpasses 4.9%).
          Notwithstanding the immediately preceding sentence, if Holder’s
          post-conversion beneficial ownership of the Company’s common stock would be
          five percent (5.0%) or greater, Holder may convert the Note, or any portion
          thereof, if (and only if) Holder has fully disclosed any and all information,
          has executed any documents, and has taken all other steps, required by any
          applicable gaming agency or regulatory authority for holders of 5.0% or more of
          the Company’s common stock (the “Disclosure Requirements”), and
          agrees to make all such information available in the future and to comply with
          any request of the Company or any applicable gaming agency or regulatory
          authority or otherwise fully complies with (on a timely basis) the requirements
          of such applicable gaming agency or regulatory authority. 



                    (ii)    
          Conversion Procedure. Before the Holder shall be entitled to convert this Note
          into shares of the Company’s common stock, Holder shall deliver the
          Conversion Notice attached hereto to Company not less than seventy-five (75)
          days prior to the date Holder desires to convert this Note. Such Conversion
          Notice shall be delivered by mail, postage prepaid, to the Company at its
          principal corporate office, and shall contain a statement of the election of
          Holder to 




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convert the Note, or a portion of the Note as well as the date the
          Holder desires such conversion to be effective. Such conversion shall be deemed
          to have been made immediately prior to the close of business on the later of (a)
          the date specified in such notice (which date shall be not less than seventy
          five (75) days from the date Company receives such notice) or (b) the date of
          surrender of this Note or (c) the date Holder has demonstrated compliance with
          the Disclosure Requirements, and the person or persons entitled to receive the
          shares issuable upon such conversion shall be treated for all purposes as the
          record holder or holders of such shares as of such date. 



          As
promptly as practicable after the conversion of this Note, the Company at its expense will
issue and deliver to the Holder of this Note a certificate or certificates for the number
of full shares of the Company’s registered common stock issuable upon such
conversion. 



          If
Holder has complied with the provisions of this Note as it relates to conversion of this
Note and, despite such compliance by Holder, it is apparent to Company that Holder will be
unable to convert this Note into fully registered and immediately transferable shares of
the Company’s common stock on the date Holder has specified in the Transfer Notice
(“Holder’s Desired Transfer Date”) because of Company’s actions,
inactions or efforts to comply with applicable securities laws, then Company shall have
the option of allowing Holder to convert this Note (or a portion hereof) so that Company
can immediately purchase and redeem the shares issued by Company to Holder upon conversion
of this Note (or a portion hereof) at a per share price equal to the per share closing
price on the Nasdaq national market (“Closing Price”) on the day of conversion
(the “Redemption Option”). Upon exercising the Redemption Option, the principal
amount of the Note will be reduced accordingly. If Company does not elect to exercise the
Redemption Option, Company will hold Holder harmless from any drop in the Closing Price
between the Holder’s Desired Transfer Date and the date Holder is able to convert
this Note into fully registered and immediately transferable shares of the Company’s
common stock (the “Interim Period”). Similarly, if during the Interim Period,
the Closing Price increases, Holder will pay the amount of the increase to Company. 



                    (iii)    
          Mechanics and Effect of Conversion. No fractional shares shall be issued upon
          conversion of this Note. In lieu of the Company issuing any fractional shares to
          the Holder upon the conversion of this Note, the Company shall pay to the Holder
          the amount of outstanding principal and interest that is not so converted. Upon
          conversion of the entire outstanding principal amount of and all accrued
          interest on this Note, the Company shall be forever released from all its
          obligations and liabilities under this Note. 



               5.    
          Conversion Price Adjustments. 



                    (i)    
          Adjustments for Splits and Subdivisions. In the event the Company should at any
          time or from time to time after the date of issuance hereof fix a record date
          for the effectuation of a split or subdivision of the outstanding capital stock
          of the Company or the determination of holders of capital stock entitled to
          receive a dividend or other distribution payable in additional shares of capital
          stock or other securities or rights convertible into, or entitling the holder
          thereof to receive directly or indirectly, additional shares of capital stock
          (hereinafter referred to as “Share




4








 Equivalents”) without payment of
          any consideration by such holder for the additional capital stock or the Share
          Equivalents (including the additional shares of capital stock issuable upon
          conversion or exercise thereof), then, as of such record date (or the date of
          such dividend distributions, split or subdivision if no record date is fixed),
          the Conversion Price of this Note shall be appropriately decreased so that the
          number of shares issuable upon conversion of this Note shall be increased in
          proportion to such increase of outstanding shares of capital stock. 



                    (ii)    
          Adjustments for Reverse Splits. If the number of shares of Company’s
          capital stock outstanding at any time after the date hereof is decreased by a
          combination of the outstanding shares of Company’s capital stock, then,
          following the record date of such combination, the Conversion Price for this
          Note shall be appropriately increased so that the number of shares issuable on
          conversion hereof shall be decreased in proportion to such decrease in
          outstanding shares. 



               6.    
          Notices of Record Date, etc. In the event of: 



                    (i)    
          Any taking by the Company of a record of the holders of any class of securities
          of the Company for the purpose of determining the holders thereof who are
          entitled to receive any distribution (other than a distribution payable only in
          cash) or other distribution, or any right to subscribe for, purchase or
          otherwise acquire any shares of stock of any class or any other securities or
          property, or to receive any other right; or 



                    (ii)    
          Any capital reorganization of the Company, any reclassification or
          recapitalization of the capital stock of the Company or any transfer outside of
          the regular course of business of all or substantially all of the assets of the
          Company to any other person (other than a subsidiary of the Company) or any
          consolidation or merger involving the Company (other than a merger with a
          subsidiary of the Company) ; or 



                    (iii)    
          Any voluntary or involuntary dissolution, liquidation or winding-up of the
          Company, 



the Company will mail to the holder
of this Note at least ten (10) days prior to the earliest date specified therein, a notice
specifying: (a) the date on which any such record is to be taken for the purpose of such
distribution or right, and the amount and character of such distribution or right; and (b)
the date on which any such reorganization, reclassification, transfer, consolidation,
merger, dissolution, liquidation or winding-up is expected to become effective and the
record date (if any) for determining shareholders entitled to vote thereon. In the event
Company delivers the notice described in this Section 6, Holder may demand immediate
conversion of this Note without regard to the notice provisions and time periods set forth
in Section 4 (ii); provided that Holder must still comply with the Disclosure Requirements
if Holder’s post-conversion beneficial ownership of the Company’s common stock
will equal or exceed 5.0%. 



               7.    
          Reservation of Shares Issuable Upon Conversion. The Company covenants that it
          shall reserve from its authorized and unissued shares of common stock, a
          sufficient number of shares 




5








to effect the conversion of the
entire outstanding
          principal amount of this Note. The Company further covenants that all shares
          that may be issued upon the exercise of rights represented by this Note will,
          when issued in accordance with the terms hereof, be fully paid, nonassessable,
          fully registered and immediately transferable (subject only to compliance with
          all applicable securities laws and regulations), free of preemptive rights and
          free from all taxes, liens and charges in respect of the issue thereof (other
          than taxes in respect of any transfer occurring contemporaneously or otherwise
          specified herein). The Company agrees that its issuance of this Note shall
          constitute full authority to its officers who are charged with the duty of
          executing stock certificates to execute and issue the necessary certificates for
          shares upon the conversion of this Note. 



               8.    
          Prepayment. The Company shall have no right to prepay this Note without the
          consent of Holder, who may grant or deny such consent in its sole discretion. 



               9.    
          Note is Subordinate to Company’s Credit Facilities and other Senior Long
          Term Debt. Holder acknowledges that Company has existing credit facilities with
          commercial lenders and other senior long term debt with institutional investors
          and that, prior to the Maturity Date, Company may enter into amendments thereto
          or into new credit facilities with commercial lenders or into new other senior
          long term debt with institutional investors (collectively, the “Credit
          Facilities and Other Senior Long Term Debt”). Notwithstanding any contrary
          statement contained in this Note, any and all payments arising on account of any
          obligation arising from or in connection with this Note (whether of principal,
          interest or otherwise) shall be, at all times, subordinate to the payment of
          amounts of any kind or nature, present or future, which are owed by Company
          pursuant to or arising from the Credit Facilities and Other Senior Long Term
          Debt. By signing below, Holder hereby irrevocably subordinates and postpones the
          payment and the time of payment of all payments arising on account of any
          obligation arising from or in connection with this Note and all claims and
          demands arising therefrom to the Credit Facilities and Other Senior Long Term
          Debt and directs that the Credit Facilities and Other Senior Long Term Debt be
          paid in full before any amounts be paid pursuant to this Note, provided such
          subordination shall not restrict Holder’s right to convert. 



               10.    
          Assignment. Subject to the restrictions on transfer described in Section 12
          below, the rights and obligations of the Company and the Holder of this Note
          shall be binding upon and benefit the successors, assigns, heirs, administrators
          and transferees of the parties. 



              11.    
          Waiver and Amendment. Any provision of this Note may be amended, waived or
          modified only upon the written consent of both the Company and the Holder. 



               12.    
          Transfer of this Note; Compliance with Securities Laws. The Holder of this Note,
          by acceptance hereof, acknowledges that this Note and the shares to be issued
          upon conversion hereof are being acquired solely for the Holder’s own
          account and not as a nominee for any other party, and for investment. This Note
          is not transferable without the express written consent of Company. Further, if
          Company consents to any transfer proposed by Holder, such transfer must be in
          compliance with all applicable securities laws and regulations as determined in
          the sole discretion of Company’s legal counsel. 





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               13.    
          Notices. Any notice, request or other communication required or permitted
          hereunder shall be in writing and shall be deemed to have been duly given when
          (i) delivered by hand (with written confirmation of receipt), or (ii) when
          received by the addressee, if sent by a nationally recognized overnight delivery
          service (receipt requested), in each case to the appropriate addresses set forth
          herein. Any party hereto may by notice so given change its address for future
          notice hereunder. 



               14.    
          No Shareholder Rights. Nothing contained in this Note shall be construed as
          conferring upon the Holder or any other person the right to vote or to consent
          to or receive notice as a shareholder in respect of meetings of shareholders for
          the election of directors of the Company or any other matters or any rights
          whatsoever as a shareholder of the Company. 



               15.    
          Waivers. The Company hereby waives presentment, demand, protest and notice of
          dishonor and protest, and also waives all other exemptions; and agrees that
          extension or extensions of the time of payment of this Note or any installment
          or part thereof may be made before, at or after maturity by agreement by the
          Holder. Upon default hereunder the Holder shall have the right to convert this
          Note without regard to the notice provisions and time periods set forth in
          Section 4 (ii); provided that Holder must still comply with the Disclosure
          Requirements if Holder’s post-conversion ownership of the Company’s
          common stock will equal or exceed 5.0%. The Company shall pay to the Holder,
          upon demand, all costs and expenses, including, without limitation,
          attorneys’ fees and legal expenses, that may be incurred by the Holder in
          connection with the enforcement of this Note, including expenses, if any,
          incurred by Holder related to the registration of shares on conversion. 



              16.    
          Governing Law. This Agreement shall be governed by and construed in accordance
          with the laws of the Commonwealth of Kentucky, excluding that body of law
          relating to conflict of laws. 



               17.    
          Heading; References. All headings used herein are used for convenience only and
          shall not be sued to construe or interpret this Note. Except where otherwise
          indicated, all references herein to Sections refer to Sections hereof. 


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          IN
WITNESS WHEREOF, the Company has caused this Convertible Promissory Note to be issued as
of this the 19th day of October, 2004. 



		
	 	“Company”


        CHURCHILL DOWNS INCORPORATED




	 	By: /S/ Michael W. Anderson                                  


Its: VP Finance & Treasurer                                      
		






		
	 	“Holder”




	 	 
		 /s/ Brad M. Kelley                                                       

Brad M. Kelley





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NOTICE OF CONVERSION 




(To Be Signed Only Upon
Conversion of Note) 




TO CHURCHILL DOWNS
INCORPORATED 



	  	
The
Note attached to this Notice of Conversion is in the principal amount of $__________ and
is dated September _____, 2004. The undersigned, the Holder of the attached Note, hereby
surrenders such Note for conversion into shares of the common stock of Churchill Downs
Incorporated, to the extent of $_________ unpaid principal amount and accrued interest of
such Note, and requests that the certificates for such shares be issued in the name of,
and delivered to, Brad M. Kelley, whose address is ___________________________. The
undersigned requests that the conversion be effective as of _________ ____, 20__ (which
date must be no less than the date which is sixty (60) days after the date this Notice of
Conversion is delivered to Churchill Downs Incorporated, except as provided in Section 6
of the Note) and further acknowledges that such effective date is subject to the terms of
the Note. 






		
	 	Dated:                                              
		






		
	 	                                                                                    

(Signature must conform in all respect to name
of Holder as specified on the face of the Note)
	 	 
	 	                                                                                     

Address