Notice of Annual Meeting of Shareholders
2015 Proxy Statement
2014 Annual Report on Form 10-K
Dear Shareholder:
The value of your common stock investment in Churchill Downs
Incorporated (NASDAQ: CHDN) increased 6% in 2014 following
a 35% increase in 2013, a 27% increase in 2012, a 20% increase
in 2011, and a 16% increase in 2010 (all on a Dec. 31 to Dec. 31
basis). In addition, we were able to again increase the Company’s
annual dividend in 2014 from $0.87 to $1.00 per share, double
what it was in 2010 ($0.50).
Your Company achieved record revenues of $813 million in
2014 and record Adjusted EBITDA of $202 million, 4% and
15% increases, respectively, over 2013. Additional information
regarding the Company’s financial performance can be found in
the Form 10-K section of this annual report.
In February, we announced a ten-year extension (through 2025) of
our Kentucky Oaks and Kentucky Derby media rights agreement
with NBC. And, in September we announced a five-year extension
(through 2020) of our Kentucky Derby presenting sponsorship
deal with Yum! Brands.
In May we opened Churchill Downs Racetrack’s new Grandstand
Terrace which added 2,400 new premium seats; and lit up our
new “Big Board”, the largest (15,224 square foot) 4K-resolution
video board in the world.
Also in May we announced a deal with The Stronach Group under
which they will operate racing at Calder Race Course through
the end of 2020. We continue to own the assets and operate the
Calder Casino. This deal ended the dispute over race days and
puts thoroughbred racing in south Florida on a better footing.
In July we completed a $61.6 million transaction to repurchase
691,000 shares of our common stock at $89.15 per share
representing about 4% of outstanding shares.
In August we undertook an important change in the Company’s
leadership as Bill Carstanjen, formerly our President and Chief
Operating Officer, was appointed the 140-year-old Company’s
12th Chief Executive Officer replacing Bob Evans who will
continue as Chairman of the Board of Directors. At the same
time, Bill Mudd, our Chief Financial Officer, was also appointed
President while maintaining his Chief Financial Officer role.
Finally, in November, we announced the biggest transaction in
your Company’s history, the acquisition of Seattle’s Big Fish Games
for $485 million upfront plus up to $350 million in an earnout
payable in 2016 based on Big Fish’s 2015 performance. We are
excited about Big Fish’s growth prospects and the outstanding
new capabilities we now have with the addition of the nearly
600-person Big Fish team. This transaction closed on Dec. 16,
which resulted in two weeks of Big Fish’s financial results, $14
million in revenue and $4 million in Adjusted EBITDA, being
included in our 2014 financial results.
Chairman and CEO’s Message
Your Board of Directors and the management team thank you for
your investment in Churchill Downs Incorporated and for your
support and trust in our leadership.
“
Your Company achieved record
revenues of $813 million in 2014
and record Adjusted EBITDA of
$202 million...thank you for your
investment in Churchill Downs
Incorporated and for your support
and trust in our leadership.
”
Robert L. Evans
Chairman of the Board
William C. Carstanjen
Chief Executive Officer
CHURCHILL DOWNS INCORPORATED
600 N. HURSTBOURNE PARKWAY, STE. 400
LOUISVILLE, KENTUCKY 40222
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON APRIL 23, 2015
To the Shareholders of
Churchill Downs Incorporated:
Notice is hereby given that the Annual Meeting of Shareholders (the “Annual Meeting”) of Churchill
Downs Incorporated (the “Company”), a Kentucky corporation, will be held at the Four Seasons Hotel Seattle,
located at 99 Union Street, Seattle, Washington 98101, on Thursday, April 23, 2015, at 9:00 a.m. Pacific
Daylight Saving Time, for the following purposes:
I.
II.
To elect the three (3) Class I Directors identified in this Proxy Statement for a term of three
(3) years, and one (1) Class III Director identified in this Proxy Statement for a term of two (2) years
(Proposal No. 1);
To ratify the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered
public accounting firm for fiscal year 2015 (Proposal No. 2);
IV. To conduct an advisory vote on executive compensation (Proposal No. 3); and
V.
To transact such other business as may properly come before the meeting or any adjournment
thereof, including matters incident to its conduct.
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The close of business on February 27, 2015, has been fixed as the record date for determining the
shareholders entitled to notice of, and to vote at, the Annual Meeting. Only shareholders of record at that time
will be entitled to notice of and to vote at the Annual Meeting and at any adjournments thereof.
Shareholders who do not expect to attend the meeting in person are urged to sign, date and promptly return
the Proxy that is enclosed herewith or vote by telephone or over the Internet.
By Order of the Board of Directors.
March 23, 2015
ALAN K. TSE
Executive Vice President,
General Counsel and Secretary
IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON APRIL 23, 2015
The Company’s Proxy Statement for the 2015 Annual Meeting of Shareholders and the Annual Report to
Shareholders for the fiscal year ended December 31, 2014 are available at
http://www.churchilldownsincorporated.com/proxy.
CHURCHILL DOWNS INCORPORATED
600 N. HURSTBOURNE PARKWAY, STE. 400
LOUISVILLE, KENTUCKY 40222
PROXY STATEMENT
Annual Meeting of Shareholders to be held on April 23, 2015
The enclosed Proxy is being solicited by the Board of Directors (the “Board of Directors” or “Board”) of
Churchill Downs Incorporated to be voted at the 2015 Annual Meeting of Shareholders to be held on Thursday,
April 23, 2015, at 9:00 a.m. Pacific Daylight Saving Time (the “Annual Meeting”), at the Four Seasons Hotel
Seattle,
located at 99 Union Street, Seattle, Washington 98101, and any adjournments thereof. This
solicitation is being made primarily by mail and at the expense of the Company. Certain officers and directors of
the Company and persons acting under their instruction may also solicit proxies on behalf of the Board of
Directors by means of telephone calls, personal interviews and mail at no additional expense to the Company.
The Proxy Card and this Proxy Statement are being sent to shareholders on or about March 23, 2015.
Voting Rights
Only holders of record of the Company’s Common Stock, no par value (“Common Stock”), on February 27,
2015, are entitled to notice of and to vote at the Annual Meeting. On that date, 17,633,393 shares of Common
Stock were outstanding and entitled to vote. Each shareholder has one vote per share on all matters coming
before the Annual Meeting. The shareholders of the Company do not have cumulative voting rights in the
election of directors. Abstentions and broker non-votes are not counted in determining the number of votes
required for the election of a director or passage of any matter submitted to the shareholders. Abstentions and
broker non-votes are counted for purposes of determining whether a quorum exists.
If the enclosed Proxy Card is properly executed and returned prior to the Annual Meeting, the shares
represented thereby will be voted as specified therein. If a shareholder does not specify otherwise, the shares
represented by the shareholder’s proxy will be voted: (i) for the election of the nominees listed below under
“Election of Directors”; (ii) for the ratification of the appointment of PricewaterhouseCoopers LLP as the
Company’s independent registered public accounting firm for fiscal year 2015; (iii) for the advisory approval of
the compensation of the Company’s named executive officers as disclosed in this Proxy Statement pursuant to
the compensation disclosure rules of the SEC; and (iv) in the discretion of the person or persons voting the
proxies, on such other business as may properly come before the Annual Meeting or any adjournments thereof.
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Voting Instructions and Information
The enclosed proxy is solicited on behalf of the Board of Directors of Churchill Downs Incorporated, a
Kentucky corporation (“Company,” “CDI,” or “CHDN”) for use at
the Company Annual Meeting of
Shareholders to be held on April 23, 2015, or at any adjournment thereof (“Annual Meeting” or “2015 Annual
Meeting of Shareholders”).
When and where is our Annual Meeting?
We will hold our Annual Meeting on Thursday, April 23, 2015 at 9:00 a.m., Pacific Daylight Saving Time,
at the Four Seasons Hotel Seattle, located at 99 Union Street, Seattle, Washington 98101.
How are we distributing our proxy materials?
We are using the rule of the United States Securities and Exchange Commission (the “SEC”) that allows
companies to furnish proxy materials to their shareholders using the “full set delivery” option; however, the
Company may elect to use the “notice only” option in the future. A company may use either option, “notice only”
or “full set delivery,” for all of its shareholders or may use one method for some shareholders and the other
method for others. Pursuant to the rules governing the “full set delivery” option, a company may provide proxy
materials in paper form and send them via standard United States mail or, if a shareholder has previously elected,
may provide the proxy materials in electronic form and send them via e-mail. In addition to delivering materials
to shareholders, the Company is obligated to post all proxy materials on a publicly available website and provide
information to shareholders about how to access that website.
Accordingly, each shareholder will receive the Company’s proxy materials by mail or, if previously
agreed to by a shareholder, by e-mail. These proxy materials include the Notice of Annual Meeting of
Shareholders, proxy statement, proxy card and Annual Report. These materials are also available at
http://www.churchilldownsincorporated.com/proxy.
Who can vote at the Annual Meeting?
You are entitled to vote or direct the voting of your shares of CHDN’s Common Stock, if you were a
shareholder of record or if you held CHDN Common Stock in “street name” at the close of business on Friday,
February 27, 2015 (the “Record Date”). On that date, 17,633,393 shares of CHDN Common Stock were
outstanding. Each share of CHDN Common Stock held by you on the Record Date is entitled to one vote.
How many votes must be present to hold the Annual Meeting?
We must have a “quorum” to conduct the Annual Meeting. A majority of the outstanding shares entitled to
vote, represented in person or by proxy, shall constitute a quorum. Once a share is represented for any purpose at
the Annual Meeting, it will be deemed present for quorum purposes for the remainder of the Annual Meeting and
for any adjournment of the Annual Meeting, unless a new record date must be set for the adjourned meeting.
What do I need to attend, and vote at, the Annual Meeting?
If you plan on attending the Annual Meeting, please remember to bring photo identification with you, such
as a driver’s license. In addition, if you hold shares in “street name” and would like to attend the Annual
Meeting, you must bring an account statement or other acceptable evidence of ownership of CHDN Common
Stock as of the close of business on the Record Date. In order to vote at the Annual Meeting if you hold shares in
“street name,” you will also need a valid “legal proxy,” which you can obtain by contacting your account
representative at the broker, bank or similar institution through which you hold your shares.
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What proposals will be voted on at the Annual Meeting?
The following proposals from the Company will be considered and voted on at the Annual Meeting:
1.
2.
To elect the three (3) Class I Directors identified in this Proxy Statement for a term of three (3) years, and
one (1) Class III Director identified in this Proxy Statement for a term of two (2) years (Proposal No. 1);
To ratify the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered
public accounting firm for fiscal year 2015 (Proposal No. 2); and
3.
To conduct an advisory vote on executive compensation (Proposal No. 3).
You may also vote on any other business as may properly come before the meeting or any adjournment
thereof, including matters incident to the meeting’s conduct.
How does the Board of Directors recommend I vote?
CDI’s Board of Directors unanimously recommends that you vote:
1.
2.
“FOR” each of the nominees specified in this Proxy Statement under “Nominees for Election as
Directors” to the Board of Directors.
“FOR” the proposal to ratify the appointment of PricewaterhouseCoopers LLP as the Company’s
independent registered public accounting firm for fiscal year 2015.
3.
“FOR” the proposal to approve, on a non-binding advisory basis, executive compensation.
How do I vote?
You may cast your vote in one of four ways:
•
•
•
•
By Submitting a Proxy by Internet. Go to the following website: www.proxyvote.com. You may
submit a proxy by Internet 24 hours a day. To be valid, your proxy by Internet must be received by
11:59 p.m., Eastern Daylight Saving Time, on April 22, 2015. Please have your proxy card available
when you access the website and follow the instructions to create an electronic voting instruction form.
By Submitting a Proxy by Telephone. To submit a proxy using the telephone, call 1-800-690-6903
any time on a touch-tone telephone. There is NO CHARGE to you for the call in the United States or
Canada. International calling charges apply outside the United States and Canada. You may submit a
proxy by telephone 24 hours a day, 7 days a week. Follow the simple prompts and instructions
provided by the recorded message. To be valid, your proxy by telephone must be received by 11:59
p.m. Eastern Daylight Saving Time, on April 22, 2015.
By Submitting a Proxy by Mail. Mark your proxy card, sign and date it, and return it in the prepaid
envelope that has been provided or return it to Vote Processing, c/o Broadridge, 51 Mercedes Way,
Edgewood, NY 11717. To be valid, your proxy by mail must be received by 7:00 a.m., Eastern
Daylight Saving Time, on April 23, 2015.
At the Annual Meeting. You can vote your shares in person at the Annual Meeting (see “What do I
need to attend, and vote at, the Annual Meeting?”). If you are a shareholder of record, in order to vote
at the Annual Meeting, you must present an acceptable form of photo identification, such as a driver’s
license. If you hold your shares in street name, you must obtain a legal proxy, as described above under
“What do I need to attend, and vote at, the Annual Meeting?”, and bring that proxy to the Annual
Meeting.
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How can I revoke my proxy or substitute a new proxy or change my vote?
You can revoke your proxy or substitute a new proxy by use of any of the following means:
For a Proxy Submitted by Internet or Telephone
•
•
•
By submitting in a timely manner a new proxy through the Internet or by telephone that is received by
11:59 p.m., Eastern Daylight Saving Time, on April 22, 2015;
Executing and mailing a later-dated proxy card that is received prior to 7:00 a.m., Eastern Daylight
Saving Time, on April 23, 2015; or
By voting in person at the Annual Meeting.
For a Proxy Submitted by Mail
•
•
•
Executing and mailing another proxy card bearing a later date that is received prior to 7:00 a.m.,
Eastern Daylight Saving Time, on April 23, 2015;
Giving written notice of revocation to CDI’s Secretary at 600 N. Hurstbourne Parkway, Ste. 400,
Louisville, Kentucky 40222 that is received by CDI prior to 7:00 a.m., Eastern Daylight Saving Time,
on April 23, 2015; or
By voting in person at the Annual Meeting.
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Security Ownership of Certain Beneficial
Owners and Management
The following table sets forth information as of February 27, 2015, (except as otherwise indicated below)
regarding the beneficial ownership of the Common Stock by the only persons known by the Company to
beneficially own more than five percent (5%) of the Common Stock, each director and director nominee of the
Company, each named executive officer (as defined in “Executive Compensation-Summary Compensation
Table” herein), and the Company’s directors and executive officers as a group. Except as otherwise indicated, the
persons named in the table have sole voting and investment power with respect to all of the shares of Common
Stock shown as beneficially owned by them. The percentage of beneficial ownership is calculated based on
17,633,393 shares of Common Stock outstanding as of February 27, 2015. We are not aware of any pledge of our
Common Stock or any other arrangements the operation of which may at a subsequent date result in a change in
control of our Company.
Name of Beneficial Owner
Amount and Nature Of
Beneficial Ownership
Percent of Class
The Duchossois Group, Inc. (f/k/a Duchossois Industries, Inc.) . . . . . . . . . .
2,944,756
16.70
845 Larch Avenue
Elmhurst, IL 60126
PAR Capital Management, Inc.
1 International Place, #2401
Boston, MA 02110
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,286,544
7.30
GAMCO Investors, Inc. and affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,247,130(1)
7.07
One Corporate Center
Rye, NY 10580-1435
Three Bays Capital LP and affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
897,321(2)
5.09
222 Berkeley Street, 19th Floor
Boston, MA 02116
Balyasny Asset Management and affiliates . . . . . . . . . . . . . . . . . . . . . . . . .
945,254(3)
5.36
181 West Madison Street, 36th Floor
Chicago, IL 60602
Ulysses L. Bridgeman, Jr.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Craig J. Duchossois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Richard L. Duchossois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Robert L. Fealy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aditi J. Gokhale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Daniel P. Harrington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
G. Watts Humphrey, Jr.
James F. McDonald . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
R. Alex Rankin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
William C. Carstanjen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Robert L. Evans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
William E. Mudd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alan K. Tse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
James E. Gay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15 Directors and Executive Officers as a Group . . . . . . . . . . . . . . . . . . . . . .
*
Less than 0.1%
-0-(4)
3,099,543(5)
3,247,944(6)
-0-(7)
-0-
233,300(8)
51,000
2,000(9)
4,800
102,602(10)
151,464(11)
60,596(12)
14,971(13)
44,530(14)
3,930,853(15)
*
17.58
18.42
*
*
1.32
0.29
*
*
0.58
0.86
0.34
0.10
0.25
22.29
(1) GAMCO and its subsidiaries and affiliates own beneficial interest of 7.07%. The 7.07% interest is held by
the following: (a) GAMCO Asset Management, Inc., (b) Gabelli Funds, LLC, (c) Teton Advisors, Inc., and
(d) Mario J. Gabelli. All are related entities.
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(2) Three Bays Capital LP and its affiliates own beneficial interest of 5.09%. The 5.09% interest is held by the
following: (a) Three Bays Capital LP, (b) TBC GP LLC, (c) TBC Master, (d) TBC Partners GP LLC, and
(e) Matthew Sidman. All are related entities.
(3) Balyasny Asset Management L.P. and its affiliates own beneficial interest of 5.36%. The 5.36% is held by
the following: (a) Atlas Master Fund, Ltd., (b) Atlas Global, LLC, (c) Atlas Global Investments, Ltd.,
(d) Atlas Institutional Fund, LLC, (e) Atlas Institutional Fund, Ltd., (f) Atlas Institutional Fund II, LLC,
(g) Atlas Institutional Fund II, Ltd., (h) Atlas Global Japan Unit Trust, (i) Atlas Enhanced Master Fund,
Ltd., (j) Atlas Enhanced Fund, L.P., (k) Atlas Enhanced Fund, Ltd., (l) Atlas Fundamental Trading Master
Fund Ltd., (m) Atlas Fundamental Trading Fund, L.P., (n) Atlas Fundamental Trading Fund Ltd., (o) Lyxor/
Balyasny Atlas Enhanced Fund Limited, (p) BAM Zie Master Fund, Ltd., (q) BAM Zie Fund, LLC,
(r) BAM Zie Fund, Ltd., (s) Balyasny Asset Management L.P., and (t) Dmitry Balyasny. All are related
entities.
(4) Excludes 622 deferred stock units, which Mr. Bridgeman has elected to defer pursuant to the Company’s
deferred compensation plan. Also excludes 1,317 restricted shares, over which Mr. Bridgeman has neither
voting nor dispositive power until his resignation or retirement from the Board, awarded by the Company
for his board service.
(5) Mr. Craig J. Duchossois is the son of Mr. Richard L. Duchossois, who is also a director of the Company.
Craig J. Duchossois shares voting and investment power with respect to 2,944,756 shares owned by The
Duchossois Group, Inc. (formerly known as Duchossois Industries, Inc.) and 137,141 shares owned by
Spring Creek Investors II, LLC, an affiliate of The Duchossois Group, Inc. Mr. Craig J. Duchossois also
shares voting and investment power with respect to 17,646 shares owned by three trusts. He specifically
disclaims beneficial ownership of these shares. Of the shares listed as beneficially owned by Mr. Craig J.
Duchossois, 3,081,897 shares are also listed as beneficially owned by Mr. Richard L. Duchossois. Figure
illustrated excludes 9,615 deferred stock units, which Mr. Craig J. Duchossois has elected to defer pursuant
to the Company’s deferred compensation plan. Also excludes 3,077 restricted shares, over which
Mr. Craig J. Duchossois has neither voting nor dispositive power until his resignation or retirement from the
Board, awarded by the Company for his board service.
(6) Mr. Richard L. Duchossois is the father of Mr. Craig J. Duchossois, who is also a director of the Company.
Mr. Richard L. Duchossois shares voting and investment power with respect to 2,944,756 shares owned by
The Duchossois Group, Inc. (formerly known as Duchossois Industries, Inc.) and 137,141 shares owned by
Spring Creek Investors II, LLC, an affiliate of The Duchossois Group, Inc. Mr. Richard L. Duchossois also
shares voting and investment power with respect to 166,047 shares owned by the RLD Revocable Trust. He
specifically disclaims beneficial ownership of these shares. Of the shares listed as beneficially owned by
Mr. Richard L. Duchossois, 3,081,897 shares are also listed as beneficially owned by Mr. Craig J.
Duchossois. Figure illustrated excludes 2,553 deferred stock units, which Mr. Duchossois has elected to
defer pursuant to the Company’s deferred compensation plan. Also excludes 3,077 restricted shares, over
which Mr. Duchossois has neither voting nor dispositive power until his resignation or retirement from the
Board, awarded by the Company for his board service.
(7) Excludes 9,007 deferred stock units, which Mr. Fealy has elected to defer pursuant to the Company’s
deferred compensation plan. Also excludes 3,079 restricted shares, over which Mr. Fealy has neither voting
nor dispositive power until his resignation or retirement from the Board, awarded by the Company for his
board service.
(8) Mr. Harrington shares voting and investment power with respect to 233,299 shares held by TVI Corp. He
specifically disclaims beneficial ownership of these shares.
(9) Excludes 5,762 deferred stock units, which Mr. McDonald has elected to defer pursuant to the Company’s
deferred compensation plan. Also excludes 3,077 restricted shares, over which Mr. McDonald has neither
voting nor dispositive power until his resignation or retirement from the Board, awarded by the Company
for his board service.
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(10) Excludes 32,500 restricted shares, tied to Mr. Carstanjen’s continued service to the Company, awarded
under the Company’s 2007 Omnibus Stock Incentive Plan over which Mr. Carstanjen has neither voting nor
dispositive power until December 31, 2015, at which time 5,000 shares shall vest without restriction,
December 31, 2016, at which time 7,500 shares shall vest without restriction, and December 31, 2017, at
which time 20,000 shares shall vest without restriction. Also excludes 25,000 restricted shares awarded
under the Company’s equity compensation program over which Mr. Carstanjen has neither voting nor
dispositive power until December 31, 2015, at which time 12,500 shares shall vest without restriction, and
December 31, 2016 at which time the remaining 12,500 shall vest without restriction.
(11) Excludes 30,000 restricted shares, tied to Mr. Evans’ continued service, awarded under the Company’s 2007
Omnibus Stock Incentive Plan over which Mr. Evans has neither voting nor dispositive power until the
restricted shares vest without restriction in equal installments of 15,000 shares on August 14, 2015 and
August 14, 2016, respectively. Also excludes 65,000 vested restricted stock units and 26,406 restricted
shares awarded pursuant to Mr. Evans’ employment agreement over which Mr. Evans has neither voting nor
dispositive power until the lapse of certain restrictions pursuant to the restricted stock agreements governing
the awards.
(12) Excludes 20,000 restricted shares, tied to Mr. Mudd’s continued service, awarded under the Company’s
2007 Omnibus Stock Incentive Plan over which Mr. Mudd has neither voting nor dispositive power until
December 31, 2015, at which time 2,500 shares shall vest without restriction, December 31, 2016, at which
time 2,500 shares shall vest without restriction, and December 31, 2017, at which time 15,000 shares shall
vest without restriction. Also excludes 4,500 shares issuable under currently exercisable options. Excludes
15,000 restricted shares awarded pursuant to Mr. Mudd’s employment agreement over which Mr. Mudd has
neither voting nor dispositive power until the lapse of a restriction period ending on March 31, 2015.
Excludes 20,000 restricted shares awarded under the Company’s equity compensation program over which
Mr. Mudd has neither voting nor dispositive power until December 31, 2015, at which time 10,000 shares
shall vest without restriction, and December 31, 2016 at which time the remaining 10,000 shall vest without
restriction.
(13) Excludes 5,000 restricted shares, tied to Mr. Tse’s continued service, awarded under the Company’s 2007
Omnibus Stock Incentive Plan over which Mr. Tse has neither voting nor dispositive power until
December 31, 2017, at which time the shares shall vest without restriction. Also excludes 5,000 restricted
shares awarded under the Company’s equity compensation program over which Mr. Tse has neither voting
nor dispositive power until December 31, 2015 at which time 2,500 shall vest without restriction, and
December 31, 2016 at which time the remaining 2,500 shares will vest without restriction.
(14) Excludes 5,000 restricted shares, tied to Mr. Gay’s continued service, awarded under the Company’s 2007
Omnibus Stock Incentive Plan over which Mr. Gay has neither voting nor dispositive power until
December 31, 2017, at which time the shares shall vest without restriction. Excludes 12,000 restricted shares
awarded under the Company’s equity compensation program over which Mr. Gay has neither voting nor
dispositive power until December 31, 2015, at which time 6,000 shares shall vest without restriction, and
December 31, 2016 at which time the remaining 6,000 shall vest without restriction.
(15) See table on page 15 and “Executive Officers of the Company”
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Executive Officers of the Company
The Company’s executive officers, as listed below, are elected annually to their executive offices and serve
at the pleasure of the Board of Directors.
Name and Age
Robert L. Evans(1)
62
William C. Carstanjen(2)
47
William E. Mudd(3)
43
Alan K. Tse(4)
43
Position(s) With Company
and Term of Office
Chairman since August 2014; Chairman and Chief Executive Officer from June 2011
to August 2014; Chief Executive Officer from March 2011 to June 2011; President
and Chief Executive Officer from August 2006 to March 2011
Chief Executive Officer since August 2014; President and Chief Operating Officer
from March 2011 to August 2014; Chief Operating Officer from January 2009 to
March 2011; Executive Vice President and Chief Development Officer from June
2005 to January 2009; General Counsel from June 2005 to December 2006
President and Chief Financial Officer since August 2014; Executive Vice President
and Chief Financial Officer from October 2007 to August 2014
Executive Vice President and General Counsel since March 2011
(1) Prior to joining the Company, Mr. Evans served as the Managing Director of Symphony Technology Group,
a strategic technology holding group focused on the software, services and analytics market, and as
President and CEO of Symphony Services Corp., a product engineering outsourcing services company, from
2002 to 2004. From 1999 to 2000, he served as President and Chief Operating Officer of i2 Technologies/
Aspect Development.
(2) Prior to joining the Company, Mr. Carstanjen was employed at General Electric Company. From 2004
through June 2005, he served as the Managing Director and General Counsel of GE Commercial Finance,
Energy Financial Services. From 2002 to 2004, he served as General Counsel of GE Specialty Materials
and, from 2000 to 2002, he served as Transactions and Finance Counsel of GE Worldwide Headquarters.
(3) Prior to joining the Company, Mr. Mudd was employed at General Electric Company. From 2006 through
October 2007, he served as Chief Financial Officer, Global Commercial & Americas P&L of GE
Infrastructure, Water & Process Technologies. From 2004 to 2006, he served as Chief Financial Officer,
Supply Chain, Information Technology and Technology Finance, GE Consumer & Industrial Europe,
Middle East, & Africa, Budapest and Hungary and, from 2002 to 2004, he served as Manager, Global
Financial Planning & Analysis and Business Development.
(4) Prior to joining the Company, Mr. Tse was employed at LG Electronics Mobilecomm U.S.A., Inc., a leading
cellular telephone manufacturer in the United States, where from January 2005 through March 2011, he
served as Vice President and General Counsel.
8
Election of Directors
(Proposal No. 1)
At the Annual Meeting, shareholders will vote to elect three (3) persons to serve in Class I and one
(1) person to serve in Class III of the Board of Directors and to hold office for a term of three (3) years expiring
at the 2018 Annual Meeting of Shareholders for those in Class I and for a term of two (2) years expiring at the
2017 Annual Meeting of Shareholders for the individual in Class III and thereafter until their respective
successors shall be duly elected and qualified or until the earlier of their resignation, death or removal.
The Amended and Restated Bylaws of the Company provide that the Board of Directors shall be composed
of not fewer than three (3) nor more than fifteen (15) members, the exact number to be established by the Board
of Directors, and further provide for the division of the Board of Directors into three (3) approximately equal
classes, of which one (1) class is elected annually to a three year term. Currently the Board of Directors is
comprised of ten (10) directors, with three (3) directors in Class I, four (4) directors in Class II and three
(3) directors in Class III. The Company has a mandatory retirement age policy with regard to directors, which
provides that a person is not qualified to serve as a director unless he or she is less than seventy (70) years of age
on the date of election. However, the Board believes that it is important to monitor overall Board performance
and suitability, and pursuant to the policy, upon the recommendation of the Nominating and Governance
Committee, the Board may waive the effective date of mandatory retirement. There are two directors in Class I
that will have met the mandatory retirement age at the Annual Meeting, Craig J. Duchossois and G. Watts
Humphrey, Jr. On February 18, 2015, the Nominating and Governance Committee voted to recommend waiving
the mandatory retirement age policy in favor of Messrs. Craig J. Duchossois’ and G. Watts Humphrey, Jr.’s
continued service to the Board. In reaching its decision to waive the policy, the Nominating and Governance
Committee considered the fact that Messrs. C. Duchossois and Humphrey are both highly experienced directors
of the Company with regard to executive compensation, strategy, and governance. Furthermore, Mr. Humphrey
has served the Company and the Board extremely well in the role of lead independent director. Upon the
recommendation of the Nominating and Governance Committee, the Board of Directors concluded that Messrs.
C. Duchossois’ and Humphrey’s experience and skill sets advance the strategic goals of the Company and the
Company would benefit from their continued service as directors, and on February 24, 2015, the Board of
Directors waived the effective date of the mandatory retirement age for Messrs. C. Duchossois and Humphrey.
At the Annual Meeting, the four (4) persons named in the following table will be nominated on behalf of the
Board of Directors for election as directors in Class I and Class III, respectively. The Nominating and
Governance Committee has recommended, and the Board has approved, the nomination of these persons. The
nominees currently serve as members of Class I and Class III, respectively, and have agreed to serve if re-
elected. Directors are elected by a plurality of votes cast by the shares entitled to vote in the election at a meeting
at which a quorum is present. With each shareholder having one vote per share to cast for each director position,
the nominees receiving the greatest number of votes will be elected. The biographical information for our
directors below includes information regarding certain of the experiences, qualifications, attributes and skills that
led to the determination that such individuals are qualified to serve on the Board of Directors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE ELECTION OF THE
FOLLOWING DIRECTORS IN CLASS I AND III.
UNLESS OTHERWISE INSTRUCTED, IT IS THE INTENTION OF THE PERSONS NAMED IN THE
PROXY TO VOTE THE SHARES REPRESENTED THEREBY “FOR” THE ELECTION OF THE CLASS I
AND CLASS III DIRECTORS NAMED BELOW.
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Nominees for Election as Directors
The following table sets forth information relating to the Class I and Class III directors of the Company who
are proposed to the shareholders for election to serve as directors for terms of three (3) years and two (2) years, in
the case of Aditi J. Gokhale, expiring at the 2018 Annual Meeting of Shareholders, or 2017 Annual Meeting of
Shareholders for Aditi J. Gokhale, and thereafter until their respective successors shall be duly elected and
qualified or until the earlier of their resignation, death or removal.
Name, Age and
Positions with
Company
Craig J. Duchossois
70
Director since 2000
Robert L. Evans
62
Director since 2006
Principal Occupation(1)
and Certain Directorships(2)
Class I—Nominated for Terms Expiring in 2018
Mr. Duchossois serves as the Chief Executive Officer and a Director of The
Duchossois Group, Inc., (a family-owned company with diversified business interests
in companies with leading brands in the residential security, lighting and convenience
products markets and the commercial control markets). While Mr. Duchossois was
originally nominated to serve as a Director of the Company pursuant
to the
stockholder’s agreement between the Company and Duchossois Industries, Inc., the
Company has been and will continue to be well served by Mr. Duchossois’ experience
and proven capabilities in the international marketplace and technology industries in
overseeing a diverse group of companies that have over 6,000 employees worldwide
with operations located in over 30 countries, as well as his financial and business
acumen. Mr. Duchossois currently holds the following leadership positions with other
entities: Chairman, The Chamberlain Group, Inc.; Director, Amsted Industries, Inc.;
not-for-profit board memberships include Culver Education Foundation, Illinois
Institute of Technology, University of Chicago, Kellogg Graduate School of
Management, World Business Chicago,
the University of Chicago Hospitals,
Executive’s Club of Chicago, Economic Club, Chicago Council on Global Affairs and
the Marine Corps Scholarship Foundation. He is a member of the Chief Executive
Officer’s Organization, World Presidents Organization, and the Civic Committee of
the Commercial Club of Chicago. Mr. Duchossois also serves as a board member for
Levy Acquisition Corp., Frontenac Company and The Edgewater Funds. He is past-
Chairman of the Board of Visitors for the United States Naval Academy.
Mr. Evans is the Chairman of the Board of the Company. Please see Mr. Evans’
positions with the Company, terms of office and other biographical information on
page 6. Mr. Evans’ role as the Chairman of the Company as well as his proven
entrepreneurial experience and abilities, his experience in senior executive positions at
some of North America’s leading manufacturing (Mr. Evans served in a variety of
management positions for Caterpillar Inc.), business consulting (former Managing
Partner of the Americas Supply Chain Practice for Accenture Ltd., formerly Andersen
Consulting), technology (former President and Chief Operating Officer of Aspect
Development Inc.) and private equity companies (Co-Founder and former Managing
Director of Symphony Technology Group, a private equity firm that provides
investment capital and strategic direction to software, services, and analytics
companies), and his experience in the thoroughbred horse racing industry qualify
Mr. Evans to serve as a Director of the Company. Mr. Evans currently holds the
following leadership positions with other entities: President, Tenlane Farm, LLC (a
thoroughbred breeding and racing operation); Mr. Evans is a former director of Aspect
Development, IronPlanet, ATC Technology Corp., Symphony Services, and Trigo
Technologies Inc.
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Name, Age and
Positions with
Company
G. Watts Humphrey, Jr.
70
Director since 1995
Aditi J. Gokhale
41
Director since 2015
Principal Occupation(1)
and Certain Directorships(2)
Mr. Humphrey is the President, GWH Holdings, Inc. (private investment company);
Chairman, IPEG (international plastics machinery equipment company); and Owner,
Shawnee Farm (thoroughbred breeding and racing operation). Among other
exceptional personal and professional attributes, Mr. Humphrey has extensive
experience in overseeing a diverse group of companies as well as in significant
leadership roles throughout the thoroughbred horseracing industry that qualify Mr.
Humphrey to serve as a member of the Board of Directors. Mr. Humphrey currently
holds the following leadership positions with other entities: Member of The Jockey
Club; Vice-Chairman, Blood-Horse Publications; Director and member of Executive
Committee, Keeneland Association, Inc.; Vice-Chairman, Shaker Village of Pleasant
Hill; Director, Smithfield Trust Company; Director, Wausau Paper; Member of the
Board of Trustees, Centre College. Previously, Mr. Humphrey served as Chairman of
the Federal Reserve Bank—Fourth District.
Class III—Nominated for a Term Expiring in 2017
Ms. Gokhale has served as the Senior Vice President of Digital for Nutrisystem, Inc., a
company specializing in weight loss and nutritional programs, since June 2012. From
2009 to 2012, Ms. Gokhale served as general manager of the wholly-owned subsidiary
of Travelocity, IGOUGO.com, a travel-planning company, where she led the daily
business operations. Prior to Travelocity, she was the co-founder and Chief Marketing
Officer for iQuanti, a company offering digital marketing services to Fortune 100
companies. Before iQuanti, Ms. Gokhale spent over 6 years at American Express from
2001-2007. Ms. Gokhale began her career at Booz & Company (formerly Booz Allen
& Hamilton) in the Media and Entertainment practice. Ms. Gokhale’s extensive
experience in digital marketing, management consulting and product development
makes her an excellent member of the Company’s Board. Ms. Gokhale was introduced
and recommended to the Board of Directors, for appointment, by the Nominating and
Governance Committee.
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(1) There has been no change in principal occupation or employment during the past five years, except with
respect to Mr. Evans (as described under “Executive Officers of the Company”) and Ms. Gokhale.
(2) Directorships at any time within the last 5 years in companies with a class of securities registered pursuant
to Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), subject to the
requirements of Section 15(d) of the Exchange Act or companies registered under the Investment Company
Act of 1940 and, in the case of certain directors, other directorships or positions considered significant by
them.
The Board of Directors has no reason to believe that the nominees will be unavailable to serve as a director.
If any nominee should become unavailable before the Annual Meeting, the persons named in the enclosed Proxy,
or their substitutes, reserve the right to vote for substitute nominees selected by the Board of Directors.
11
Continuing Directors
The following tables set forth information relating to the Class II and Class III directors of the Company
who will continue to serve as directors until the expiration of their respective terms of office.
Name, Age and
Positions with
Company
Ulysses L. Bridgeman, Jr.
61
Director since 2012
Principal Occupation(1)
and Certain Directorships(2)
Class II—Terms Expiring in 2016
Mr. Bridgeman is the owner and President of Manna, Inc. and ERJ Inc. which
currently oversee the administration and operation of 124 Chili’s Restaurants in ten
states, and 235 Wendy’s Old Fashioned Hamburger Restaurants in seven states. The
restaurants presently employ approximately 20,000 employees. According to the
restaurant
Restaurant Finance Monitor, Mr. Bridgeman is the second largest
franchisee in the United States. His educational background includes a Bachelor of
Arts in Psychology from the University of Louisville in 1975. From 1975-1983 and
from 1986-1987, Mr. Bridgeman played professional basketball with the Milwaukee
Bucks. During the interim of 1983-1986 he played for the Los Angeles Clippers.
During his professional basketball career, Mr. Bridgeman worked as a Sales and
Public Relations Representative for Howard Johnson in Milwaukee. His experience
also includes holding a position as an analyst with Towers, Perrin, Foster & Crosby
Insurance Consultants in Milwaukee. Mr. Bridgeman’s leadership skills have been
further developed through his eleven years with the NBA Players Association. As a
Player Representative, he acted as a liaison between the players and management.
He was directly involved in arbitration proceedings and also assisted with the
implementation of special programs such as Career Alternatives, Fitness and
Wellness and Financial Planning. During his time with the Players Association, he
held the title of Treasurer
four years.
Mr. Bridgeman’s experience in leading a large and diverse workforce, along with his
entrepreneurial vision and director experience make him an excellent member of the
Company’s Board. Mr. Bridgeman is also actively involved in the Louisville
community. He currently serves on the Board of Directors of Fifth Third Bank; the
West End School; the PGA Foundation Board; the Naismith Basketball Hall of
Fame; and most recently joined the Meijer Board. He serves as Past Chairman of the
Board of Trustees University of Louisville and a past member of the Library Board.
three years and President
for
for
Richard L. Duchossois
93
Director since 2000
Mr. Duchossois is the founder and serves as the Chairman of The Duchossois Group,
Inc. (a family-owned company with diversified business interests in companies with
leading brands in the residential security, lighting and convenience products markets
and the commercial control and automation). Mr. Duchossois also serves as the
Chairman of Arlington Park Racecourse, LLC, a subsidiary of the Company. While
Mr. Duchossois was originally nominated to serve as a director of the Company
pursuant to the stockholder’s agreement between the Company and Duchossois
Industries, Inc., the Company has been and will continue to be well served by
Mr. Duchossois’ entrepreneurial experience and abilities, his proven leadership
capabilities in successfully developing and managing a diverse group of companies
that have over 6,000 employees worldwide with operations located in over 30
countries, as well as his horse racing industry experience in which he led the
resurrection of Arlington Park Racecourse as a world renowned racetrack.
Mr. Duchossois currently holds the following leadership positions with other entity:
Director, The Chamberlain Group, Inc.
12
Name, Age and
Positions with
Company
James F. McDonald
75
Director since 2008
R. Alex Rankin
59
Director since 2008
Principal Occupation(1)
and Certain Directorships(2)
Mr. McDonald is an investor, partner, and founder of a number of private businesses
which include construction aggregates, real estate investment partnerships, and
livestock operations. From April 30, 2011 to December 31, 2011, Mr. McDonald
served as a consultant to Cisco Systems, Inc. (“Cisco”). From 2006 to April 30,
2011, Mr. McDonald was a Senior Vice President of Cisco (a world leader in
networking that provides hardware, software, and service offerings that are used to
create Internet solutions that allow individuals, companies, and countries to increase
productivity, improve customer satisfaction and strengthen competitive advantage.)
From 1993 to 2006, Mr. McDonald served as the Chairman, Chief Executive Officer
and President of Scientific-Atlanta, Inc. (a global provider of cable and internet
television set-tops, data and voice cable modems, end-to-end video
protocol
distribution networks, and video systems integration services, which was acquired by
Cisco Systems, Inc. in February 2006). Among other exceptional personal and
professional attributes, Mr. McDonald’s experience as the chief executive or a senior
executive of leading global technology companies and as a director of large publicly
traded companies in a variety of industries qualify Mr. McDonald to serve on the
Board of the Company. Mr. McDonald has held the following leadership positions
with other entities: Director, Burlington Resources, Inc. from 1988 to 2006, Director,
Mirant Corporation from 2001 to 2006, Director, National Data Corporation and
NDCHealth Corporation from 2000 to 2006, Director, Scientific-Atlanta, Inc. from
1993 to 2006. Mr. McDonald is also a former Director of Sprint (now Sprint Nextel
Corporation).
Mr. Rankin is the President of Sterling G. Thompson Co. (a private insurance agency
and broker), the President of Upson Downs Farm, Inc. (a thoroughbred breeding and
racing operation), the Chairman of the James Graham Brown Foundation (a private,
non-profit foundation that fosters the well-being, quality of life, and image of
Louisville and Kentucky by actively supporting and funding projects in the fields of
civic affairs, economic development, education, and health and general welfare,
which since 1954 has awarded over 2,680 grants totaling over $450 million). Among
other exceptional personal and professional attributes, Mr. Rankin’s expertise in the
areas of finance and risk management, as well as his experience in the Company’s
core business of thoroughbred horseracing qualify Mr. Rankin as a member of the
Board of Directors and the Audit Committee.
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(1) Except as noted with respect to Mr. McDonald, there has been no change in principal occupation or
employment during the past five years.
(2) Directorships at any time within the last 5 years in companies with a class of securities registered pursuant
to Section 12 of the Exchange Act, subject to the requirements of Section 15(d) of the Exchange Act or
companies registered under the Investment Company Act of 1940 and, in the case of certain nominees, other
directorships or positions considered significant by them.
13
Name, Age and
Positions with
Company
Robert L. Fealy
63
Director since 2000
Daniel P. Harrington
59
Director since 1998
Principal Occupation(1)
and Certain Directorships(2)
Class III—Terms Expiring in 2017
Mr. Fealy currently serves as Chairman of Brivo Systems, LLC, an affiliate of The
Duchossois Group. He retired effective June 30, 2014 as President, Chief Operating
Officer and Director of The Duchossois Group, Inc. (a family owned company with
diversified business interests in companies with leading brands in the residential security,
lighting and convenience products markets and the commercial control, automation and
digital media markets). While Mr. Fealy was originally nominated to serve as a Director
of the Company pursuant to the stockholder’s agreement between the Company and
Duchossois Industries, Inc., the Company has been and will continue to be well served by
Mr. Fealy’s experience as a certified public accountant and senior executive with
oversight of a diverse group of companies that has over 6,000 employees worldwide with
operations located in over 30 countries as well as proven capabilities in strategic business
planning in a variety of industries. Mr. Fealy currently holds the following leadership
positions with other entities: Lead Director, Pella Corporation; Founding Board Member
and Vice Chairman, Illinois Venture Capital Association; Director, Illinois Venture
Capital Association PAC; Chairman, Chicago Ventures and member of the Investment
Committee of the Illinois Innovation Accelerator Fund; Chairman of the Board of
Trustees, University of Cincinnati Foundation; Member, University of Cincinnati
Business Advisory Council; Member, Advisory Board of
for
Entrepreneurship and Innovation at the University of Chicago Booth School; Chairman,
Chicago Children’s Choir; Trustee, The Morton Arboretum.
the Polsky Center
interests
(private holding company with diversified business
Mr. Harrington serves as the President and Chief Executive Officer of HTV Industries,
Inc.
include
telecommunications, manufacturing distribution and banking). Among other exceptional
personal and professional attributes, Mr. Harrington has extensive financial, accounting
and chief executive experience within a variety of industries that qualifies Mr. Harrington
as a member of the Board of Directors. In addition, Mr. Harrington qualifies as an Audit
Committee Financial Expert, which makes him well suited for his current role as the
Chairman of the Company’s Audit Committee. Mr. Harrington also serves in the
following leadership positions of other entities: Director, First Guaranty Bank; Trustee,
The Veale Foundation. In addition, Mr. Harrington has served as a Director of First State
Financial Corporation, Portec Rail Products, Inc. (and on the Audit and Compensation
Committees) and Biopure Corporation (and on the Audit Committee).
that
(1) Except as noted with respect to Mr. Fealy, there has been no change in principal occupation or employment
during the past five years.
(2) Directorships at any time within the last 5 years in companies with a class of securities registered pursuant
to Section 12 of the Exchange Act, subject to the requirements of Section 15(d) of the Exchange Act or
companies registered under the Investment Company Act of 1940 and, in the case of certain directors, other
directorships or positions considered significant by them.
Emeritus Directors
Emeritus Directors are available for counsel, but do not attend meetings of the Board of Directors and do not
vote on matters presented to the Board. The Company’s Amended and Restated Bylaws provide that a person
shall not be qualified for election as a director due to age pursuant to any mandatory retirement age requirement
adopted by the Company. The Company’s Corporate Governance Guidelines provide that the Board will
establish and maintain a policy with regard to a mandatory retirement age for non-employee directors. The
current policy provides that a person is not qualified to serve as a director unless he or she is less than seventy
(70) years of age on the date of election. However, the Board believes that it is important to monitor overall
Board performance and suitability and, upon the recommendation of the Nominating and Governance
Committee, the Board may waive the effective date of mandatory retirement. Each director shall become a
14
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Director Emeritus upon the expiration of his or her current term following the date on which he or she is no
longer qualified for election due to age, provided the effective date of such mandatory retirement has not been
waived. The Emeriti Directors are Charles W. Bidwill, Jr., Catesby W. Clay, J. David Grissom, Thomas H.
Meeker, Carl F. Pollard, and Darrell R. Wells.
Director Compensation for Fiscal Year Ended December 31, 2014
During 2014, directors received an annual retainer fee of $50,000; directors who served as committee
chairmen of the Compensation Committee and the Nominating and Governance Committee received an
additional $10,000 and $7,500 for a total annual retainer fee of $60,000 and $57,500, respectively; the director
who served as committee chairman of the Audit Committee received an additional retainer fee of $15,000 for a
total annual retainer fee of $65,000. Directors were paid $2,000 for each meeting of the Board of Directors and
$1,500 for each committee meeting they attended, either in person or by teleconference, and for each special ad
hoc meeting in which they participated. Finally, each director received a grant of restricted share units, with an
aggregate grant date fair value of $75,000. Directors who did not reside in Louisville may request reimbursement
for their travel expenses. Only non-employee directors receive this compensation.
In 2014, we provided the following annual compensation to our non-employee directors:
Name
Fees earned or
paid in cash ($)
Stock
Awards ($)(2)
. . . . . . . . . . . . . . . . . . . . . . . . . .
Ulysses L. Bridgeman, Jr.
Leonard S. Coleman, Jr.
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Craig J. Duchossois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Richard L. Duchossois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Robert L. Fealy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Daniel P. Harrington . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
G. Watts Humphrey, Jr.
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
James F. McDonald . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
R. Alex Rankin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Darrell R. Wells . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65,500(1)
89,000
71,500(1)
67,000(1)
65,500(1)
91,000(1)
89,000
73,000(1)
85,000
35,000
75,000
-
75,000
75,000
75,000
75,000
75,000
75,000
75,000
-
Total ($)
140,500
89,000
146,500
142,000
140,500
166,000
164,000
148,000
160,000
35,000
(1) The Churchill Downs Incorporated 2005 Deferred Compensation Plan allows directors to defer receipt of all
or part of their retainer and meeting fees in a deferred share account until after their service on the Board has
ended. This account allows the director, in effect, to invest his or her deferred cash compensation in
Company Common Stock. Funds in this account are credited as hypothetical shares of Common Stock based
on the market price of the stock at the time the compensation would otherwise have been earned.
Hypothetical dividends are reinvested in additional shares based on the market price of the stock on the date
dividends are paid. All shares in the deferred share accounts are hypothetical and are not issued or
transferred until the director ends his or her service on the Board. Upon the end of Board service, the shares
are issued or transferred to the director. In 2014, Mr. Craig J. Duchossois, Mr. Fealy, Mr. Harrington, and
Mr. McDonald deferred all of their 2014 directors’ fees into a deferred share account under the plan.
Mr. Bridgeman deferred 50% of his 2014 directors’ fees into a deferred share account under the plan. As of
December 31, 2014, Mr. Fealy had 8,912 deferred shares, Mr. Craig Duchossois had 9,514 deferred shares,
Mr. Richard Duchossois had 2,525 deferred shares, Mr. Harrington had 7,486 deferred shares,
Mr. McDonald had 5,701 deferred shares and Mr. Bridgeman had 615 deferred shares under the plan.
(2) On April 23, 2014, each director, with the exception of Mr. Evans, received a grant of restricted stock units,
valued in the amount of $75,000, calculated based upon the closing price of a share of Common Stock on
the date of grant. The restricted stock units vest one year from the date of grant. At the time a director ceases
being a director of the Company, the Company will issue one share of Common Stock for each vested
restricted stock unit held by such director. As of December 31, 2014, each individual serving as a non-
employee director during 2014, excluding Mr. Evans, Mr. Bridgeman, Mr. Wells, and Mr. Coleman, had
3,047 restricted stock units outstanding, which were granted for board service. Mr. Evans does not receive
grants of restricted stock units for his board service due to his position as a NEO. Mr. Wells did not receive
a grant of restricted stock units due to his retirement effective as of the 2014 annual meeting of
shareholders. Mr. Coleman, due to his resignation from the Board, effective December 17, 2014, forfeited
the 2014 grant of restricted stock units.
15
Corporate Governance
The Board of Directors is responsible for providing effective governance over the Company’s affairs. The
Company’s corporate governance practices are designed to align the interests of the Board and management with
those of our shareholders and to promote honesty and integrity throughout the Company.
During the past year, we continued to review our corporate governance policies and practices and compare
them to those suggested by various authorities in corporate governance and the practices of other public
companies. We have also reviewed guidance and interpretations provided by the SEC and NASDAQ.
Copies of the current charter, as approved by our Board, for each of our Audit, Compensation and
Nominating and Governance Committees and a copy of our Corporate Governance Guidelines, Code of Conduct
for Employees and Code of Ethics for Principal Financial Officers (along with any amendments or waivers
related to the Code of Conduct or Code of Ethics)
corporate website,
http://www.churchilldownsincorporated.com, under the “Investors” heading.
available on our
are
Shareholders may send communications to the Company’s Board of Directors addressed to the Board of
Directors or to any individual director c/o Churchill Downs Incorporated, 600 N. Hurstbourne Parkway, Ste. 400,
Louisville, Kentucky 40222. Any correspondence addressed to the Board of Directors in care of the Company is
forwarded to the Board of Directors without review by management.
Board Leadership Structure
On August 27, 2014, the Company’s Chairman and Chief Executive Officer, Robert L. Evans, transitioned
to the singular role of Chairman of the Board of Directors. Mr. Evans’ transition was a part of the Board’s
strategy toward delegating certain responsibilities from the combined role of the Chairman and Chief Executive
Officer to the former President and Chief Operating Officer, Mr. Carstanjen, who assumed the role of Chief
Executive Officer simultaneously with Mr. Evans’ transition. Even with the transition of titles and job
responsibilities, the Board deemed it advisable to maintain certain aspects of its governance structure to assure
effective independent oversight. These governance practices included maintaining: (1) a lead independent
director (see below for a description of the lead independent director role), and (2) executive sessions of the
independent directors after each Board meeting and annual performance evaluations of the Chairman and Chief
Executive Officer by the independent directors.
No less frequently than once every two years the Board will continue to appoint a lead director from among
its independent directors. On February 24, 2015, G. Watts Humphrey, Jr. was re-appointed as the lead
independent director. The lead independent director’s authority and responsibilities include: (i) presiding over all
meetings of the Board at which the Chairman is not present, including the executive sessions of the independent
directors, (ii) serving as liaison between the Chairman and the independent directors, (iii) approving meeting
agendas, schedules and information sent to the Board, (iv) the ability to call meetings of the independent
directors, and (v) ex-officio status on each committee of the Board that the lead independent director is not
already a voting member.
Oversight of Company Risk
As part of its responsibility to oversee the management, business and strategy of the Company, the Board of
Directors has overall responsibility for risk oversight. While the Board of Directors as a whole performs certain
risk oversight functions directly, such as its ongoing review, approval and monitoring of the Company’s
fundamental business and financial strategies and major corporate actions, the majority of the Board of Directors’
risk oversight functions are carried out through the operation of its committees. Each committee oversees risk
management within its assigned areas of responsibility, as described below in the discussion of committee
responsibilities. The Audit Committee is primarily responsible for overseeing the Company’s risk assessment and
16
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risk management practices, as well as its compliance programs. The Compensation Committee’s responsibilities
include oversight of the risks associated with the Company’s compensation policies and practices, as well as its
managerial development and succession plans. The Nominating and Governance Committee oversees the risks
related to the Company’s corporate governance structure and processes.
Share Ownership Guidelines
The Board expects all directors and senior executive officers (those holding the title of executive vice
president or above) to display confidence in the Company by ownership and retention of a meaningful amount of
the Company’s stock. As a result, each director is expected to own shares of the Company’s stock with a fair
market value equal to five (5) times the director’s annual retainer. Each director who was serving as such on the
date of adoption of the ownership guidelines (March 15, 2007) had five (5) years from such date to meet this
requirement and each director appointed or elected since such date will have five (5) years from the date of
appointment or election to the Board to meet this requirement. Initial compliance was measured in March 2012,
the five (5) year anniversary date of the adoption of the ownership guidelines (for directors in office on
March 15, 2007) or at the five (5) year anniversary date of the director’s appointment or election (for new
directors). Each director’s continuing compliance with the ownership guidelines will be measured in the year he
or she stands for re-election and will be considered as one of the criteria for nomination by the Nominating and
Governance Committee. As illustrated by the chart below, all directors proposed for re-election during the 2015
Annual Meeting of Shareholders are compliant with the ownership guidelines. Furthermore, deferred shares
acquired by directors under the Churchill Downs Incorporated 2005 Deferred Compensation Plan and restricted
stock units granted as director compensation are included for purposes of measuring compliance with the
Company’s share ownership guidelines.
Director
Ulysses L. Bridgeman, Jr.
. . . . . . . . . . . . .
Craig J. Duchossois . . . . . . . . . . . . . . . . . . .
Richard L. Duchossois . . . . . . . . . . . . . . . .
Robert L. Fealy . . . . . . . . . . . . . . . . . . . . . .
Aditi J. Gokhale . . . . . . . . . . . . . . . . . . . . . .
Daniel P. Harrington . . . . . . . . . . . . . . . . . .
G. Watts Humphrey, Jr.
. . . . . . . . . . . . . . .
James F. McDonald . . . . . . . . . . . . . . . . . . .
R. Alex Rankin . . . . . . . . . . . . . . . . . . . . . .
Ownership
Guidelines(1)
Shares
Owned(2)
Value of
Shares(3)
Met
Guidelines(4)
5x
5x
5x
5x
5x
5x
5x
5x
5x
1,939
3,112,236
3,253,574
12,088
-
243,943
54,077
10,840
7,877
$
184,786
$296,596,090
$310,065,602
1,151,986
$
$
-
$ 23,247,767
5,153,538
$
1,033,052
$
750,678
$
*
✓
✓
✓
*
✓
✓
✓
✓
✓ = Met guidelines.
* = Has not yet met guidelines.
(1) Guidelines adopted per the Company Board of Directors. See page 32 for more detail regarding Mr. Evans.
(2) Calculated as of December 31, 2014 and represents shares of Common Stock owned outright, amounts
deferred per the Company’s Deferred Compensation Plan, and RSU issued for board service.
(3) FMV based on CHDN closing stock price of $95.30 as of December 31, 2014.
(4) Mr. Bridgeman joined the Board of Directors in 2012 and thus has until 2017 to meet the Ownership
Guidelines associated with his board service. Ms. Gokhale joined the Board of Directors in 2015 and thus
has until 2020 to meet the Ownership Guidelines associated with her board service.
(5) Mr. Evans and the listing of his Shares Owned are excluded as he is subject to maintaining a multiple of his
base annual salary, above 5x, pursuant to the Executive Share Ownership Guidelines.
17
Board Meetings and Committees
Eight (8) meetings of the Board of Directors were held during the last fiscal year. All directors attended at
least seventy-five percent (75%) of the aggregate number of meetings of the Board of Directors and the meetings
of the committee(s) on which they served in 2014. The Company encourages its directors to attend the Annual
Meeting each year. All of the directors attended the Company’s Annual Meeting on April 22, 2014.
The Board has determined that all of the directors of the Company are “independent directors,” as defined
under NASDAQ Rule 5605(a)(2), except Robert L. Evans.
As required by the Company’s Corporate Governance Guidelines, the Board of Directors currently has four
(4) standing committees: the Executive, Audit, Compensation and the Nominating and Governance Committees.
No Director Emeritus serves on any Board committee. The structure of the committees is illustrated in the table
below, with the number of meetings held in 2014.
Board of
Directors
✓
Executive
Committee
Audit
Committee
Compensation
Committee
Nominating and
Governance Committee
✓
Director Name
Ulysses L. Bridgeman . . . . . . . . . .
Leonard S. Coleman, Jr.(1) . . . . . . .
Craig J. Duchossois . . . . . . . . . . . .
Richard L. Duchossois . . . . . . . . .
Robert L. Evans© . . . . . . . . . . . . .
Robert L. Fealy . . . . . . . . . . . . . . .
Aditi J. Gokhale(2) . . . . . . . . . . . . .
Daniel P. Harrington . . . . . . . . . . .
G. Watts Humphrey, Jr.(3)
James F. McDonald . . . . . . . . . . . .
R. Alex Rankin . . . . . . . . . . . . . . .
Darrell R. Wells(4) . . . . . . . . . . . . .
Number of meetings in 2014 . . . .
✓
✓
Chairman
✓
✓
✓
. . . . . . . Lead Director Chairman
✓
✓
✓
✓
✓
Chairman
*
✓
✓
✓
*
✓
Chairman
✓
*
Chairman
8
0
4
5
2
✓ = Member
© = Chairman of the Board
* = Ex-officio Member
(1) Mr. Leonard S. Coleman resigned from the Board of Directors on December 17, 2014. However, prior to his
resignation, Mr. Coleman attended all board and committee meetings schedule during the last fiscal year.
Mr. Coleman previously served on both the Compensation Committee (as chairman) and the Audit
Committee. As illustrated above, the Board has filled the vacancy, on both the Audit and Compensation
Committee, created by Mr. Coleman’s departure, by naming James F. McDonald and R. Alex Rankin,
respectively.
(2) The Board appointed Ms. Aditi J. Gokhale as a Class III director of the Company, effective January 26,
2015.
(3) Mr. G. Watts Humphrey, Jr. serves as lead independent director, and is an ex-officio, non-voting member
(Audit, Compensation, and Nominating and Governance Committees).
(4) Mr. Darrell R. Wells served as a director until his retirement on April 22, 2014, at which time he became an
Emeritus Director. Prior to his retirement, Mr. Wells attended the February 13 and 25, 2014 meetings of the
Board of Directors.
18
Executive Committee
The Executive Committee is authorized, subject to certain limitations set forth in the Company’s Amended
and Restated Bylaws, to exercise the authority of the Board of Directors between Board meetings. The members
of the Executive Committee are G. Watts Humphrey, Jr., who serves as Chairman, Robert L. Fealy, and
R. Alex Rankin. The Executive Committee does not meet on a regular basis, but instead meets as and when
needed.
The Executive Committee did not meet during the last fiscal year.
Audit Committee
The primary purposes of the Audit Committee are to assist
the Board of Directors in fulfilling its
responsibility in monitoring management’s conduct of the Company’s financial reporting process and overseeing
the Company’s risk assessment and risk management practices. Under its charter, the Audit Committee is
generally responsible for monitoring the integrity of the financial reporting process, systems of internal controls
and financial statements and other financial reports provided by the Company to any governmental or regulatory
body, the public or other users thereof, as well as overseeing the processes by which management assesses the
Company’s exposure to risk and evaluating the guidelines and policies governing the Company’s monitoring,
control and minimization of such exposures.
The Audit Committee’s responsibilities are as follows:
•
•
•
•
•
To monitor the performance of the Company’s internal audit function;
To appoint, compensate, retain and oversee the Company’s independent registered public accounting
firm employed by the Company for the purpose of preparing or issuing audit opinions on the
Company’s financial statements and its internal control over financial reporting;
To monitor the Company’s compliance with legal and regulatory requirements as well as the
Company’s Code of Conduct and compliance policies; and
To inquire of management, including its internal auditor, and the Company’s independent auditors
regarding significant risks or exposures, including those related to fraudulent activities, facing the
Company; to assess the steps management has taken or proposes to take to minimize such risks to the
Company; and to periodically review compliance with such steps.
In discharging its oversight role, to investigate any matter brought to its attention with full access to all
books, records, facilities and personnel of the Company and to retain outside counsel, auditors or other
experts for this purpose.
The officers of the Company responsible for risk assessment and risk management functions report directly
to the Audit Committee on a periodic basis, such as the Company’s internal auditor presenting its audit plan
annually, the Company’s chief compliance officer presenting updates on its enterprise risk management program,
and on a case by case basis as necessary.
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The members of
the Audit Committee are Daniel P. Harrington, who serves as Chairman,
James F. McDonald, and R. Alex Rankin. The Company’s Board of Directors has determined that all members of
the Company’s Audit Committee are independent as defined under NASDAQ Rule 5605(a)(2) and
2014,
Rule
Mr. Leonard S. Coleman, Jr. ceased serving on the Audit Committee as he tendered his resignation from the
Board of Directors. Mr. Coleman’s replacement is Mr. James F. McDonald.
and Exchange Commission. As
the Securities
of December
10A-3(b)(1)
17,
of
Four (4) meetings of the Audit Committee were held during the last fiscal year. The Audit Committee
reviews the adequacy of its charter on an annual basis.
19
The Board of Directors has determined that Daniel P. Harrington is an “audit committee financial expert” as
defined by regulations promulgated by the SEC.
Compensation Committee
Responsibilities of the Compensation Committee
The Compensation Committee of the Board of Directors operates under a written charter and is comprised
entirely of directors meeting the independence requirements of NASDAQ and Rule 10C-1 of the Securities and
Exchange Commission. The Board established the Compensation Committee to assist it in discharging the
Board’s responsibilities relating to compensation of the Company’s chief executive officer and each of the
Company’s other executive officers. The Compensation Committee has overall responsibility for decisions
relating to all compensation plans, policies and perquisites as they affect the chairman, chief executive officer
(“CEO”) and other executive officers. Furthermore,
the Committee has created a special Subcommittee
comprised of three non-employee directors for the purposes of approving any stock grants or other stock related
transactions to officers or directors of the Company, as required under Rule 16b-3. This Subcommittee is
comprised only of “outside directors” as defined by Section 162(m) of the Internal Revenue Code of 1986, as
amended (the “Code”), and is responsible for approving all performance standards for officers for any pay
program intended to qualify as “performance based compensation” under this section of the Code. The members
of this special Subcommittee are R. Alex Rankin, James F. McDonald, and Daniel P. Harrington.
During 2014,
the Compensation Committee was composed of
independent directors.
Mr. Leonard S. Coleman, Jr., prior to his resignation from the Board of Directors, presided over all of the
meetings held by the Compensation Committee in 2014. Post Mr. Coleman’s resignation, the Compensation
Committee is currently comprised of the following members: R. Alex Rankin, who serves as Chairman,
Craig J. Duchossois, Daniel P. Harrington, and James F. McDonald.
four
(4)
Five (5) meetings of the Compensation Committee were held during the last fiscal year. Members of
management attended each meeting. The agenda for each meeting was determined by the Chairman of the
Compensation Committee with management’s input prior to each meeting.
The Compensation Committee’s responsibilities are as follows:
•
•
•
•
•
•
Oversee the development and implementation of the Company’s compensation policies and programs
for executive officers, including the Chairman and CEO.
Establish the annual goals and objectives relevant to the compensation of the Chairman, CEO and the
executive officers and to present such to the Board annually.
Evaluate the performance of the Chairman, CEO and the executive officers in light of the agreed-upon
goals and objectives and to determine and approve the compensation level of the Chairman and CEO,
including the balance of the components of total compensation, based on such evaluation and to present
its report to the Board annually.
To develop guidelines for the compensation and performance of the Company’s executive officers and
to determine and approve the compensation of the Company’s executive officers, including the balance
of the components of total compensation.
To establish appropriate performance targets, participations and levels of awards with respect to the
Company’s incentive compensation plans.
To administer the Company’s equity-based compensation plans, including the establishment of criteria
for the granting of stock-based awards and the review and approval of such grants in accordance with
the criteria.
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•
•
•
•
•
•
•
•
•
•
•
•
To establish and periodically review company policies relating to senior management perquisites and
other non-cash benefits.
To review periodically the operation of the Company’s overall compensation program for key
employees and evaluate its effectiveness in promoting shareholder value and company objectives.
To review the results of any advisory shareholder votes on executive compensation and consider
whether to recommend adjustments to the Company’s compensation policies and programs as a result
of such results.
To consider, at least annually, whether risks arising from the Company’s compensation policies and
practices for all employees, including non-executive officers, are reasonably likely to have a material
adverse effect on the Company,
incentive compensation
arrangements encourage excessive or inappropriate risk-taking.
including whether
the Company’s
To approve any compensation “clawback” policy required by law or otherwise adopted by the
Company.
To oversee regulatory compliance with respect to matters relating to executive officer compensation.
To approve plans for managerial development and succession within the Company and to present such
plans to the Board annually.
To review, assess and recommend to the Board appropriate compensation for outside directors.
To produce the report on executive compensation to be included in the Company’s proxy statement for
the annual meeting of shareholders.
To review and discuss with management the compensation discussion and analysis, and based on such
discussion, make a recommendation to the Board as to whether or not the compensation discussion and
analysis should be included in the proxy statement.
To review and reassess the adequacy of its charter annually and recommend any proposed changes to
the Board for approval.
To conduct an annual performance evaluation of the Committee.
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The Compensation Committee’s charter reflects these responsibilities, and the Compensation Committee
and the Board periodically review and revise the charter.
Compensation Committee Interlocks and Insider Participation
None of the directors who served on the Compensation Committee at any time during the last fiscal year
were officers of the Company or were former officers of the Company. None of the members who served on the
Committee at any time during fiscal 2014 had any relationship with the Company requiring disclosure under
Item 404 of Regulation S-K. Finally, no executive officer of the Company serves, or in the past fiscal year has
served, as a member of the compensation committee (or other board committee performing equivalent functions)
of any entity that has one or more of its executive officers serving on the Committee.
Compensation Risk Assessment
The Compensation Committee performed an assessment of whether risks arising from the Company’s
compensation policies and practices for all employees during 2014, including non-executive officers, are
reasonably likely to have a material adverse effect on the Company. The Committee determined that the
Company’s compensation policies and practices are not reasonably likely to have a material adverse effect on the
Company.
21
Nominating and Governance Committee
The Company’s Nominating and Governance Committee operates under a written charter and is responsible
for establishing the criteria for and reviewing the effectiveness of the Company’s Board of Directors. In addition,
the Nominating and Governance Committee provides oversight with regard to the Company’s programs for
dealing with business ethics and other governance issues.
Pursuant to the Company’s Corporate Governance Guidelines and its Policy on Board Composition, the
Nominating and Governance Committee determines criteria regarding personal qualifications needed for Board
membership and the Committee considers, reviews qualifications and recommends qualified candidates for
Board membership. In doing so, the Nominating and Governance Committee reviews the composition of the
Board to identify skill sets and qualifications which are represented in order to determine which ones are needed.
In addition, the Nominating and Governance Committee reviews the Company’s strategic plan to determine its
needs with regard to Board composition. While the Company does not have a formal policy on diversity for
members of the Board of Directors, the Company’s Corporate Governance Guidelines and its Policy on Board
Composition specifically provide that diversity of race and gender, as well as general diversity of backgrounds
and experience represented on the Board of Directors are factors to consider in evaluating potential directors. The
Nominating and Governance Committee sometimes employs an outside consultant to identify nominees with the
skill sets, experience and backgrounds that suit the Company’s needs.
A candidate for the Company’s Board of Directors should possess the highest personal and professional
ethics, integrity and values and be committed to representing the long-term interests of the Company’s various
constituencies. In considering a candidate for nomination as a member of the Board, the Nominating and
Governance Committee will consider criteria such as independence; occupational background,
including
principal occupation (i.e., chief executive officer, attorney, accountant, investment banker, or other pertinent
occupation); level and type of business experience (i.e., financial, lending, investment, media, racing industry,
technology, etc.); diversity in race and gender; number of boards on which the individual serves; and the general
diversity of backgrounds and experience represented on the Board. The Nominating and Governance Committee
periodically reviews the Company’s Corporate Governance Guidelines and its Policy on Board Composition and
recommends changes to the Board. It also evaluates the performance of the Board as a whole and provides
feedback to the Board on how the directors, the committees and the Board are functioning. Finally, it evaluates
Board of Director practices at the Company and other well-managed companies on an annual basis and
recommends appropriate changes to the Board and/or its practices.
The Nominating and Governance Committee receives and considers issues raised by shareholders or other
stakeholders in the Company and recommends appropriate responses to the Board. The Nominating and
Governance Committee will consider recommendations for director candidates submitted by shareholders. Such
questions, comments or recommendations should be submitted in writing to the Nominating and Governance
Committee in care of the Office of the Secretary at 600 N. Hurstbourne Parkway, Ste. 400, Louisville, Kentucky
40222. The Nominating and Governance Committee, in having adopted criteria to be considered for membership
on its Board, considers such candidates applying such criteria and follows the recommendation process noted
above. Recommendations by shareholders that are made in accordance with these procedures will receive the
same consideration as recommendations from other sources.
The members of the Nominating and Governance Committee, each of whom is independent as defined by
the NASDAQ listing standards, are R. Alex Rankin, who serves as Chairman, Ulysses L. Bridgeman, and
Richard L. Duchossois.
Two (2) meetings of the Nominating and Governance Committee were held during the last fiscal year.
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Proposal to Ratify the Appointment of PricewaterhouseCoopers LLP as the
Company’s Independent Registered Public Accounting Firm for 2015
(Proposal No. 2)
On February 24, 2015, the Board of Directors, on recommendation from the Audit Committee, selected
PricewaterhouseCoopers LLP (“PwC”) to serve as the Company’s independent registered public accounting firm
for the year ending December 31, 2015. PwC has served as the Company’s independent registered public
accounting firm since the Company’s 1990 fiscal year.
Although the Company’s Amended and Restated Bylaws do not require that the Company’s shareholders
ratify the appointment of PwC as the Company’s independent registered public accounting firm, the Board of
Directors is submitting the appointment of PwC to the Company’s shareholders for ratification as a matter of
good corporate governance. This proposal will be approved if the votes cast favoring the action exceed the votes
cast opposing the action. If the appointment is not ratified, the Company’s Audit Committee will consider
whether it is appropriate to select another independent registered public accounting firm. Even if the appointment
is ratified, the Company’s Audit Committee, in its sole discretion, may select a different independent registered
public accounting firm at any time during the year if it determines that such a change would be in the best
interests of the Company and its shareholders.
Representatives of PwC are expected to be present at the Annual Meeting and will be available to respond to
appropriate questions and will have the opportunity to make a statement if they desire to do so.
THE BOARD OF DIRECTORS AND THE AUDIT COMMITTEE RECOMMEND THAT THE
SHAREHOLDERS
OF
PRICEWATERHOUSECOOPERS LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM FOR FISCAL YEAR 2015.
APPOINTMENT
RATIFICATION
“FOR”
VOTE
THE
THE
OF
UNLESS OTHERWISE INSTRUCTED, IT IS THE INTENTION OF THE PERSONS NAMED IN THE
PROXY TO VOTE THE SHARES REPRESENTED THEREBY IN FAVOR OF THE PROPOSAL TO RATIFY
THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE COMPANY’S INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM FOR FISCAL YEAR 2015.
Independent Public Accountants
Audit Fees
The audit fees incurred by the Company for services provided by PwC (i) for the year ended December 31,
2013, were $1,125,000 and (ii) for the year ended December 31, 2014, were $1,429,100. Audit fees include
services related to the audit of the Company’s consolidated financial statements, the audit of the effectiveness of
internal control over financial reporting, involvement with registration statement filings, statutory audits and
consultations related to miscellaneous SEC and financial reporting matters.
Audit-Related Fees
During 2013 and 2014, the Company incurred $0 and $0, in fees, respectively, for assurance and related
services performed by PwC that were reasonably related to the performance of the audit or review of the
Company’s financial statements that are not reported in the preceding section.
Tax Fees
Tax fees incurred by the Company for services provided by PwC (i) in 2013, were $105,000, and (ii) in
2014, were $90,100. Tax fees include services related to tax return preparation for a related entity, tax
consultation and tax advice.
23
All Other Fees
All other fees incurred by the Company for services provided by PwC relate to the use of Comperio, PwC’s
accounting research software, which amounted to $1,800 in both 2013 and 2014. The Audit Committee has
considered whether the provision of non-audit services to the Company is compatible with maintaining PwC’s
independence.
The Audit Committee has adopted a policy of evaluating pre-approval of services provided by the
independent auditors on a case-by-case basis. The Audit Committee pre-approved all audit and permissible non-
audit services provided by the independent auditors in 2014.
Advisory Vote on Executive Compensation
(Proposal No. 3)
Pursuant to Section 14A of the Securities Exchange Act of 1934, the Company’s shareholders are entitled to
a vote to approve, on an advisory and non-binding basis, the compensation of the Company’s named executive
officers (“NEOs”) as disclosed in this Proxy Statement in accordance with SEC rules. In accordance with the
preference expressed by shareholders in the 2011 advisory vote regarding the frequency of voting on the
Company’s executive compensation program, the Company is holding such advisory votes on an annual basis.
The Company has a “pay-for-performance” philosophy that forms the foundation of all decisions regarding
compensation of the Company’s NEOs. This compensation philosophy, and the program structure approved by
the Compensation Committee, is central to the Company’s ability to attract, motivate and retain individuals who
can achieve superior financial results while also aligning the interests of the executives with the interests of
shareholders over the long-term. This approach has resulted in the Company’s ability to attract and retain the
executive talent necessary to guide the Company successfully during a period of growth and transformation.
Please refer to “Compensation Discussion and Analysis—Executive Summary” for an overview of the
compensation of the Company’s NEOs.
This vote is not intended to address any specific item of compensation, but rather the overall compensation
of our NEOs and the policies and practices described in this Proxy Statement. At the Annual Meeting,
shareholders will be asked to approve the compensation of the Company’s NEOs by voting FOR the following
resolution:
“RESOLVED, that the Company’s shareholders approve, on an advisory basis, the compensation of the
named executive officers, as disclosed in this Proxy Statement pursuant to the compensation disclosure rules
of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, the
Summary Compensation Table and the other related tables and disclosure in this Proxy Statement.”
This vote is advisory and therefore not binding on the Company. The Board of Directors and Compensation
Committee value the opinions of the Company’s shareholders. Should there be a significant vote against the
named executive officer compensation as disclosed in this Proxy Statement, the Board will consider those
shareholders’ concerns and will evaluate whether any actions are necessary to address those concerns.
This proposal will be approved if the votes cast favoring the action exceed the votes cast opposing the
action.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE APPROVAL OF THE
ADVISORY RESOLUTION RELATING TO THE COMPENSATION OF THE COMPANY’S NAMED
EXECUTIVE OFFICERS AS DISCLOSED IN THIS PROXY STATEMENT.
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Compensation Discussion and Analysis
Executive Summary
Churchill Downs Incorporated is a leader in the entertainment, racing, casino and social gaming markets. As
such, our long-term success depends on our ability to attract, engage, motivate and retain highly talented
executives and key employees to achieve our strategic plans and deliver financial returns to shareholders over
both the short-term and long-term. One of the key objectives of our executive compensation program is to link
executives’ pay to their performance and their advancement of the Company’s long-term performance and
business strategies. Other objectives include aligning the executives’ interests with those of shareholders and
encouraging high-performing executives to remain with the Company over the course of their careers. We
believe that
the amount of compensation for each Named Executive Officer (NEO) reflects extensive
management experience, high performance and exceptional service to Churchill Downs Incorporated and our
shareholders. We also believe that the Company’s compensation strategies have been effective in attracting
executive talent and promoting performance and retention.
This Compensation Discussion and Analysis describes the Company’s executive compensation policies and
programs and how they apply to our NEOs (the senior executives included in the 2014 Summary Compensation
Table on page 35). It also describes the actions and decisions of the Committee and the Committee’s special
Subcommittee (the “Subcommittee”), both of which oversee the executive compensation program and determine
the compensation of the NEOs. A detailed discussion of the Committee’s structure (including the Subcommittee),
roles and responsibilities, and related matters can be found under “Compensation Committee” on pages 20-21.
2014 Compensation Highlights
NEO pay opportunity for fiscal 2014 was set in February 2014 considering relevant factors, including fiscal
2013 performance. We have highlighted several key executive compensation decisions below:
•
•
•
•
•
•
Increased the base salaries of Mr. Carstanjen and Mr. Mudd in recognition of Mr. Carstanjen’s promotion
to Chief Executive Officer and Mr. Mudd’s promotion to President and Chief Financial Officer;
Decreased the base salary of Mr. Evans in recognition of his transition from the role of Chief Executive
Officer to Chairman;
Increased the short-term performance-based incentive compensation target from 80% to 100% for
Mr. Carstanjen in recognition of his promotion to Chief Executive Officer;
Increased the short-term performance-based incentive compensation target from 75% to 80% for
Mr. Mudd in recognition of his promotion to President and Chief Financial Officer;
The NEOs did not receive any equity awards in fiscal year 2014 in light of the multi-year awards
provided in prior years; and
Eliminated all NEO employment agreements and replaced them with Change in Control, Severance
and Indemnity Agreements, which do not provide for (1) 280G tax gross-ups, (2) employment tied to a
specific term (all NEOs subject to the agreement are considered “at will” employees), or (3) certain
executive prerequisites.
Executive Compensation Philosophy and Core Principles
We Do
We Don’t Do
✓ Executive Stock Ownership Guidelines
✓ Limited future severance agreements
✓ Pay for Performance
✓ Double trigger vesting of equity awards upon change
✗ Employment Agreements
✗ Re-pricing of SARs or stock options
✗ Individually negotiated change in control agreements
✗ Excise tax gross-ups upon change in control
in control
25
The fundamental philosophy of the Compensation Committee is to provide an executive compensation
program that links pay to business strategy and performance in a manner that is effective in attracting, motivating
and retaining key executives while also aligning the interests of the executives with the interests of shareholders
over the long-term. In order to continue to support the Company’s high-performance culture, the Company’s key
principles underlying the executive compensation program are to:
•
•
Attract and retain executives with the skills and experience needed to successfully grow the Company
and create value for shareholders;
Create an entrepreneurial culture and mindset by de-emphasizing fixed pay (primarily salary) and
focusing a significant percentage of compensation on at-risk pay elements (annual and long-term
incentives); and
• Motivate and reward executives for achieving exceptional performance supportive of creating value for
shareholders over the long-term.
The Company will continue to adjust its pay practices to support these principles over time.
2014 “Say-on-Pay” Advisory Vote on Executive Compensation
The Compensation Committee monitors closely the results of the annual advisory “say-on-pay” vote, and
considers such results as one of the many factors considered in connection with the discharge of its
responsibilities. In 2014, the Company provided shareholders a “say-on-pay” advisory vote on its executive
compensation program, as disclosed in the Company’s 2014 proxy statement. At the 2014 Annual Meeting,
approximately 77% of our shareholders expressed support for the compensation of our NEOs as disclosed in the
proxy statement. The Compensation Committee considered the results of the 2014 advisory vote and also
considered other factors in evaluating the Company’s executive compensation programs as discussed in this
Compensation Discussion and Analysis, including the advice of the Committee’s independent compensation
consultant. The Committee did not make any changes to the Company’s executive compensation program and
policies specifically in light of the aforementioned vote by our shareholders.
Role of Management and Independent Advisors
The Compensation Committee meetings are regularly attended by the Chairman, the CEO, the Senior Vice
President of Human Resources, who is responsible for leading some of the discussions regarding the Company’s
compensation programs as well as being responsible for recording the minutes of the meeting, and in-house
corporate counsel. The Committee may request the participation of management or outside consultants as it
deems necessary or appropriate. The Committee regularly reports to the Board on compensation matters and
annually reviews the Chairman’s and CEO’s compensation with the Board.
The Committee and the Subcommittee may also meet in executive session without any members of
management, for the purpose of among other things discussing and approving compensation for the Chairman
and the CEO. The CEO reviews the performance of, and makes recommendations to, the Committee regarding
total compensation to be paid to the Company’s executive officers other than himself and the Chairman,
including salary, annual bonus, long-term incentive awards, as appropriate. Management also develops and
presents to the Committee recommendations for the performance measures and targets to be used to evaluate
annual performance incentives.
After the end of each fiscal year, the Committee conducts a review of the Chairman’s and the CEO’s
performance. As part of this process, the Chairman and the CEO provide a written self-assessment report. The
Committee sets the compensation of the Chairman and the CEO in executive session after considering its
assessment of the Chairman’s and the CEO’s performance, including due consideration of their self-assessment
reports. Neither the Chairman nor the CEO, or any other members of management are present during this session.
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The Committee has sole discretion, at the Company’s expense, to retain and terminate independent advisors,
including sole authority to approve the fees and retention terms for such advisors, if it shall determine the
services of such advisors to be necessary or appropriate. Such advisors are engaged by, and report directly to, the
Committee. During 2014 the Committee was assisted in fulfilling its responsibilities by Semler Brossy
Consulting Group, LLC (“Semler Brossy”). The scope of the engagement of this advisor during 2014 included:
•
•
•
•
•
•
•
•
•
Assisting the Chairman of the Committee in establishing appropriate agendas for the Committee
meetings;
Reviewing management reports and recommendations to the Committee as related to executive
compensation matters;
Attending all Committee meetings and providing the Committee with input and advice based on the
advisor’s broad experience with market practices,
including a perspective with regard to the
competitive market;
Assisting with the review of pay and performance and the evaluation of payouts under the Company’s
long-term incentive program;
Assisting in the review and evaluation of non-employee director compensation;
Providing the Committee and management with data on market practices for executive pay;
On behalf of the Committee, assisting management with disclosures, including the compensation
discussion and analysis;
Providing updates to the Committee with regard to regulatory and market developments;
Assisting the Committee in evaluating future equity grants for the NEOs, including the Chairman and
the CEO.
Semler Brossy did not provide any services to the Company, other than advising the Committee as provided
above. All of the decisions with respect to the Company’s executive compensation programs are made by the
Committee alone and may reflect factors and considerations other than, or that may differ from, the information
and recommendations provided by management or its outside advisor. The Compensation Committee assessed
Semler Brossy’s independence in light of the SEC requirements and NASDAQ listing standards and determined
that Semler Brossy’s work did not raise any conflict of interest or independence concerns.
Factors Used to Evaluate Pay Decisions
The Company does not currently manage compensation for individual executives to a specific total
compensation value or based on a strategy of positioning pay to a specific “percentile” of market practices.
Rather, the Company seeks to retain the services of executives who bring the skills, experience, and motivation
deemed necessary to significantly expand the scope and scale of the Company’s operations. Therefore,
compensation decisions for individual executives are made based on a balance of many subjective factors as
evaluated by the CEO in the case of his direct reports (with Committee review and approval) and the Committee
in the case of the Chairman and the CEO. These factors include, in order of importance for each element of pay:
•
•
•
Base salaries tied to: (1) internal equity comparisons among the executive’s peers at the Company,
(2) the scope and responsibility of the NEO’s position, and (3) recruitment and development of talent;
Target annual incentive opportunities based on internal equity considerations and the perceived level of
contribution of the NEO to meeting or exceeding annual goals, as approved by the Committee; and
Long-term incentive opportunities driven by the perceived level of contribution expected of the
executive toward achieving the Company’s growth objectives and comparisons among other Company
executives who participate in the same programs.
27
Each element of compensation is evaluated independently based on the role of that component in achieving
the Company’s overall compensation objectives, with an emphasis on long-term incentives and retention.
In making executive pay decisions, the Committee relies substantially on the advice and experience of its
independent advisor and the Chairman, and the CEO to evaluate the reasonableness of executive pay. As there
are few direct peers to the Company, the Committee does not rely directly on peer practices to establish pay
levels or programs for its executives. Rather, the Committee determines pay levels and practices based on the
talent needs of the organization as defined by our strategy of growing and diversifying revenues and with the
guidance of the Committee’s independent advisor.
While the Committee periodically conducts reviews of pay relative to broad market practices, based on data
provided by the Committee’s independent advisor, to set context for the Company’s programs from time to time,
the Committee does not use market compensation practices to drive decision making. Rather, the Committee
evaluates market data to see how and why the Company’s compensation practices differ from market practices
and to gauge where Company compensation falls relative to the market as a secondary test of reasonableness. It
is the opinion of the Committee that the pay decisions made by the Committee are reasonable relative to pay
provided to executives at other public companies, based on the Committee’s experience, the performance
expectations established for each element of pay, and consultation with the Committee’s independent advisor.
Components of Compensation
During 2014, the Company used multiple components to provide an overall compensation and benefits
package designed to attract and retain the needed level of executive talent for the Company.
Base Salary
The Committee’s philosophy is that base salaries should meet the objectives of attracting and retaining the
executive talent needed to grow the business and create shareholder value. Therefore, the Committee establishes
base salaries for new hires based on the advice of management and its independent advisor regarding reasonable
market pay practices, and comparisons with the executive’s peers at the Company. Upon promotion or other
adjustment of responsibilities, executives receive base pay increases that are commensurate with their new role or
responsibilities and the pay levels for colleagues at similar levels in the organization and market pay practices,
with more modest rates of increase thereafter. For example, the table below illustrates the salary adjustments
made in 2014 to reflect new roles and responsibilities for Mr. Evans, Mr. Carstanjen, and Mr. Mudd. Mr. Tse
received a salary adjustment in 2014 to more appropriately reflect his position as an Executive Vice President
with the Company. Increases in base salary affect the opportunity for annual incentive payouts under the
incentive compensation plan.
In 2014, the following adjustments were made to the base salaries for the Company’s NEOs:
Name
Position
2013 Base
Salary ($)
Percentage
Change
Salary
Change ($)
2014 Base
Salary ($)(1)
Robert L. Evans . . . . . . . . . . . . . . . . . . Chairman
William C. Carstanjen . . . . . . . . . . . . . Chief Executive Officer
William E. Mudd . . . . . . . . . . . . . . . . . President & CFO
James E. Gay . . . . . . . . . . . . . . . . . . . . Senior Vice President
Alan K. Tse . . . . . . . . . . . . . . . . . . . . . EVP & GC
$600,000
480,000
435,000
335,000
300,000
-8.3% $-50,000
70,000
14.6%
65,000
14.9%
16,235
4.8%
65,000
21.7%
$550,000
550,000
500,000
351,235
365,000
(1) Annual rate of base compensation following promotions effective August 27, 2014. Actual salaries paid in
2014 shown in the Summary Compensation Table on page 35.
The salary adjustments above further illustrate the Committee’s overall philosophy toward compensation.
Based upon Mr. Evans’ transition from the role of Chief Executive Officer to Chairman, his base salary was
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decreased to reflect his new set of duties. Conversely, Mr. Carstanjen’s base salary was increased, commensurate
with the Committee’s expected level of contribution from Mr. Carstanjen, and in recognition of his enhanced role
as Chief Executive Officer. Similarly, Mr. Mudd and Mr. Tse also received an increase in base salary
commensurate with the expected contributions from Mr. Mudd in his new role as President and Chief Financial
Officer, and additional goals and objectives placed on the Executive Vice President and General Counsel.
Mr. Gay did not receive any additional increase to his base salary, in 2014, other than a routine cost of living
adjustment, as his base salary was previously adjusted by the Committee to reflect compensation commensurate
with his role as President of Churchill Downs Interactive.
Executive Annual Incentive Plan
Bonus awards or incentive compensation paid with respect to 2014 were determined by the Committee per
the terms of the Executive Annual Incentive Plan (2013) (“EAIP”), a shareholder approved incentive plan.
Pursuant to the EAIP, the Committee established performance goals for the Company and bonus opportunities
for the 2014 performance year. In analyzing proposed awards against
target and maximum payouts, the
Committee used the goals as its roadmap to determine whether to issue awards above, at, or below each NEO’s
target award. As it has done historically, for 2014, the Committee sets performance goals based upon a
comprehensive assessment of the Company against its long-term strategic goals and its ability to achieve said
goals with its current leadership team and key employees. Therefore, individual performance by the Company’s
NEOs (as measured by various factors, including, but not limited to, continued growth and diversification of the
Company’s asset portfolio through acquisitions, customer and employee satisfaction, and the completion of
certain specified legislative and regulatory outcomes), and unit performance (as measured by among other things
increases in sales and revenues) led by some of the Company’s key employees also played a significant role in
setting and evaluating the Company’s performance goals, and determining the proper level of compensation
deemed necessary to incent the NEOs and key employees to continue to drive growth.
2014 Performance Goals. For 2014, the Committee set the following goals (per segment) for the Company.
These goals were used to assess the NEOs’ performance and determine EAIP payouts as disclosed in the 2014
Summary Compensation Table on page 35. The Committee, in setting the goals, considered the challenges to the
Company; however, each goal was deemed achievable, representing requirements for a superior level of
performance. The goals are expressed generally as follows:
Racing
• Manage overall budgets to reduce cost (without impacting the customer experience);
•
•
Increase the financial performance of big events (i.e., Kentucky Derby, Kentucky Oaks, Arlington
Million, etc.);
Continue to work on innovative approaches to combat the long-term decline in racing;
Gaming
•
•
•
Achieve adjusted earnings before interest, taxes, depreciation and amortization (“Adjusted EBITDA”)
goals at our gaming properties;
Successfully re-develop, construct and open current projects and properties;
Assess and pursue opportunities to acquire accretive gaming properties;
Online
•
•
Continue to invest in and grow our advanced deposit wagering businesses;
Assess and pursue opportunities to expand our online gaming profile;
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Other
•
•
•
Increase Adjusted EBITDA;
Develop technology-driven cost out opportunities for all subsidiaries; and
Execute through acquisition and/or development projects that take the Company into new business
segments.
Incentive Opportunities. Under the EAIP, the NEOs have target award opportunities, which the Committee
reserves the right to exercise negative discretion against if it so chooses. For NEOs, these targets are determined
by the Committee based on internal pay equity considerations, impact on total short-term compensation and the
expected level of contribution of each NEO to the Company’s performance goals and growth objectives.
The Compensation Committee approves the target and maximum incentive levels proposed by the CEO for
each NEO, excluding the Chairman, at the beginning of each year. During 2014, the target and maximum awards
assigned to the Chairman, the CEO and the other NEOs were as follows:
Name
Position
Target Incentive
Award as a
Percentage
of Salary
Target Incentive
Award in ($)
Maximum Target
Incentive Award as a
Percentage of Salary
Maximum Target
Incentive
Award in ($)
Robert L. Evans . . . . . . . . Chairman
William C. Carstanjen . . . Chief Executive Officer
William E. Mudd . . . . . . . President & CFO
James E. Gay . . . . . . . . . . Senior Vice President
Alan K. Tse . . . . . . . . . . . . EVP & GC
100%
100%
80%
60%
60%
$583,300
450,100
358,375
213,006
207,744
200%
200%
200%
200%
200%
$1,166,600
900,200
716,750
426,012
415,488
2014 Performance Results. In determining the payouts,
the Compensation Committee exercises its
discretion to determine whether to payout at, above, or below the target opportunities based upon its review of
the outcomes evaluated against Company and individual performance. The Compensation Committee established
a minimum corporate Adjusted EBITDA performance threshold for 2014 of $125 million required before any
incentives were eligible to be paid under the EAIP for 2014. The Compensation Committee certified that actual
Adjusted EBITDA for 2014 exceeded this threshold and that executives were eligible for payouts under the EAIP
for 2014.
In evaluating 2014 performance, the Compensation Committee considered (i) the Company’s continued
diversification in 2014 including the acquisition of Big Fish Games, one of the world’s largest producers and
distributors of mobile and online games, (ii) total attendance at the 140th Kentucky Derby and Oaks was strong,
hosting 277,977 fans, and (iii) wagering from all-sources on the Kentucky Derby totaled $186.6 million. The
Compensation Committee determined that these achievements contributed to benefits being realized by the
Company’s shareholders.
The results for amounts earned by the NEOs for 2014 under the EAIP are reflected in the 2014 Summary
Compensation Table on page 35 in the column labeled “Non-Equity Incentive Plan Compensation”. As noted
above, the Company exhibited strong financial performance in 2014, which exceeded the performance goals. The
top four NEOs (Mr. Evans, Mr. Carstanjen, Mr. Mudd, and Mr. Tse) were viewed by the Committee to be the
primary parties responsible for meeting and exceeding the performance goals in 2014. The Compensation
Committee, after considering overall Company performance awarded the NEOs EAIP awards above the target, as
shown in the table on page 35, to reward them for the Company’s outstanding performance. As such, the NEOs
were awarded an EAIP award at the following percentage of their target incentive award: Mr. Evans 124%,
Mr. Carstanjen 167%, Mr. Mudd 100%, Mr. Tse 123%, and Mr. Gay 99%. These awards were made pursuant to
the EAIP and as a reward for the NEOs respective roles in driving performance during the period ending
December 31, 2014.
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Long-Term Incentives
Corporate Long-Term Incentive Plan. The objective of the Company’s long-term incentive compensation
program is to support the entrepreneurial mindset desired by management and the Board of Directors by
providing an opportunity to earn significant equity in the Company for achieving significant performance
improvements.
The Compensation Committee did not make any new long-term incentive awards in 2014 as the executives
continued to be eligible to earn time- and performance-based awards granted in 2013 (for executives other than
the Chairman, who was granted awards under his amended and restated employment agreement in 2010). The
2013 New Company LTIP and prior Chairman awards are described in more detail below.
2013 New Company LTIP. For 2013, the Company opted to develop a new long-term incentive program
utilizing the 2007 Omnibus Stock Incentive Plan (the “New Company LTIP”). As a way to continue to encourage
innovation, an entrepreneurial approach, and careful risk assessment,
in addition to the retention of key
executives, the Company’s new incentive program offered new long-term incentive compensation opportunities
to the Company’s NEOs, with the exception of Robert L. Evans. Restricted stock awards were granted, to the
NEOs, under the New Company LTIP, on March 21, 2013, subject to certain vesting conditions.
The 2013 restricted stock awards were divided between time-vesting and stock price-vesting restricted stock
(weighted approximately 25% and 75%, respectively). All time-based restricted shares will vest by December 31,
2016, as described in the 2014 Outstanding Equity Awards at Fiscal Year End table on page 38. The stock-price
vesting restricted shares vest over a five-year performance period based on the Company’s stock price
performance, with four vesting triggers tied to the daily closing NASDAQ stock market price for the Company’s
Common Stock (collectively, referred to as the “Stock Price Triggers”). Stock Price Trigger 1 was $75 (earned
on May 24, 2013) and each successive Stock Price Trigger ($85 (earned on December 19, 2013), $95 (earned on
September 29, 2014), and $105 (yet to be earned)) is at least 10% above the preceding Stock Price Trigger, with
the vesting of the stock price shares to occur in 25% installments for each Stock Price Trigger earned. In order
for a Stock Price Trigger to be reached the Company must successfully achieve and maintain for a 20
consecutive trading day period a specific daily share closing price value.
As an additional key executive retention device, the vesting of Stock Price Triggers 1 and 2, achieved in
2013, was subject to the NEOs’ continued employment until the first anniversary of the grant date, March 21,
2014. If the Company does not achieve the final Stock Price Trigger ($105) during the five-year performance
period, NEOs under this program will forfeit any incentive compensation opportunity tied to that Stock Price
Trigger.
The amounts earned by each participating NEO with regard to the 2014 achievement of the third trigger
under the New Company LTIP are as follows:
Name
Position
Robert L. Evans . . . . . . . . . . . . . . . . . . . .
William C. Carstanjen . . . . . . . . . . . . . . .
William E. Mudd . . . . . . . . . . . . . . . . . . .
James E. Gay . . . . . . . . . . . . . . . . . . . . . .
Alan K. Tse . . . . . . . . . . . . . . . . . . . . . . .
Chairman
Chief Executive Officer
President & CFO
Senior Vice President
EVP & GC
New Company LTIP
Share Award for
Achievement of
Stock Price
Trigger 3
n/a
22,500
20,000
10,750
9,750
Fair Market
Value for
Stock Price
Trigger 3
as of
Vesting Date
$
n/a
2,183,400
1,940,800
1,043,180
946,140
Long-Term Incentives for the Chairman. Mr. Evans, in his previous role as the CEO, received a significant
grant of Company stock (with both time- and performance-based vesting) as a component of his original 2006
31
employment agreement and his amended and restated employment agreement in 2010 and therefore he has not
been, nor is he currently, a participant in the New Company LTIP. The Committee believes that having a separate
incentive plan for the Chairman from the incentive plan for the rest of the executive team in this context is
appropriate and beneficial as it allows the Chairman to evaluate the Company’s long-term performance and make
recommendations to the Committee regarding the pay of the CEO without bias to his own compensation from the
Company. Mr. Evans was not granted any equity-based awards in 2011, 2012, 2013, or 2014.
Executive Stock Ownership Guidelines
Our Board of Directors has adopted minimum stock ownership guidelines for our executive officers and
directors. The principal objective of the guidelines is to enhance the linkage between the interests of shareholders
and our executive officers and directors by requiring a meaningful, minimum level of stock ownership. The
current guidelines provide that, within five (5) years of becoming subject to the stock ownership guidelines, our
Chairman and our CEO should own shares valued at an amount equal to six times (6x) their base salary, our
President and CFO should own shares valued at an amount equal to four times (4x) his base salary, and that all
other executive officers should own shares valued at an amount equal to three times the executive’s base salary.
Mr. James E. Gay is not an executive officer of the Company, therefore, he is not subject the aforementioned
guidelines.
In 2014, each executive subject to the ownership guidelines met or exceeded the guidelines:
Executive Officer
Ownership Guidelines
Shares Owned(1) Value of Shares(2) Multiple of Salary(3)
Robert L. Evans . . . . . . . . . . . . . . . . . .
William C. Carstanjen . . . . . . . . . . . . .
William E. Mudd . . . . . . . . . . . . . . . . .
Alan K. Tse . . . . . . . . . . . . . . . . . . . . .
6x
6x
4x
3x
151,464
102,602
60,596
14,971
$14,434,519
$ 9,777,971
$ 5,774,799
$ 1,426,736
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(1) Calculated as of December 31, 2014 and represents shares of Common Stock owned outright.
(2) Based on CHDN closing stock price of $95.30 as of December 31, 2014.
(3) Calculated using the base salary information illustrated on page 28.
Deferred Compensation Benefits
The Company’s philosophy is to provide retirement and savings benefits to executives which are commonly
provided by other public companies. These benefits include:
401(k). The Company maintains a 401(k) Retirement Plan, which is a profit sharing plan that is intended to
be a qualified retirement plan under Section 401(a) of the Code. The 401(k) Retirement Plan allows all
employees who meet the eligibility requirements to become participants. Participants may make salary deferral
contributions pursuant to Section 401(k) of the Code up to limits prescribed by the plan and the Code. The
Company makes matching contributions with respect to such salary deferrals at a rate of 100% on the first 3% of
compensation deferred and 50% on deferrals in excess of 3% of compensation deferred but no more than 5% of
compensation deferred. Salary deferral contributions and matching contributions are fully vested at all times.
Participants are allowed to direct investment of their accounts under the 401(k) Retirement Plan into as many as
25 investment options. All assets of the 401(k) Retirement Plan are held in a trust which is intended to be
qualified under Section 501 of the Code.
Deferred Compensation Plan. The Company also maintains a Deferred Compensation Plan for select
executives. The purpose of the plan is to provide eligible executives of the Company an opportunity to defer to a
future date the receipt of base salary and bonus compensation for services and to receive matching contributions
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in similar fashion as provided by the Company’s 401(k) Retirement Plan for any base salary and bonus deferred
beyond the limits imposed by the IRS for that plan. The Committee believes that a Deferred Compensation Plan
is a normal and typical benefit for executives at companies similar to the Company and is necessary to attract and
retain executive talent.
For purposes of determining earnings under the Deferred Compensation Plan, various hypothetical
investment alternatives are selected by the Committee in its discretion. The Deferred Compensation Plan allows,
but does not require, the Committee to receive input from participants regarding such investment alternatives.
The current hypothetical investments selected by the Committee include 33 investment return options for
determining the rate of return to be credited on participant deferrals. Participants are allowed to choose among
these investment return options in order to direct the hypothetical investments used to determine earnings under
the Plan.
Life insurance contracts have been purchased by the Company to provide some or all of the benefits under
the Deferred Compensation Plan. Other details regarding the Deferred Compensation Plan can be found in the
Nonqualified Deferred Compensation Table, on page 39, and the accompanying narrative below.
Allowances and Other Benefits
The Company’s standard, non-cash executive benefits are Company-paid premiums on executive term life
insurance and an optional supplemental long-term disability income plan for all of the NEOs. These plans
provide benefits which are similar to those provided to all employees, but extend the benefit levels to be
appropriate to the income of the executive officers.
The Company’s executive perquisites, in 2014, were as follows:
•
•
Automobile allowance, including reimbursement for gas expenses, in the case of Mr. Evans; and
Reimbursement of spouse’s travel expenses for travel with the executive on Company business on a
case-by-case basis.
The Company also previously provided for a miscellaneous perquisites allowance for each executive officer
of $10,000, for Mr. Evans, Mr. Carstanjen, Mr. Mudd, and Mr. Tse, and $7,500 for Mr. Gay. However, this
allowance was eliminated in late 2014.
Severance Benefits
The Committee believes that arrangements which provide benefits upon termination or a change in control of the
Company support the goals of attracting and retaining qualified executives by clarifying the terms of employment and
reducing the risks to the executive in situations where the executive believes that the Company may undergo a merger
or be acquired or where the Company has tasked the executive to develop new markets or lines of business for the
Company. In addition, the Committee believes that such agreements align the interests of executives with the interests
of shareholders if a qualified offer to acquire the Company is made, in that each of the executives would likely be
aware of or involved in any such negotiation and it is to the benefit of shareholders to have the executives negotiating
in the best interests of the Company without regard to their personal financial interests. In 2014, the Committee, in lieu
of negotiating individual severance agreements with each executive, adopted a form Executive Change in Control,
Severance and Indemnity Agreement (the “Change in Control Agreement”). Each executive officer of the Company,
namely Robert L. Evans, William C. Carstanjen, William E. Mudd, and Alan K. Tse, executed a Change in Control
Agreement on August 27, 2014. The Change in Control Agreements, at the time of their execution, became
immediately effective and each of the executive officer’s previously executed employment agreement terminated.
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Each Change in Control Agreement provides that, subject to the Company receiving a general release of
claims from the executive, in the event the executive’s employment is terminated (i) by the Company without
“Cause” (as defined in the Change in Control Agreement) or (ii) by the executive for “Good Reason” (as defined
in the Change in Control Agreement), the executive will be entitled to receive an amount in cash equal to 1.5
times the sum of (a) the executive’s annual base salary and (b) the amount of the executive’s annual target bonus
for the year in which the executive was terminated. All equity-based awards in effect at the time of termination
for the aforementioned reasons shall remain governed by the applicable plan or award agreement.
Each Change in Control Agreement provides further that, subject to the Company receiving a general
release of claims from the executive, in the event the executive’s employment is terminated within the 2-year
period following a “Change in Control” (as defined in the Change in Control Agreement) (i) by the Company,
other than for “Cause” (as defined in the Change in Control Agreement), “Disability” (as defined in the Change
in Control Agreement), or death, or (ii) by the executive for “Good Reason” (as defined in the Change in Control
Agreement), the executive will be entitled to receive an amount in cash equal to 2 times the sum of (a) the
executive’s annual base salary and (b) the amount of the executive’s annual target bonus for the year in which the
executive was terminated.
The Change in Control Agreements eliminated any tax gross-ups for excise taxes payable following a
Change in Control.
Additional
information regarding severance benefits may be found under “Potential Payments Upon
Termination or Change in Control” on page 40.
Section 162(m) of the Code
As a publicly-traded company, we are subject to Section 162(m) of the Internal Revenue Code which limits
our ability to deduct for U.S. income tax purposes compensation in excess of $1 million paid to the NEOs unless
the compensation is performance-based under Section 162(m). The Compensation Committee considers tax
deductibility to be an important, but not the sole or primary, consideration in setting executive compensation.
Because the Compensation Committee also recognizes the need to retain flexibility to make compensation
decisions that may not meet the standards of Section 162(m) when necessary to enable us to continue to attract,
retain, and motivate highly-qualified executives, it reserves the authority to approve potentially non-deductible
compensation.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the information appearing above under the
heading “Compensation Discussion and Analysis” with management and, based on that review and discussion,
has recommended to the Board of Directors that the “Compensation Discussion and Analysis” section be
included in this Proxy Statement and the Company’s Annual Report on Form 10-K for the year ending
December 31, 2014.
Compensation Committee of the Board of Directors:
R. Alex Rankin, Chairman
Craig J. Duchossois
Daniel P. Harrington
James F. McDonald
34
2014 Summary Compensation Table
The following table provides information regarding compensation earned by each individual who served as
our Chairman, Chief Executive Officer, President & Chief Financial Officer, Executive Vice President & General
Counsel, and one officer employed at the end of 2014 who were the most highly compensated for 2014
(sometimes referred to in this proxy statement as the “Named Executive Officers” or “NEOs”).
Name and Principal Position(3)
Year
Base
Salary
($)
Bonus
($)
Stock
Awards
($)
Option
Awards
($)
Non-Equity
Incentive Plan
Compensation
($)(1)
All Other
Compensation
($)(2)
Total
($)
Robert L. Evans . . . . . . . . . 2014 $584,615 $
Chairman
2013 588,462
2012 550,000
-0- $
-0-
-0-
-0- $-0-
-0-
-0-
-0-
-0-
$725,000
825,000
875,000
$80,488
75,433
78,122
$1,390,103
1,488,895
1,503,122
William C. Carstanjen . . . . 2014 511,539
2013 476,539
2012 465,000
Chief Executive Officer
William E. Mudd . . . . . . . . 2014 462,500
2013 431,539
2012 420,000
President and Chief
Financial Officer
James E. Gay . . . . . . . . . . . . 2014 344,363
2013 335,000
2012 286,346
Senior Vice President
-0-
-0-
-0- 8,843,525
-0- 1,625,000
-0-
-0-
-0- 7,417,000
-0- 1,250,000
-0-
-0-
-0- 4,022,588
750,000
-0-
Alan K. Tse . . . . . . . . . . . . . 2014 345,000
2013 297,692
2012 290,000 60,000
-0-
-0-
-0- 3,056,978
150,000
Executive Vice
President and General
Counsel
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
750,000
530,000
500,000
500,000
450,000
425,000
210,000
210,000
180,000
255,000
235,000
180,000
19,435
22,150
21,605
35,385
36,803
36,273
52,649
39,320
14,527
29,937
27,878
41,350
1,280,974
9,872,213
2,611,605
997,885
8,335,342
2,131,273
607,012
4,606,908
1,230,873
629,937
3,617,548
721,350
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(1) Amounts in this column represent payments for performance under the Executive Annual Incentive Plan
(“EAIP”). Payment for each year shown is made by March 31 of the following year.
(2) The table below shows the components of this column for 2014, which include the Company match for each
individual’s defined contribution plan contributions,
life insurance premiums, supplemental long-term
disability insurance premiums and allowances. Allowances for Mr. Evans for 2014 include $33,541 for
Mr. Evans’ ground transportation allowance and other monetary allowances. The monetary allowance for
each of Mr. Evans, Mr. Carstanjen, Mr. Mudd, Mr. Tse, and Mr. Gay for 2014 ceased, effective August 27,
2014. Additionally, $36,000 in relocation expense reimbursements is also included for Mr. Gay. Mr. Gay’s
relocation expenses were valued on the basis of the aggregate incremental cost to the Company and
represent the amount accrued for payment or paid to the service provider or Mr. Gay, as applicable.
(3) As of August 27, 2014, James E. Gay’s reporting role changed with the promotion of William C. Carstanjen
to the role of Chief Executive Officer. Consequently, Mr. Gay, as of December 16, 2014, no longer is
reported by the Company under Section 16 of the Exchange Act.
35
All Other Compensation
For Fiscal Year Ended December 31, 2014
Name
Company
Contributions
Under Defined
Contribution
Plans
(a)
Robert L. Evans . . . . . . . . . . . . . . . . . . . . . .
William C. Carstanjen . . . . . . . . . . . . . . . .
William E. Mudd . . . . . . . . . . . . . . . . . . . . .
James E. Gay . . . . . . . . . . . . . . . . . . . . . . . .
Alan K. Tse . . . . . . . . . . . . . . . . . . . . . . . . . .
$31,729
10,200
26,793
10,112
21,296
Supplemental
Long-Term
Disability
Insurance
Premiums
(c)
Allowances
(d)
Total All Other
Compensation
$1,479
900
750
715
999
$40,464
7,039
6,923
41,192
6,923
$80,488
19,435
35,386
52,649
29,937
Life
Insurance
Premiums
(b)
$6,816
1,296
919
630
719
(a) This amount includes Company contributions to both 401(k) and deferred compensation accounts.
(b) The NEOs receive group life coverage equal to two times base salary with a $1 million maximum, whereas
other employees receive coverage of two times base salary with a $300,000 maximum. The amounts in this
column are the premiums for the NEOs’ coverage.
(c) The NEOs receive long-term disability coverage equal to sixty percent (60%) of the NEO’s base salary with
a $10,000 per month maximum in the event of a long-term disability, which benefit is taxable to the NEO.
The Company offers supplemental long-term disability income insurance to help fill the gap between the
executive’s regular monthly net income and the amount that would be paid under the Company’s standard
long-term disability insurance policy that is available to other salaried employees. The amounts in this
column are the premiums for the NEOs’ supplemental coverage paid by the Company.
(d) See Note 2 to the 2014 Summary Compensation Table on page 35.
36
Grants of Plan-Based Awards
For Fiscal Year Ended December 31, 2014
The grants in the following table are generally described in the Compensation Discussion and Analysis,
beginning on page 25.
Name
Robert L. Evans
William C. Carstanjen
William E. Mudd
James E. Gay
Alan K. Tse
Estimated Future Payout
under
Non-Equity Incentive Plan
Awards(1)
Grant
Date
Threshold
($)
Target
($)
n/a
n/a
n/a
n/a
n/a
291,650
225,050
179,188
106,503
103,872
583,300
450,100
358,375
213,006
207,744
Max ($)
1,166,600
900,200
716,750
426,012
415,488
(1) Represents annual incentive bonus opportunities under the EAIP for each of the NEOs. See “Compensation
Discussion and Analysis” beginning on page 25. Actual bonus payments for 2014 are listed under Non-
Equity Incentive Plan Compensation in the Summary Compensation Table on page 35.
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Outstanding Equity Awards at Fiscal Year-End
For Fiscal Year Ended December 31, 2014
Stock Awards
Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#)
Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(#)
Option
Exercise
Price ($)
Option
Expiration
Date
Name
Robert L. Evans . . . . . . . .
William C. Carstanjen . . .
-0-
William E. Mudd . . . . . . .
4,500
James E. Gay . . . . . . . . . . .
Alan K. Tse . . . . . . . . . . . .
-0-
-0-
-0-
-0-
-0-
-0-
-0-
-0-
$52.58 10/15/2017
-0-
-0-
-0-
-0-
Number of
Shares or
Units of
Stock That
Have
Not Vested
(#)
Market
Value of
Shares or
Units of
Stock That
Have
Not Vested
($)(4)
Equity
Incentive Plan
Awards;
Number
of Unearned
Shares, Units
or Other
Rights
That Have
Not Vested
(#)
Equity
Incentive Plan
Awards;
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested ($)(4)
26,406(1)
$2,516,492
-0-
-0-
25,000(3)
15,000(2)
20,000(3)
$2,382,500
$1,429,500
$1,906,000
22,500(5)
-0-
20,000(5)
$2,144,250
-0-
$1,906,000
12,000(3)
$1,143,600
10,750(5)
$1,024,475
5,000(3)
$ 476,500
9,750(5)
$ 929,175
(1) Represents shares of restricted stock granted to Mr. Evans on September 27, 2010 pursuant to his amended
and restated employment agreement that vest in quarterly installments of either 4,062 shares or 4,063 shares
of restricted stock on the last day of each calendar quarter through June 30, 2016, with an initial installment
of 2,032 shares of restricted stock that vested on September 30, 2011, and a final installment of 2,031 shares
of restricted stock that will vest on August 14, 2016.
(2) Represents restricted stock awarded in connection with Mr. Mudd’s employment agreements that will
become vested after the restriction periods that expires on March 31, 2015.
(3) Represents restricted stock awards under the New Company LTIP that were granted in 2013 but have not
yet vested.
(4) Based on the closing price of our Common Stock on the NASDAQ Global Market at December 31, 2014 of
$95.30 per share.
(5) Represents restricted stock awards under the New Company LTIP that will vest, if at all, over a five-year
performance period based on the Company’s stock price performance.
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Option Exercises and Stock Vested
For Fiscal Year Ended December 31, 2014
Option Awards
Stock Awards
Number of
Shares
Acquired on
Exercise (#)
Value
Realized
on Exercise
($)(1)
Number of
Shares
Acquired
on Vesting (#)
Robert L. Evans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
William C. Carstanjen . . . . . . . . . . . . . . . . . . . . . . . . . .
William E. Mudd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
James E. Gay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alan K. Tse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
180,000
-0-
-0-
-0-
-0-
$9,547,126
-0-
-0-
-0-
-0-
16,250
94,726
69,404
37,893
33,630
Value Realized
on Vesting ($)(1)
$1,520,230
8,887,517
6,535,368
3,567,800
3,171,234
(1) Amounts reflect the market value of the stock on the day the stock vested or day the stock options were
exercised.
Nonqualified Deferred Compensation
For Fiscal Year Ended December 31, 2014
Name
Executive
Contributions
in Last Fiscal
Year ($)(1)
Registrant
Contributions
in Last Fiscal
Year ($)(2)
Aggregate
Earnings
(Losses) in Last
Fiscal Year ($)
Aggregate
Withdrawals
Distributions ($)
Aggregate
Balance at Last
Fiscal Year End ($)(3)
Robert L. Evans . . . . . . . . . . .
William C. Carstanjen . . . . . .
William E. Mudd . . . . . . . . . .
James E. Gay . . . . . . . . . . . . .
Alan K. Tse . . . . . . . . . . . . . . .
$605,423
-0-
23,125
-0-
17,250
$21,529
-0-
16,593
-0-
11,096
$122,271
-0-
19,358
-0-
(1,230)
$-0-
-0-
-0-
-0-
-0-
$4,402,152
-0-
277,897
-0-
49,805
(1) The amounts in this column are also included in the 2014 Summary Compensation Table on page 35 in the
salary column or the non-equity incentive plan compensation column.
(2) The amounts in this column are also included in the 2014 Summary Compensation Table on page 35 in the
all other compensation column as a part of the Company contributions under defined contribution plans.
(3) Of the totals in this column,
the following totals have previously been reported in the Summary
Compensation Table for this year and for previous years:
Name
2014 ($)
Previous Years ($)
Total
Robert L. Evans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
William C. Carstanjen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
William E. Mudd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
James E. Gay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Alan K. Tse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$626,952
-0-
39,718
-0-
28,346
$3,272,344
-0-
152,229
-0-
21,294
$3,899,296
-0-
191,947
-0-
49,640
The Nonqualified Deferred Compensation table above shows information about
the Company’s
nonqualified deferred compensation plan. Executive officers and other executives may defer receipt of all or part
of their cash compensation under this plan. The plan operates in a similar manner as the Company’s 401(k) plan,
whereby participants can manage their self-directed accounts to allocate balances among various investment
alternatives, which determine gains or losses under the plan. A company match is provided for amounts deferred
above the qualified plan limits. The plan is unfunded for ERISA purposes and subject to forfeiture in the event of
insolvency or bankruptcy by the Company. Participants can elect to receive their deferred compensation balance
(i) upon termination of employment through a lump sum payment or (ii) while employed by the Company
provided that the initial distribution date is at least five (5) years from the initial participation date, in which case
distributions may be made on a monthly basis or in a lump sum.
39
Potential Payments Upon Termination or Change of Control
The Company has entered into certain agreements and maintains certain plans that will require the Company
to provide compensation to the NEOs in the event of a termination of employment or a change in control (“CIC”)
of the Company. The amount of compensation payable to each NEO in each situation as of December 31, 2014 is
listed in the table below.
Name
Robert L. Evans
Cash
Severance
Payment
Acceleration
&
Continuation
of Equity
Awards(1)
Involuntary or good reason termination . . . .
Change In Control without termination . . . .
Death or Disability . . . . . . . . . . . . . . . . . . . .
Involuntary or good reason termination
$1,702,523
-0-
583,300(2)
$
-0-(3)
1,258,246(4)
2,322,938(5)
Total Benefits
$1,702,523
1,258,246
2,906,238
within 2 years CIC . . . . . . . . . . . . . . . . . . .
2,269,173
2,516,492(6)
4,785,665
William C. Carstanjen
Involuntary or good reason termination . . . .
Death or Disability . . . . . . . . . . . . . . . . . . . .
Involuntary or good reason termination
$1,504,141
450,100(2)
$
-0-(3)
-0-
$1,504,141
450,100
within 2 years CIC . . . . . . . . . . . . . . . . . . .
2,004,191
4,526,750(8)
6,530,941
William E. Mudd
Involuntary or good reason termination . . . .
Death or Disability . . . . . . . . . . . . . . . . . . . .
Involuntary or good reason termination
$1,291,913
358,375(2)
$1,429,500(3)
1,429,500(7)
$2,721,413
1,787,875
within 2 years CIC . . . . . . . . . . . . . . . . . . .
1,721,101
5,241,500(8)
6,962,601
James E. Gay
Involuntary or good reason termination . . . .
Death or Disability . . . . . . . . . . . . . . . . . . . .
Involuntary or good reason termination
$ 175,618
213,006
within 2 years CIC . . . . . . . . . . . . . . . . . . .
175,618
Alan K. Tse
Involuntary or good reason termination . . . .
Death or Disability . . . . . . . . . . . . . . . . . . . .
Involuntary or good reason termination
$ 863,467
207,744(2)
$
$
-0-
-0-
$ 175,618
213,006
2,168,075(8)
2,343,693
-0-
-0-
$ 863,467
207,744
within 2 years CIC . . . . . . . . . . . . . . . . . . .
1,149,839
1,405,675(8)
2,555,514
(1) Represents the market value as of December 31, 2014 of restricted stock awards. For purposes of this
disclosure, market value is the closing price of our Common Stock on the NASDAQ Global Market at
December 31, 2014, of $95.30 per share.
(2) Represents the pro rata bonus for the year of death or disability based on the target bonus the executive was
eligible to receive for that year.
(3)
In the event of involuntary or good reason termination, Mr. Evans would vest in only those equity awards
scheduled to vest up to and during the quarter in which such termination occurs; equity awards scheduled to
vest after such quarter would be forfeited. This value reflects the fact that on December 31, 2014, Mr. Evans
would have fully vested in those equity awards scheduled to vest during the quarter and thus no awards
pertaining to the quarter would have remained unvested and subject to acceleration of vesting. With regard
to Mr. Carstanjen and Mr. Mudd, this value reflects the market value of the unvested restricted stock granted
to each of them in accordance with their employment agreements.
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(4) Represents the market value of fifty percent (50%) of all of Mr. Evans’ unvested equity awards, as of
December 31, 2014. In the event of a change in control, Mr. Evans would immediately vest in fifty percent
(50%) of his unvested equity awards as of the time of the change in control; remaining unvested equity
awards would continue to vest based on existing vesting schedules.
(5) Represents 18 months accelerated vesting of 24,375 shares of restricted stock pursuant to the terms of
Mr. Evans’ employment agreement.
(6) Represents the market value of one hundred percent (100%) of all of Mr. Evans’ unvested equity awards, as
of December 31, 2014. In the event of involuntary or good reason termination within two years of a change
in control, Mr. Evans would vest in any then-remaining unvested equity awards.
(7) Represents the accelerated vesting of the restricted stock granted to Mr. Mudd in accordance with his
employment agreement.
(8) Represents the accelerated vesting of the restricted stock granted to Mr. Mudd in accordance with his
employment agreement and one hundred percent (100%) of all unvested restricted stock awards granted
under the New Company LTIP.
Non-Solicit Provisions
On August 27, 2014, Mr. Evans, Mr. Carstanjen, Mr. Mudd and Mr. Tse (the “Key Executives”) each
entered into an Executive Change in Control, Severance and Indemnity Agreement (the “Change in Control
Agreement”) with the Company, replacing all previously executed employment agreements, which were
mutually terminated by the Company and each Key Executive. Pursuant to each of these agreements, each Key
Executive is subject to a two-year non-solicitation period after the termination of his employment with the
Company for any reason, during which he may not solicit any employee of the Company to leave employment
with the Company or solicit any customer of the Company for the purpose of engaging in business with them that
competes with the business engaged in by the Company.
Severance Benefits
The Change in Control Agreement, executed by the Key Executives, provides for the following principal
severance provisions upon termination by the Company without cause or by the executive upon constructive
termination or for good reason (as defined in each agreement):
Mr. Evans, Mr. Carstanjen, Mr. Mudd and Mr. Tse. Cash payments equal to the product of 1.5 times the
sum of (a) base salary plus (b) target bonus for the year of termination of employment, payable in equal
installments over 18 months; treatment of all equity-based awards per the terms of the applicable plan, award or
agreement; and a lump sum cash payment equal to the total premiums for medical, dental and vision benefits for
a three month period.
Mr. Gay. If terminated Mr. Gay is entitled to the standard benefits provided to our executives under the
Executive Severance Policy.
The Company’s Executive Severance Policy provides severance equal to three weeks of salary per year of
service (up to a maximum of 26 weeks) for Senior Vice Presidents and two weeks of salary per year of service
for Vice Presidents (up to a maximum of 26 weeks) in the case of Job Elimination. Job Elimination is the
involuntary separation of an executive without cause due to elimination of an executive’s position or duties due
to a restructuring, cost containment, or other reasons not related to job performance. Therefore, this plan does not
provide a severance payment to an executive who is terminated due to poor performance.
41
Change in Control Benefits. The new agreements for the Key Executives also provide for the following
change in control provisions: if the executive is terminated within two years following a change in control, he
will receive severance as provided above, except that the salary and bonus severance shall instead equal the
product of 2.0 times the sum of (a) base salary plus (b) target bonus for the year of termination of employment,
payable in one lump sum on the sixtieth (60th) day following such termination.
In the event that any or all payments to any of the Key Executives are subject to the excise tax imposed by
Section 4999 of the Code, such payments shall be reduced to one dollar ($1) below the maximum amount of
payments that will not be subject to such tax; provided, however, that the foregoing limitation shall not apply in
the event the total payments to a Key Executive, on an after-tax basis, would exceed the after-tax benefits to the
Key Executive if such limitation applied. The Key Executive shall bear the expense of any and all excise taxes
due on any payments that are deemed to be “excess parachute payments” under Section 280G of the Code.
Equity Compensation Plan Information(1)
(a)
(b)
Plan Category
Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
(c)
Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column (a))
Equity compensation plans approved by
security holders(2)
. . . . . . . . . . . . . . . . . . . .
10,348(3)(4)
Equity compensation plans not approved by
security holders (5) . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
65,000
75,348
$48.63
$36.16
$37.87
1,809,185(6)
-0-
1,809,185
(1) This table includes (i) aggregate data, including pricing, for shares presently committed under all equity
compensation plans of the Company as of the end of the most recently completed fiscal year and
(ii) aggregate data for shares still available to be issued under those plans.
(2) The equity compensation plans of the Company which have been approved by the shareholders of the Company
are the Churchill Downs Incorporated 2000 Employee Stock Purchase Plan (“Stock Purchase Plan”), the
Churchill Downs Incorporated 1993 Stock Option Plan (“1993 Plan”), the Churchill Downs Incorporated 1997
Stock Option Plan (“1997 Plan”), the Churchill Downs Incorporated 2003 Stock Option Plan (“2003 Plan”), the
Churchill Downs Incorporated 2004 Restricted Stock Plan (“Restricted Stock Plan”) and the Churchill Downs
Incorporated 2007 Omnibus Stock Incentive Plan (“2007 Plan”) and certain stock options and restricted stock
awards granted to the CEO as a part of his employment agreement. The 1993 Plan, the 1997 Plan and the 2003
Plan each allow one- to three-year option vesting periods and require that options expire ten (10) years after the
date of grant, if not earlier under certain circumstances. The Restricted Stock Plan allows for the award of stock
subject to certain conditions and restrictions as determined by the Compensation Committee at the time of the
award. The 2007 Plan allows the Compensation Committee the flexibility to design compensatory awards that are
responsive to the Company’s needs. Awards under the 2007 Plan may be in the form of stock options, stock
appreciation rights, restricted stock, restricted share units, performance shares or performance units.
(3) Of this total, zero (0) shares of Common Stock of the Company are issuable upon the exercise of
outstanding options granted under the 1997 Plan, 10,348 shares of Common Stock of the Company are
issuable upon the exercise of outstanding options granted under the 2007 Plan and zero (0) shares of
Common Stock of the Company are issuable upon the exercise of outstanding options granted to the CEO of
the Company as a part of his employment agreement. The total does not include 78,250 (which excludes the
New Company LTIP awards) outstanding shares of Common Stock which have been awarded under the
Restricted Stock Plan and the 2007 Plan, as of December 31, 2014, which are unvested and over which the
participants have neither voting nor dispositive power until the lapse of the restriction period.
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(4) Because each participant in the Stock Purchase Plan has one option each plan year and that option consists
of the number of shares which can be purchased, through exercise, at the end of the plan year using
compensation deductions made throughout the plan year, no outstanding options, warrants or rights for a
specific number of the Company’s securities to be issued upon exercise existed at fiscal year’s end and,
therefore, none are included in this total for the Stock Purchase Plan.
(5) As a part of his employment agreement, the Chairman of the Company was granted 65,000 restricted stock
units representing shares of Common Stock of the Company, which vest quarterly over a 5 year period
beginning with the end of the third calendar quarter of 2006. The Chairman of the Company is entitled to
receive the shares underlying the restricted stock units (along with a cash payment equal to accumulated
dividend equivalents beginning with the lapse of forfeiture, plus interest at a 3% annual rate) six months
after termination of employment. The restricted stock units were granted to the Chairman of the Company
as a material inducement to enter into the employment agreement.
(6) Of this total, as of December 31, 2014, 64,843 shares of Common Stock of the Company remained available
for future issuance under the Stock Purchase Plan and 1,744,342 shares of Common Stock of the Company
remained available for future issuance under the 2007 Plan. In 2014, a shareholder approved amendment to
the 2007 Plan increased the shares available for issuance under the 2007 Plan by 1,800,000 shares of
Common Stock. Stock awards under the 2007 Plan, other than stock options, will be counted against the
maximum number of shares as to which stock awards may be granted on a ratio of 2-to-1.
Certain Relationships and Related Transactions
The Company has adopted written policies and procedures for identifying and approving or ratifying related
person transactions. The policies and procedures cover all related person transactions required to be disclosed
under Item 404 (a) of Regulation S-K. The Audit Committee is responsible for applying the policies and
procedures. In evaluating related person transactions, the Audit Committee considers all factors it deems
appropriate, including without limitation, whether the related person transaction is on terms no less favorable
than terms generally available to an unaffiliated third party under the same or similar circumstances, the extent of
the related person’s interest in the transaction, and whether products or services of a similar nature, quantity, or
quality are readily available from alternative sources.
During the past fiscal year, the Company did not engage in any transactions in which any director, officer
(or family member of any of the foregoing) or 5% shareholder of the Company had any material interest.
Directors of the Company may from time to time own or have interests in horses racing at the Company’s tracks.
All such races are conducted, as applicable, under the regulations of the Kentucky Horse Racing Commission, the
Illinois Racing Board, the Florida Department of Business and Professional Regulation Division of Pari-Mutuel
Wagering or the Louisiana State Racing Commission, and no director receives any extra or special benefit with regard
to having his or her horses selected to run in races or in connection with the actual running of races.
In its ordinary course of business, the Company may enter into transactions with certain of its officers and
directors for the sale of personal seat licenses and suite accommodations at its racetracks, and tickets for its live
racing events. The Company believes that each such transaction has been on terms no less favorable for the
Company than could have been obtained in a transaction with a third party and no such person received any extra
or special benefit in connection with such transactions.
Churchill Downs Incorporated
Audit Committee Report
The following is the report of the Company’s Audit Committee (the “Committee”), which currently consists
of three directors, each of whom has been determined by the Board of Directors (the “Board”) to meet the current
standards of the Securities and Exchange Commission and the NASDAQ exchange to be considered an
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“independent director.” The Board has also determined that one member, Daniel P. Harrington, is an “audit
committee financial expert” as defined by the Securities and Exchange Commission.
The Committee has an Audit Committee Charter (the “Charter”), which was re-approved by the Board on
February 24, 2014. The Charter sets forth certain responsibilities of the Committee, which include monitoring
and oversight of the financial reporting process, the system of internal controls, the internal audit function, the
independent auditors, the Company’s procedures for legal and regulatory compliance, and the Company’s risk
management practices. The Committee’s job is one of oversight and the Committee reviews the work of the
Company’s management, the internal audit staff and the independent auditors on behalf of the Board.
Specifically, the Committee:
• Met four (4) times during the year, during which the Committee reviewed and discussed with
management and the independent auditors the Company’s interim and annual financial statements for
2014; at each of such meetings, the Committee met in executive session with the Company’s Chief
Compliance Officer.
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Discussed with the independent auditors all matters required to be discussed under Auditing Standard
No. 16, as amended (Communication with Audit Committees), as adopted by the Public Company
Accounting Oversight Board, which sets forth required communication between independent auditors
and audit committees.
Received the written disclosures and letters from the independent auditors required by applicable
requirements of the Public Company Accounting Oversight Board, regarding the independent auditors’
communications with the Audit Committee concerning independence, and discussed with the
independent auditors the independent auditors’ independence.
Based on the review and discussions referred to in the first three bullets above, the Committee
recommended to the Board that the Company’s audited financial statements be included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
Reviewed and discussed reports from the Company’s internal audit department and reports from the
Company’s legal department.
Discussed with management and the independent auditors the quality of the Company’s internal
controls.
Reviewed and approved all related person transactions.
Self-evaluated the effectiveness of the Committee.
Evaluated the effectiveness of the Company’s internal audit function.
Inquired of management, including its internal auditor, and the Company’s independent auditors
regarding significant risks or exposures, including those related to fraudulent activities, facing the
Company; assessed the steps management has taken or proposes to take to minimize such risks to the
Company and reviewed compliance with such steps.
Reviewed and approved the 2014 audit and non-audit services and related fees provided by the
independent auditors, PricewaterhouseCoopers LLP (“PwC”). The non-audit services approved by the
Audit Committee were also reviewed to ensure compatibility with maintaining the auditor’s
independence.
In February 2014, the Committee selected PwC to be reappointed as independent auditors for the
calendar year 2015. The Committee also reviewed and pre-approved the 2014 audit fees for services
related to the first quarter Form 10-Q review.
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No portion of this Audit Committee Report shall be deemed to be incorporated by reference into any filing
under the Securities Act of 1933, as amended (the “Securities Act”), or the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), through any general statement incorporating by reference in its entirety the
Proxy Statement in which this report appears, except to the extent that the Company specifically incorporates this
report or a portion of it by reference. In addition, this report shall not be deemed to be filed under either the
Securities Act or the Exchange Act.
Members of the Audit Committee
Daniel P. Harrington, Chairman
James F. McDonald
R. Alex Rankin
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires that the Company’s directors, executive officers and persons
who beneficially own more than ten percent (10%) of the Company’s Common Stock file certain reports with the
SEC with regard to their beneficial ownership of the Common Stock. The Company is required to disclose in this
Proxy Statement any failure to file or late filings of such reports. Based solely on our review of the forms filed
with the Securities and Exchange Commission or written representations from certain reporting persons received
by us, we believe that our directors, officers and persons who own more than ten percent (10%) of the
Company’s Common Stock have complied with all applicable filing requirements, except in the following
instances: the Company filed late one Form 4 on behalf of Alan K. Tse reporting the withholding of stock to
satisfy tax liability; the Company filed late two (2) Form 4s on behalf of James E. Gay reporting the withholding
of stock to satisfy tax liability; the Company filed late two (2) Form 4s on behalf of William C. Carstanjen
reporting the withholding of stock to satisfy tax liability; the Company filed late two (2) Form 4s on behalf of
William E. Mudd reporting the withholding of stock to satisfy tax liability; the Company filed late five (5) Form
4s on behalf of Robert L. Evans reporting his exercise of stock options and the corresponding sell of Company
Common Stock; and the Company filed late one Form 4 on behalf of Richard L. Duchossois reporting the
purchase of Company Common Stock.
Multiple Shareholders Sharing the Same Address
The SEC has adopted rules that permit companies and intermediaries (e.g., brokers) to satisfy the delivery
requirements for proxy statements with respect to two or more shareholders sharing the same address by
delivering a single proxy statement addressed to those shareholders. This process, which is commonly referred to
as “house-holding,” potentially means extra convenience for shareholders and cost savings for companies.
At this time, one or more brokers with accountholders who are Company shareholders will be “house-
holding” our proxy materials. A single Proxy Statement will be delivered to multiple shareholders sharing an
address unless contrary instructions have been received from the affected shareholder. Once you have received
notice from your broker that they will be “house-holding” communications to your address, “house-holding” will
continue until you are notified otherwise or until you revoke your consent. If, at any time, you no longer wish to
participate in “house-holding” and would prefer to receive a separate Proxy Statement, please notify your broker.
You may direct your written request for a copy of the Proxy Statement to Churchill Downs Incorporated, Attn:
Bridgett Gatewood, 600 N. Hurstbourne Parkway, Ste. 400, Louisville, Kentucky 40222, or at (502) 636-4400. If
your broker is not currently “house-holding” (i.e., you received multiple copies of the Company’s Proxy
Statement), and you would like to request delivery of a single copy, you should contact your broker.
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Proposals by Shareholders
Any shareholder proposal that may be included in the Board of Directors’ Proxy Statement and Proxy for
presentation at the annual meeting of shareholders to be held in 2016 must be received by the Company at the
principal executive office at 600 N. Hurstbourne Parkway, Ste. 400, Louisville, Kentucky 40222, Attention of the
Secretary, no later than November 25, 2015. Pursuant to the Company’s Amended and Restated Bylaws,
proposals of shareholders intended to be presented at the Company’s 2015 annual meeting of shareholders must
be received by the Company at the principal executive offices of the Company not less than 90 nor more than
120 days prior to the anniversary date of the immediately preceding annual meeting of shareholders.
Accordingly, any shareholder proposals intended to be presented at the 2016 annual meeting of shareholders of
the Company must be received in writing by the Company at its principal executive offices no later than
January 25, 2016, and no sooner than December 26, 2015. Any proposal submitted before or after those dates
will be considered untimely, and the Chairman shall declare that the business is not properly brought before the
meeting and such business shall not be transacted at the annual meeting.
BY ORDER OF THE BOARD OF DIRECTORS
Robert L. Evans
Chairman
Alan K. Tse
Executive Vice President and
General Counsel
Louisville, Kentucky
March 23, 2015
PLEASE SIGN AND RETURN THE ENCLOSED PROXY
OR VOTE BY TELEPHONE OR OVER THE INTERNET
IF YOU CANNOT BE PRESENT IN PERSON
46
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2014
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission file number 001-33998
(Exact name of registrant as specified in its charter)
Kentucky
(State or other jurisdiction of incorporation or organization)
61-0156015
(IRS Employer Identification No.)
600 North Hurstbourne Parkway, Suite 400
Louisville, Kentucky 40222
(Address of principal executive offices) (zip code)
(502) 636-4400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, No Par Value
(Title of each class registered)
The NASDAQ Stock Market LLC
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
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No
No
No
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Exchange Act during the preceding 12 months and (2) has been subject to such filing requirements for the past 90
days. Yes
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the
preceding 12 months (or for such shorter period that the Registrant was required to submit and post such
files). Yes
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a
smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act.
No
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
No
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes
As of February 20, 2015, 17,632,693 shares of the Registrant’s Common Stock were outstanding. As of June 30, 2014 (based
upon the closing sale price for such date on the NASDAQ Global Market), the aggregate market value of the shares held by non-
affiliates of the Registrant was $1,177,242,546.
Portions of the Registrant’s Proxy Statement for its Annual Meeting of Shareholders to be held on April 23, 2015 are incorporated
by reference herein in response to Items 10, 11, 12, 13 and 14 of Part III of Form 10-K. This Form 10-K filing includes 120
pages, which includes an exhibit index on pages 117-120.
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CHURCHILL DOWNS INCORPORATED
INDEX TO ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2014
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Legal Proceedings
Mine Safety Disclosures
Item 3.
Item 4.
Item 5.
Part I
Part II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6.
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Part III
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 15.
Exhibits and Financial Statement Schedule
Part IV
Signatures
Schedule II—Valuation and Qualifying Accounts
Exhibit Index
2
PART I
ITEM 1.
BUSINESS
A.
Introduction
Churchill Downs Incorporated (the “Company”) is a diversified provider of pari-mutuel horseracing, online account wagering on
horseracing and casino gaming. We are also one of the world's largest producers and distributors of online and mobile casual
games. Our principal executive offices are located at 600 North Hurstbourne Parkway, Suite 400, Louisville, Kentucky, 40222.
We manage our operations through five operating segments as follows:
1. Racing, which includes:
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Churchill Downs Racetrack (“Churchill Downs”) in Louisville, Kentucky, an internationally known
thoroughbred racing operation and home of the Kentucky Derby since 1875;
Arlington International Race Course (“Arlington”), a thoroughbred racing operation in Arlington Heights along
with ten off-track betting facilities (“OTBs”) in Illinois;
Fair Grounds Race Course (“Fair Grounds”), a thoroughbred and quarterhorse racing operation in New Orleans
along with twelve OTBs in Louisiana; and
Calder Race Course (“Calder”), a thoroughbred racing facility in Miami Gardens, Florida, where as of July 1,
2014, we ceased pari-mutuel operations, except for limited operations conducted by a third party.
2. Casinos, which includes:
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Oxford Casino ("Oxford") in Oxford, Maine, which we acquired on July 17, 2013. Oxford operates approximately
860 slot machines, 26 table games and various dining facilities;
Riverwalk Casino Hotel ("Riverwalk") in Vicksburg, Mississippi, which we acquired on October 23, 2012.
Riverwalk operates approximately 690 slot machines, 15 table games, a five story, 80-room attached hotel, multi-
functional event center and dining facilities;
Harlow’s Casino Resort & Spa (“Harlow’s”) in Greenville, Mississippi, which operates approximately 750 slot
machines, 13 table games, a five-story, 105-room attached hotel, multi-functional event center, pool, spa and
dining facilities;
Calder Casino, a slot facility in Florida adjacent to Calder, which operates approximately 1,130 slot machines
and included a poker room branded “Studz Poker Club” which ceased operations on June 30, 2014;
Fair Grounds Slots, a slot facility in Louisiana adjacent to Fair Grounds, which operates approximately 620 slot
machines;
Video Services, LLC (“VSI”), the owner and operator of approximately 710 video poker machines in southeast
Louisiana which are located within ten of our OTBs; and
Our equity investment in Miami Valley Gaming, LLC ("MVG"), a 50% joint venture harness racetrack and video
lottery terminal facility in Lebanon, Ohio, which opened on December 12, 2013. MVG has approximately 1,580
video lottery terminals, a racing simulcast center and a harness racetrack.
3. TwinSpires, which includes:
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TwinSpires, an Advance Deposit Wagering (“ADW”) business that is licensed as a multi-jurisdictional
simulcasting and interactive wagering hub in the state of Oregon;
Fair Grounds Account Wagering (“FAW”), an ADW business that is licensed in the state of Louisiana;
Velocity, a business that is licensed in the British Dependency Isle of Man focusing on high wagering-volume
international customers;
Bloodstock Research Information Services (“BRIS”), a data service provider for the equine industry;
Our equity investment in HRTV, LLC (“HRTV”), a horseracing television channel, which was divested on
January 2, 2015; and
Luckity, an ADW business that offered real-money online bingo with outcomes based on and determined by
pari-mutuel wagers on live horseraces which ceased operations during the fourth quarter of 2014.
4. Big Fish Games, Inc. ("Big Fish Games") which:
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Is headquartered in Seattle, Washington with locations in Oakland, California and Luxembourg, which we
acquired on December 16, 2014. Big Fish Games is a producer of premium paid, casual free-to-play and casino-
style games for PCs and mobile devices.
5. Other Investments, which includes:
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United Tote Company and United Tote Canada (collectively “United Tote”), which manufactures and operates
pari-mutuel wagering systems for racetracks, OTBs and other pari-mutuel wagering businesses;
Capital View Casino & Resort, a 50% joint venture with Saratoga Harness Racing, Inc. ("SHRI") formed to bid
on the development and management of a destination casino and resort in the Capital Region of New York;
Bluff Media ("Bluff"), a multimedia poker content brand and publishing company, which we acquired on February
10, 2012; and
Our other minor investments.
B.
Acquisition, Development & Disposal Activity
Big Fish Games
On December 16, 2014, the Company completed the acquisition of Big Fish Games for upfront consideration of $485 million plus
a working capital adjustment with an earnout payment of up to $350 million. Big Fish Games, headquartered in Seattle, Washington,
with offices in Oakland, California and Luxembourg, employs approximately 580 employees and develops casual games for PCs
and mobile devices worldwide. Big Fish Games operates in three business lines: premium paid, casino and casual free-to-play.
The Company acquired Big Fish Games to leverage its casino and casual game experience, as well as its assembled workforce,
and to position itself as a leader in the mobile and online games industry. The Company financed the upfront consideration for
the acquisition with borrowings under its Amended and Restated Credit Agreement (the “Senior Secured Credit Facility”) and a
$200 million Term Loan Facility (“Term Loan”) added to its existing Senior Secured Credit Facility.
Saratoga Harness Racing, Inc. Joint Ventures
On May 13, 2014, the Company entered into a 50% joint venture with Saratoga Harness Racing, Inc. ("SHRI") to bid on the
development, construction and operation of the Capital View Casino & Resort located in the Capital Region near Albany, New
York. On June 30, 2014, the joint venture filed an application with the New York State Facility Location Board to obtain a license
to build and operate a facility with approximately 1,500 slot machines, 56 table games, a 100-room hotel and multiple entertainment
and dining options. On December 17, 2014, the New York State Facility Location Board recommended that the Capital Region
license be granted to another bidder.
During the year ended December 31, 2014, the Company incurred $1.0 million in equity losses in its other investments segment
associated with the license application process and funded $3.3 million to the joint venture. Due to the result of the bidding process,
we recorded an impairment loss of $1.6 million to reduce the value of the Company's investment in the joint venture to its estimated
fair market value of $1.1 million.
On October 28, 2014, the Company signed a definitive purchase agreement to acquire a 25% ownership interest in Saratoga Casino
Holdings, LLC ("SCH"), a newly formed entity which owns Saratoga Casino and Raceway in Saratoga Springs, NY; SHRI's
controlling interest in Saratoga Casino Black Hawk in Black Hawk, Colorado; SHRI's 50% interest in a joint venture with Delaware
North Companies to manage the Gideon Putnam Hotel and Resort in Saratoga Springs, New York; its interest in the proposed
Capital View Casino & Resort in East Greenbush, New York; and SHRI's interest in a joint venture with Rush Street Gaming to
build the proposed Hudson Valley Casino and Resort in Newburgh, New York.
In addition, the Company signed a five-year management agreement pursuant to which it will manage Saratoga Casino and Raceway
and Saratoga Casino Black Hawk. Both the funding of the equity investment and the commencement of the management agreement
are subject to regulatory approval and licensing requirements in New York and Colorado.
Oxford
On July 17, 2013, the Company completed its acquisition of Oxford in Oxford, Maine for cash consideration of approximately
$168.6 million. The transaction included the acquisition of a 25,000-square-foot casino with various dining facilities on
approximately 130 acres of land. The acquisition continued the Company's diversification and growth strategies to invest in assets
with rates of returns attractive to the Company's shareholders. The Company financed the acquisition with borrowings under its
Senior Secured Credit Facility. During December 2013, Oxford continued an expansion of its facilities, adding an additional 46
slot machines and four table games. An additional twelve slot machines were added to the facilities during 2014.
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Miami Valley Gaming Joint Venture
During March 2012, the Company entered into a 50% joint venture with Delaware North Companies Gaming & Entertainment
Inc. (“DNC”) to develop a new harness racetrack and video lottery terminal (“VLT”) casino facility in Lebanon, Ohio.
Through the joint venture agreement, the Company and DNC formed a new company, MVG, to manage both the Company’s and
DNC’s interests in the development and operation of the racetrack and VLT casino facility. During the years ended December 31,
2014, 2013 and 2012, the Company funded $14.6 million, $70.5 million and $19.9 million in capital contributions to the joint
venture, respectively. On December 21, 2012, MVG completed the purchase of the harness racing licenses and certain assets held
by Lebanon Trotting Club Inc. and Miami Valley Trotting Inc. for total consideration of $60.0 million, of which $10.0 million was
funded at closing with the remainder funded through a $50.0 million note payable with a six-year term effective upon the
commencement of casino operations. In addition, there is a potential contingent consideration payment of $10.0 million based
on the financial performance of the facility during the seven-year period after casino operations commence.
On December 12, 2013, the new facility opened on a 120-acre site. The facility includes a 5/8-mile harness racing track and a
186,000-square-foot gaming facility with approximately 1,580 VLTs. MVG has invested approximately $204.6 million in the
new facility, which includes a $50.0 million license fee.
Luckity ADW Operations
On November 4, 2014, we ceased operations of Luckity, our ADW business which offered real-money online bingo with outcomes
based on and determined by pari-mutuel wagers on live horseraces. We determined that Luckity did not achieve the expected
financial returns and was unlikely to significantly improve its results. During the fourth quarter of 2014, we recorded an impairment
charge of $3.2 million for fixed assets specifically associated with Luckity. We do not expect to incur any additional, material
expenditures in connection with ceasing operations.
Calder Racecourse
On July 1, 2014, we finalized an agreement with The Stronach Group (“TSG”) under which TSG operates, at TSG’s expense, live
racing and maintains certain facilities used for racing and training at Calder. The agreement, which expires on December 31, 2020,
includes a lease to TSG of Calder’s racetrack and certain other racing and training facilities, including a portion of the barns on
Calder’s backside consisting of approximately 430 stalls. TSG will operate live horse racing at Calder under Calder’s racing
permits in compliance with all applicable laws and licensing requirements. TSG operates and maintains the racing and training
facilities at Calder on a year-round basis. Furthermore, TSG is responsible for substantially all of the direct and indirect costs
associated with these activities and receive the associated revenues. We continue to own and operate the Calder Casino.
As part of the agreement with TSG, effective July 1, 2014, we amended Calder’s agreement with the Florida Horsemen’s Benevolent
and Protective Association, Inc. (“FHBPA”) which reduced the rate of non-stakes purse supplements payable by the Calder Casino
from 12 percent to 10 percent of slot machine revenue. Finally, we modified our HRTV operating and ownership agreement with
TSG which resulted in the divestiture of the Company’s interest in HRTV on January 2, 2015.
Bluff
Bluff, which we acquired in February 2012, operates a poker periodical, BLUFF Magazine and BluffMagazine.com; ThePokerDB,
a comprehensive online database and resource that tracks and ranks the performance of poker players and tournaments; and various
other news and content forums. During January 2015, we ceased the distribution of BLUFF Magazine in paper form and now
distribute Bluff only electronically.
C.
Racing
We conduct live horseracing at Churchill Downs, Fair Grounds and Arlington. The following is a summary of our significant live
racing events, a description of our properties and our annual racing calendar.
The Kentucky Derby and the Kentucky Oaks, both held at Churchill Downs, continue to be our premier racing events offering
minimum purses of $2.0 million and $1.0 million, respectively. The Kentucky Derby is the first race of the annual series of races
for 3-year old thoroughbreds known as the Triple Crown. Our other significant stakes races include the Arlington Million at
Arlington and the Louisiana Derby at Fair Grounds, each of which offers purses of approximately $0.8 million.
Churchill Downs
The Churchill Downs racetrack site and improvements (the “Churchill facility”) are located in Louisville, Kentucky. Churchill
Downs has conducted thoroughbred racing continuously since 1875 and is internationally known as the home of the Kentucky
Derby. The Churchill facility consists of approximately 147 acres of land with a one-mile dirt track, a seven-eighths (7/8) mile
turf track, a grandstand, luxury suites and a stabling area. The Churchill facility accommodates approximately 57,400 persons in
our clubhouse, grandstand, Jockey Club Suites, Finish Line Suites, Grandstand Terrance, Rooftop Garden and Mansion. The
Churchill facility also has a saddling paddock, accommodations for groups and special events, parking areas for the public, our
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racetrack office facilities, and includes permanent lighting in order to accommodate night races. The stable area has barns sufficient
to accommodate approximately 1,400 horses, a 114-room dormitory and other facilities for backstretch personnel. The Churchill
facility also includes a simulcast wagering facility, "The Parlay", designed to accommodate 600 persons, which is Churchill Downs'
simulcast wagering facility during the months outside of its live racing meets and houses the track's media operations in the weeks
leading up to the Kentucky Derby, and a hospitality venue, "The Mansion". The Mansion, located on the sixth floor of the
Clubhouse, is used primarily during the Kentucky Derby and Kentucky Oaks. The Mansion has accommodations for 296 guests
and offers seating in its Dining Room, Living Room, Library, Parlor and Veranda. The Churchill facility opened the Grandstand
Terrace and Rooftop Garden during the second quarter of 2014. This new area offers nearly 2,400 new seats and updated restrooms,
wagering windows and food and beverage offerings. In the second quarter of 2014, the Churchill facility also completed the
installation of a 15,224 square foot, state of the art high-definition video board, which provides an enhanced viewing experience
for patrons. During the second quarter of 2015, the Churchill facility plans to open its new winner's circle suites and a courtyard.
The winner's circle suites will include 20 private, open-air suites reserved specifically for Kentucky Derby and Oaks horsemen.
The courtyard will be a spacious lawn area in front of the winner's circle suites.
To supplement the facilities at Churchill Downs, we provided additional stabling facilities sufficient to accommodate 500 horses
and a three-quarter (3/4) mile dirt track at a facility known as Trackside Louisville. Trackside Louisville previously operated as
a simulcast wagering facility until 2013, when it ceased operations. The simulcast wagering portion of the facility, a 100,000
square-foot property on approximately 88 acres of land, was razed during January 2015.
As part of financing improvements to the Churchill facility, during 2002, we transferred title of the Churchill facility to the City
of Louisville, Kentucky and leased back the facility. Subject to the terms of the lease, we can re-acquire the facility at any time
for $1.00.
Calder
The Calder racetrack and improvements (the “Calder facility”) are located in Miami-Dade County, Florida. The Calder facility
is adjacent to Sun Life Stadium, home of the Miami Dolphins, and consists of approximately 231 acres of land with a one-mile
dirt track, seating for 15,000 persons, food and beverage facilities, barns and stabling facilities. During 2014, Calder raced from
January to June. Effective July 1, 2014, TSG assumed racing operations at the facility, as more fully described in subheading "J.
Government Regulation, Florida" in Item 1. "Business" of this Annual Report on Form 10-K. We continue to assess potential
alternative uses of the Calder facility not associated with the TSG lease agreement, and during 2014, we accelerated deprecation
expense related to Calder's barns, which are not expected to be utilized subsequent to December 31, 2014.
Fair Grounds
The Fair Grounds racetrack facility, located in New Orleans, Louisiana, consists of approximately 145 acres of land, a one-mile
dirt track, a seven-eighths (7/8) mile turf track, a grandstand and a stabling area. The facility includes clubhouse and grandstand
seating for approximately 5,000 persons, a general admissions area and food and beverage facilities ranging from concessions to
clubhouse dining. The stable area consists of a receiving barn, feed rooms, tack rooms, detention barns and living quarters that
can accommodate 132 persons and approximately 2,000 horses. The Fair Grounds facility also features a saddling paddock,
parking areas and office facilities.
Arlington
The Arlington racetrack, located in Arlington Heights, Illinois, was constructed in 1927 and reopened its doors in 1989 after a fire
four years earlier. The racetrack sits on 336 acres, has a one and one-eighth (1 1/8) mile synthetic track, a one-mile turf track and
a five-eighths (5/8) mile training track. The facility includes a clubhouse, grandstand and suite seating for 6,045 persons and food
and beverage facilities. The stable area has 34 barns able to accommodate approximately 2,200 horses and a temporary housing
unit that accommodates 288 persons. The Arlington facility also features a saddling paddock, parking areas and office facilities.
Racing Calendar
The following table is a summary of our expected 2015 and actual 2014 live thoroughbred racing dates for each of our racetracks.
Racing dates are generally approved annually by the respective state racing authorities:
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Racetrack
Churchill Downs
Spring Meet
September Meet
Fall Meet
Calder Race Course
Calder Meet
Tropical Meet
Arlington
Fair Grounds
Winter Meet 13/14
Winter Meet 14/15
Winter Meet 15/16
Total thoroughbred race dates
2015
2014
Racing Dates
# of Days
Racing Dates
# of Days
April 25 - June 27
Sept. 11- Sept. 27
Nov. 1 - Nov. 29
N/A
N/A
38 April 26 - June 29
11
Sept. 4 - Sept. 28
21 Oct. 26 - Nov. 30
70
— Jan. 1 - June 30
—
—
N/A
April 27 - Sept. 30
77 May 2 - Sept. 28
Jan.1 - Mar. 29
Nov. 20 - Dec. 31
Jan. 1 - Mar. 30
57 Nov. 20 - Dec. 31
24
81
228
38
12
24
74
79
—
79
89
53
24
77
319
During 2015, MVG expects to conduct 89 days of live harness racing during the months of January through May. In 2014,
MVG conducted 64 days of live harness racing.
D.
Simulcasting
We generate a significant portion of our pari-mutuel wagering revenues by sending signals of races from our racetracks to other
facilities and businesses (“export”) and receiving signals from other racetracks (“import”). Revenues are earned through pari-
mutuel wagering on signals that we both import and export. Arlington, Churchill Downs, Fair Grounds and the Company's OTBs
in Illinois and Louisiana offer year-round simulcast wagering. Calder ceased operating as a simulcast wagering facility on July
1, 2014.
Off-Track Betting Facilities
To create a common identity for our multi-state OTB operations, we have collectively branded each OTB location a “Trackside”
OTB. Trackside Louisville, a 100,000 square-foot OTB in Louisville, Kentucky, ceased simulcast operations during 2013 and
was razed during January 2015.
Arlington operates ten Trackside OTBs that accept wagers on races at Arlington as well as on races simulcast from other locations.
One OTB is located on the Arlington property and another, Quad City Downs, was located in East Moline, Illinois on approximately
122 acres. The Quad City Downs facility ceased operations on January 31, 2015. Arlington also leases an OTB located in
Waukegan, Illinois consisting of approximately 25,000 square-feet. Arlington operates eight OTBs within existing non-owned
Illinois restaurants under license agreements. These OTBs are located in Chicago, which was relocated from its previous location
in June 2012, Orland Hills, Villa Park, Rockford, South Elgin, McHenry, Hodgkins and Aurora and opened in April 2012, July
2011, December 2009, December 2002, June 2003, December 2007 and April 2013, respectively.
Fair Grounds operates twelve OTBs that accept wagers on races at Fair Grounds as well as on races simulcast from other locations.
The Gentilly OTB is located on the Fair Grounds property. Another OTB is located in Kenner, Louisiana and consists of
approximately 4.3 acres. Fair Grounds also leases its other OTBs in the southeastern Louisiana communities of: Chalmette,
Covington, Elmwood, Gretna, Houma, LaPlace, Metairie, Boutte, Thibodaux and Westwego. Leased space for these OTBs ranges
from approximately 5,000 to 20,000 square-feet per facility. Video poker is offered at Chalmette, Kenner, Elmwood, Gretna,
Houma, LaPlace, Boutte, Metairie, Thibodaux and Westwego.
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E.
Casinos
During March 2012, the Company entered into a 50% joint venture with DNC to develop a new harness racetrack and VLT casino
facility in Lebanon, Ohio. On December 12, 2013, the new facility opened on a 120-acre site. The facility includes a 5/8-mile
harness racing track and an 186,000 square-foot gaming facility with approximately 1,600 VLTs.
On July 17, 2013, we completed the acquisition of Oxford in Oxford, Maine for cash consideration of approximately $168.6
million. The transaction included the acquisition of a 25,000 square-foot casino with approximately 800 slot machines, 22 table
games and dining facilities on approximately 130 acres of land. During 2014, we completed a casino expansion project at Oxford,
including an additional 2,000 square-feet, 58 slot machines and two table games.
On October 23, 2012, we completed the acquisition of Riverwalk in Vicksburg, Mississippi for cash consideration of approximately
$145.6 million. The transaction included the acquisition of a 25,000 square-foot casino with approximately 725 slots machines
and 18 table games, an 80-room hotel, a 5,600 square-foot event center and dining facilities on approximately 22 acres of land.
On December 16, 2010, we completed the acquisition of Harlow’s in Greenville, Mississippi for cash consideration of
approximately $140.4 million. The transaction included the acquisition of a 33,000 square-foot casino with approximately 900
slot machines and 21 tables games, a 105-room attached hotel, a 2,600 seat entertainment center and three dining facilities. Harlow’s
is located on approximately 78 acres of leased land adjacent to U.S. Highway 82 in Greenville, Mississippi. The property is visible
from the highway and is the first casino facility encountered when crossing the Greenville Bridge into Mississippi from Arkansas.
On May 12, 2011, the property sustained flood damage to its 2,600 seat entertainment center and a portion of its dining facilities.
On June 1, 2011, we resumed casino operations with temporary dining facilities. During December 2012 and January 2013, we
completed the renovation and improvement projects, which included a new buffet area, steakhouse, business center, spa facility,
fitness center, pool and a multi-purpose event center.
On January 22, 2010, we opened a slot facility, Calder Casino, which is adjacent to Calder. The casino is a 104,000 square-foot
facility which offers approximately 1,130 slot machines on a single-level. The facility offers three dining options, including a
buffet dining area, a centrally located bar with a separate casual dining area and a “grab and go” dining option.
During October 2008, we opened our 33,000 square-foot slot operations facility, Fair Grounds Slots, adjacent to Fair Grounds,
which operates approximately 620 slot machines. The facility includes two concession areas, a bar adjacent to the casino floor,
a renovated simulcast facility and other amenities for casino and pari-mutuel wagering patrons.
VSI is the operator of approximately 710 video poker machines at ten OTBs operated by Fair Grounds.
F.
TwinSpires
We accept online and mobile pari-mutuel wagers through Churchill Downs Technology Initiatives Company, which is doing
business as TwinSpires.com ("TwinSpires"). TwinSpires, headquartered in Mountain View, California, operates our ADW business,
which accepts pari-mutuel wagering from customers residing in certain states who establish and fund an account from which they
may place wagers via telephone, mobile device or through the Internet at www.twinspires.com. TwinSpires offers its customers
streaming video of live horse races along with race replays and an assortment of racing and handicapping information. TwinSpires
also offers all of its customers the ability to automatically enroll in its rewards program, TSC Elite. We believe that TwinSpires
is a key component to the growth of the Company.
We maintain one of the world’s largest computerized databases of pedigree and racing information for the thoroughbred horse
industry. We provide special reports, statistical information, handicapping information, pedigrees, and other data to organizations,
publications and individuals within the thoroughbred industry. This service is accessible through the Internet at www.brisnet.com.
In addition, many of the handicapping products are available at our ADW site, www.twinspires.com.
In addition, TwinSpires provides technology services to other third parties and earns commissions from white label advance deposit
wagering products and services. Under these arrangements, TwinSpires typically provides an advance deposit wagering platform
and related operational services while the other entities typically provide a brand name, marketing and limited customer functions.
Fair Grounds also operates its own ADW business for Louisiana residents through a contractual agreement with TwinSpires.
Velocity operates an ADW business that is licensed in the British Dependency Isle of Man focused on high wagering-volume
international customers. Luckity, an ADW business that offered real-money online bingo with outcomes based on and determined
by pari-mutuel wagers on live horseraces, ceased operations in November 2014. Luckity did not contribute significantly to our
operations and its closure did not have a material impact on our results of operations.
G.
Big Fish Games
Big Fish Games develops casual games for PCs and mobile devices worldwide. Our developed technology is comprised of a
portfolio of mobile gaming software, offering games in many genres such as social casino, match three, hidden object, tycoon,
mystery and adventure. We offer PC, Mac, online, iPad and iPhone, and Android games. We operate Big Fish Casino, which
generates the majority of our social casino game revenue from mobile devices and specifically the Apple App Store. Big Fish
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Games was founded in 2002 and is headquartered in Seattle, Washington with additional offices in Oakland, California and
Luxembourg.
We operate in three business lines: premium paid, casino, and casual free-to-play. Premium paid games are available on PC and
mobile devices. Customers pay upfront to purchase content and there is no further monetization through in-game purchases. The
games have a distinct beginning, middle, and end. Casino games are free to download through PC and mobile devices. Game
options include casino-style games such as blackjack, poker, slots, craps, and roulette. There is monetization through purchase of
in-game virtual goods to enhance the game-playing experience. Casual free-to-play games are also free to download through PC
and/or mobile devices. These are all non-casino game types with monetization through in-game transactions, i.e., power-ups or
other virtual tools to enhance the game experience.
H. Other Investments: United Tote
We manufacture and operate pari-mutuel wagering systems for racetracks, OTBs and other pari-mutuel wagering businesses
through our subsidiary, United Tote. United Tote provides totalisator services, which accumulate wagers, record sales, calculate
payoffs and display wagering data to patrons who wager on horseraces. United Tote has contracts to provide totalisator services
to a significant number of third-party racetracks, OTBs and other pari-mutuel wagering businesses, in addition to providing these
services at many of our facilities.
I.
Sources of Revenue
Our racing revenues include commissions on pari-mutuel wagering at our racetracks and OTBs, plus simulcast host fees earned
from other wagering sites. In addition, ancillary revenues generated by the pari-mutuel facilities include admissions, sponsorships
and licensing rights and food and beverage sales. Our casino revenues are primarily generated from slot machines, video poker
and table games while ancillary revenues include hotel and food and beverage sales. Our TwinSpires revenues are generated by
our ADW business from wagering through the Internet, telephone or other mobile devices on pari-mutuel events. Our Big Fish
Games revenue is primarily generated from the sales of premium casual games and virtual goods within games. Finally, our other
revenues are primarily generated by United Tote and our other minor subsidiaries.
Financial information about our segments required by this Item is incorporated by reference from the information contained in
the Notes to Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data” of this Annual
Report on Form 10-K.
J.
Governmental Regulations
The ownership, operation, and management of our casino and racing facilities are subject to regulation under the laws and regulations
of each of the jurisdictions in which we operate. Casino laws are generally designed to protect casino consumers and the viability
and integrity of the casino industry. Casino laws may also be designed to protect and maximize state and local revenues derived
through taxes and licensing fees imposed on casino industry participants as well as to enhance economic development and tourism.
To accomplish these public policy goals, casino laws establish procedures to ensure that participants in the casino industry meet
certain standards of character and fitness. In addition, casino laws require casino industry participants to:
• Ensure that unsuitable individuals and organizations have no role in casino operations;
• Establish procedures designed to prevent cheating and fraudulent practices;
• Establish and maintain responsible accounting practices and procedures;
• Maintain effective controls over their financial practices, including establishment of minimum procedures for
internal fiscal affairs and the safeguarding of assets and revenues;
• Maintain systems for reliable record keeping;
•
• Ensure that contracts and financial transactions are commercially reasonable, reflect fair market value and are
File periodic reports with casino regulators;
arms-length transactions; and
• Establish programs to promote responsible gambling and inform patrons of the availability of help for problem
gambling.
Typically, a state regulatory environment is established by statute and administered by a regulatory agency with broad discretion
to regulate the affairs of owners, managers, and persons with financial interests in casino operations. Among other things, casino
authorities in the various jurisdictions in which we operate:
• Adopt rules and regulations under the implementing statutes;
•
•
• Review the character and fitness of participants in casino operations and make determinations regarding their
Interpret and enforce casino laws;
Impose disciplinary sanctions for violations, including fines and penalties;
suitability or qualification for licensure;
• Grant licenses for participation in casino operations;
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• Collect and review reports and information submitted by participants in casino operations;
• Review and approve transactions, such as acquisitions or change-of-control transactions of casino industry
participants, securities offerings and debt transactions engaged in by such participants; and
• Establish and collect fees and taxes.
Any change in the laws or regulations of a casino jurisdiction could have a material adverse effect on our casino operations.
Licensing and Suitability Determinations
Gaming laws require us, each of our subsidiaries engaged in casino operations, certain of our directors, officers and employees,
and in some cases, certain of our shareholders, to obtain licenses from casino authorities. Licenses typically require a determination
that the applicant qualifies or is suitable to hold the license. Gaming authorities have very broad discretion in determining whether
an applicant qualifies for licensing or should be deemed suitable. Criteria used in determining whether to grant a license to conduct
casino operations, while varying between jurisdictions, generally include consideration of factors such as the good character,
honesty and integrity of the applicant; the financial stability, integrity and responsibility of the applicant, including whether the
operation is adequately capitalized in the state and exhibits the ability to maintain adequate insurance levels; the quality of the
applicant’s casino facilities; the amount of revenue to be derived by the applicable state from the operation of the applicant’s
casino; the applicant’s practices with respect to minority hiring and training; and the effect on competition and general impact on
the community.
In evaluating individual applicants, casino authorities consider the individual’s business experience and reputation for good
character, the individual’s criminal history and the character of those with whom the individual associates.
Many casino jurisdictions limit the number of licenses granted to operate casinos within the state, and some states limit the number
of licenses granted to any one casino operator. Licenses under casino laws are generally not transferable without approval. Licenses
in most of the jurisdictions in which we conduct casino operations are granted for limited durations and require renewal from time
to time. There can be no assurance that any of our licenses will be renewed. The failure to renew any of our licenses could have
a material adverse effect on our casino operations.
In addition to our subsidiaries engaged in casino operations, casino authorities may investigate any individual who has a material
relationship to or material involvement with, any of these entities to determine whether such individual is suitable or should be
licensed as a business associate of a casino licensee. Our officers, directors and certain key employees must file applications with
the casino authorities and may be required to be licensed, qualify or be found suitable in many jurisdictions. Gaming authorities
may deny an application for licensing for any cause which they deem reasonable. Qualification and suitability determinations
require submission of detailed personal and financial information followed by a thorough investigation. The applicant must pay
all the costs of the investigation. Changes in licensed positions must be reported to casino authorities and in addition to their
authority to deny an application for licensure, qualification or a finding of suitability, casino authorities have jurisdiction to
disapprove a change in a corporate position.
If one or more casino authorities were to find that an officer, director or key employee fails to qualify or is unsuitable for licensing
or unsuitable to continue having a relationship with us, we would be required to sever all relationships with such person. In
addition, casino authorities may require us to terminate the employment of any person who refuses to file appropriate applications.
Moreover, in many jurisdictions, certain of our shareholders may be required to undergo a suitability investigation similar to that
described above. Many jurisdictions require any person who acquires beneficial ownership of more than a certain percentage of
our voting securities, typically 5%, to report the acquisition to casino authorities, and casino authorities may require such holders
to apply for qualification or a finding of suitability. Most casino authorities, however, allow an “institutional investor” to apply
for a waiver. An “institutional investor” is generally defined as an investor acquiring and holding voting securities in the ordinary
course of business as an institutional investor, and not for the purpose of causing, directly or indirectly, the election of a member
of our board of directors, any change in our corporate charter, bylaws, management, policies or operations, or those of any of our
casino affiliates, or the taking of any other action which casino authorities find to be inconsistent with holding our voting securities
for investment purposes only. Even if a waiver is granted, an institutional investor generally may not take any action inconsistent
with its status when the waiver was granted without once again becoming subject to the foregoing reporting and application
obligations.
Generally, any person who fails or refuses to apply for a finding of suitability or a license within the prescribed period after being
advised it is required by casino authorities may be denied a license or found unsuitable, as applicable. Any shareholder found
unsuitable or denied a license and who holds, directly or indirectly, any beneficial ownership of our voting securities beyond such
period of time as may be prescribed by the applicable casino authorities may be guilty of a criminal offense. Furthermore, we may
be subject to disciplinary action if, after we receive notice that a person is unsuitable to be a shareholder or to have any other
relationship with us or any of our subsidiaries, we: (i) pay that person any dividend or interest upon our voting securities; (ii) allow
that person to exercise, directly or indirectly, any voting right conferred through securities held by that person; (iii) pay remuneration
in any form to that person for services rendered or otherwise; or (iv) fail to pursue all lawful efforts to require such unsuitable
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person to relinquish his voting securities including, if necessary, the immediate purchase of said voting securities for cash at fair
market value.
Violations of Gaming Laws
If we or our subsidiaries violate applicable casino laws, our casino licenses could be limited, conditioned, suspended or revoked
by casino authorities, and we and any other persons involved could be subject to substantial fines. Further, a supervisor or
conservator can be appointed by casino authorities to operate our casino properties, or in some jurisdictions, take title to our casino
assets in the jurisdiction, and under certain circumstances, earnings generated during such appointment could be forfeited to the
applicable state or states. Furthermore, violations of laws in one jurisdiction could result in disciplinary action in other jurisdictions.
As a result, violations by us of applicable casino laws could have a material adverse effect on our casino operations.
Some casino jurisdictions prohibit certain types of political activity by a casino licensee, its officers, directors and key employees.
A violation of such a prohibition may subject the offender to criminal and/or disciplinary action.
Reporting and Record-keeping Requirements
We are required periodically to submit detailed financial and operating reports and furnish any other information about us and our
subsidiaries which casino authorities may require. Under federal law, we are required to record and submit detailed reports of
currency transactions involving greater than $10,000 at our casinos and racetracks, as well as any suspicious activity that may
occur at such facilities. Failure to comply with these requirements could result in fines or cessation of operations. We are required
to maintain a current stock ledger which may be examined by casino authorities at any time. If any securities are held in trust by
an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to casino authorities.
A failure to make such disclosure may be grounds for finding the record holder unsuitable. Gaming authorities may require
certificates for our securities to bear a legend indicating that the securities are subject to specified casino laws.
Review and Approval of Transactions
Substantially all material loans, leases, sales of securities and similar financing transactions by us and our subsidiaries must be
reported to and in some cases approved by casino authorities. Neither we nor any of our subsidiaries may make a public offering
of securities without the prior approval of certain casino authorities. Changes in control through merger, consolidation, stock or
asset acquisitions, management or consulting agreements, or otherwise are subject to receipt of prior approval of casino authorities.
Entities seeking to acquire control of us or one of our subsidiaries must satisfy casino authorities with respect to a variety of
stringent standards prior to assuming control. Gaming authorities may also require controlling stockholders, officers, directors
and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated
and licensed as part of the approval process relating to the transaction.
License Fees and Gaming Taxes
We pay substantial license fees and taxes in many jurisdictions, including some of the counties and cities in which our operations
are conducted, in connection with our casino operations, computed in various ways depending on the type of gambling or activity
involved. Depending upon the particular fee or tax involved, these fees and taxes are payable with varying frequency. License
fees and taxes are based upon such factors as a percentage of the gross casino revenues received; the number of gambling devices
and table games operated; or a one-time fee payable upon the initial receipt of license and fees in connection with the renewal of
license. In some jurisdictions, casino tax rates are graduated such that they increase as gross casino revenues increase. Furthermore,
tax rates are subject to change, sometimes with little notice, and such changes could have a material adverse effect on our casino
operations. In addition to taxes specifically unique to gambling, we are required to pay all other applicable taxes.
Operational Requirements
In most jurisdictions, we are subject to certain requirements and restrictions on how we must conduct our casino operations. In
certain states, we are required to give preference to local suppliers and include minority and women-owned businesses as well as
organized labor in construction projects to the maximum extent practicable as well as in general vendor business activity. Similarly,
we may be required to give employment preference to minorities, women and in-state residents in certain jurisdictions. In addition,
our ability to conduct certain types of games, introduce new games or move existing games within our facilities may be restricted
or subject to regulatory review and approval. Some of our operations are subject to restrictions on the number of gaming positions
we may have and the maximum wagers allowed to be placed by our customers.
Horseracing and Pari-Mutuel Wagering Regulations
Horseracing is a highly regulated industry. In the U.S., individual states control the operations of racetracks located within their
respective jurisdictions with the intent of, among other things, protecting the public from unfair and illegal gambling practices,
generating tax revenue, licensing racetracks and operators and preventing organized crime from being involved in the industry.
Although the specific form may vary, states that regulate horseracing generally do so through a horseracing commission or other
gambling regulatory authority. In general, regulatory authorities perform background checks on all racetrack owners prior to
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granting them the necessary operating licenses. Horse owners, trainers, jockeys, drivers, stewards, judges and backstretch personnel
are also subject to licensing by governmental authorities. State regulation of horse races extends to virtually every aspect of racing
and usually extends to details such as the presence and placement of specific race officials, including timers, placing judges, starters
and patrol judges. We currently satisfy the applicable licensing requirements of the racing and gambling regulatory authorities in
each state where we maintain racetracks or pari-mutuel operations and/or carry on business, including, but not limited to, the
Florida Department of Business and Professional Regulation, Division of Pari-Mutuel Wagering (“DPW”), the Illinois Racing
Board (“IRB”), the Kentucky Horse Racing Commission (“KHRC”), the Louisiana State Racing Commission (“LSRC”), the Ohio
State Racing Commission (“OSRC”) and the Oregon Racing Commission (“ORC”).
In the United States, interstate pari-mutuel wagering on horseracing is subject to the Interstate Horseracing Act, as amended in
2000 (the “IHA”). Through the IHA, racetracks can commingle wagers from different racetracks and wagering facilities and
broadcast horseracing events to other licensed establishments.
Kentucky
Kentucky’s racetracks, including Churchill Downs, are subject to the licensing and regulation of the KHRC. The KHRC is
responsible for overseeing horseracing and regulating the state equine industry. Licenses to conduct live thoroughbred racing
meets, to participate in simulcasting and to accept ADW wagers from Kentucky residents are approved annually by the KHRC
based upon applications submitted by the racetracks in Kentucky. To some extent, Churchill Downs competes with other racetracks
in Kentucky for the award of racing dates, however, the KHRC is required by state law to consider and seek to preserve each
racetrack’s usual and customary live racing dates. During October 2014, Churchill Downs received re-approval to conduct an 11-
day September meet during 2015, in addition to its traditional spring and fall racing meets.
Illinois
In Illinois, licenses to conduct live thoroughbred racing and to participate in simulcast wagering are approved by the IRB. In
January 2015, the IRB appointed Arlington the host track in Illinois for 23 simulcast host days, which was consistent with 2014.
Arlington was awarded one additional live host day during 2015 as compared to the prior year.
During November 2013, Illinois racetracks and horsemen’s groups reached an agreement to extend Illinois’s account wagering
law, which was scheduled to expire on January 31, 2014. On January 29, 2014, the Illinois legislature approved regulations to
reauthorize ADW wagering though January 2017 and began imposing an incremental surcharge on winning wagers of 0.2%, in
addition to the previous surcharge of 0.18%. The legislation was approved by the Illinois legislature and signed by the Governor
of Illinois during January 2014.
Florida
In Florida, licenses to conduct live thoroughbred racing and to participate in simulcast wagering are approved by the DPW. The
DPW is responsible for overseeing the network of state offices located at every pari-mutuel wagering facility, as well as issuing
the permits necessary to operate a pari-mutuel wagering facility. The DPW also issues annual licenses for thoroughbred,
standardbred and quarter horse races but does not approve the specific live race days. During 2013, Calder and Gulfstream Park
began conducting concurrent live thoroughbred racing in certain months, leading to an overlapping of live racing resulting in direct
competition for on-track horseracing and horses in South Florida, as well as the intrastate and interstate simulcasting markets.
This negatively affected Calder’s ability to achieve full field horseraces and to generate handle on live racing. On July 1, 2014,
we finalized an agreement with TSG under which TSG will operate, at TSG’s expense, live racing and maintain certain facilities
used for racing and training at Calder. The agreement, which expires on December 31, 2020, involves a lease to TSG of Calder’s
racetrack and certain other racing and training facilities, including a portion of the barns on Calder’s backside consisting of
approximately 430 stalls. TSG will operate live horse racing at Calder, under Calder’s racing permits, in compliance with all
applicable laws and licensing requirements. TSG will operate and maintain the racing and training facilities at Calder on a year-
round basis. Furthermore, TSG will be responsible for substantially all of the direct and indirect costs associated with these
activities and receive the associated revenues. We will continue to own and operate the Calder Casino.
Louisiana
In Louisiana, licenses to conduct live thoroughbred racing and to participate in simulcast wagering are approved by the LSRC.
The LSRC is responsible for overseeing the awarding of licenses for the conduct of live racing meets, the conduct of thoroughbred
horseracing, the types of wagering which may be offered by pari-mutuel facilities and the disposition of revenue generated from
wagering. Off-track wagering is also regulated by the LSRC. Louisiana law requires live racing at a licensed racetrack for at least
80 days over a 20 week period each year to maintain the license and to conduct casino operations.
Additionally, with the addition of slot machines at Fair Grounds, Louisiana law requires live quarter horseracing to be conducted
at the racetrack. We conducted twelve days of quarter horseracing in 2014 and fourteen days of quarter horseracing in 2013.
Other States
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TwinSpires is licensed in Oregon under a multi-jurisdictional simulcasting and interactive wagering totalisator hub license issued
by the ORC and in accordance with Oregon law. TwinSpires also holds ADW licenses in certain other states where required such
as California, Illinois, Idaho, Kentucky, Maryland, Virginia, Colorado, Arizona, Wyoming, Arkansas, New York and Washington.
Changes in the form of new legislation or regulatory activity at the state or federal level could adversely impact the operations,
success or growth of our ADW business.
The total number of days on which each racetrack conducts live thoroughbred racing fluctuates annually according to each calendar
year and the determination of applicable regulatory activities
Casino Regulations
The manufacture, distribution, servicing and operation of video draw poker devices in Louisiana are subject to the Louisiana Video
Draw Poker Devices Control Law and the rules and regulations promulgated thereunder. The manufacture, distribution, servicing
and operation of video poker devices and slot machines are maintained by a single gaming control board for the regulation of
gaming in Louisiana. This board, created on May 1, 1996, is called the Louisiana Gaming Control Board (the “Louisiana Board”)
and oversees all licensing for all forms of legalized gaming in Louisiana (including all regulatory enforcement and supervisory
authority that exist in the state as to gaming on Native American lands). The Video Gaming Division and the Slots Gaming Division
of the Gaming Enforcement Section of the Office of the State Police within the Department of Public Safety and Corrections (the
“Division”) performs the investigative functions for the Louisiana Board for video poker and slot gaming. The laws and regulations
of Louisiana are based on policies of maintaining the health, welfare and safety of the general public and protecting the video
gaming industry from elements of organized crime, illegal gambling activities and other harmful elements, as well as protecting
the public from illegal and unscrupulous gaming to ensure the fair play of devices. The Louisiana Board also regulates slot machine
gaming at racetrack facilities pursuant to the Louisiana Pari-Mutuel Live Racing Facility Economic Redevelopment and Gaming
Control Act. Changes in Louisiana laws or regulations may limit or otherwise materially affect the types of gaming that may be
conducted and such changes, if enacted, could have an adverse effect on us and our Louisiana gaming operations. In addition, the
LSRC also issues licenses required for Fair Grounds to operate slot machines at the racetrack and video poker devices at its OTBs.
The failure to comply with the rules and regulations of the Louisiana Board could have a material, adverse impact on our business,
financial condition and results of operations.
The ownership and operation of casino gaming facilities in the State of Mississippi is subject to extensive state and local regulation,
but primarily the licensing and regulatory control of the Mississippi Gaming Commission (the “Mississippi Commission”). The
laws, regulations and supervisory procedures of the Mississippi Commission are based upon declarations of public policy that are
concerned with, among other things: (1) the prevention of unsavory or unsuitable persons from having direct or indirect involvement
with gaming at any time or in any capacity; (2) the establishment and maintenance of responsible accounting practices and
procedures; (3) the maintenance of effective controls over the financial practices of licensees, including the establishment of
minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing for reliable record keeping
and requiring the filing of periodic reports with the Mississippi Commission; (4) the prevention of cheating and fraudulent practices;
(5) providing a source of state and local revenues through taxation and licensing fees; and (6) ensuring that gaming licensees, to
the extent practicable, employ Mississippi residents. The regulations are subject to amendment and interpretation by the Mississippi
Commission. Changes in Mississippi laws or regulations may limit or otherwise materially affect the types of gaming that may
be conducted and such changes, if enacted, could have an adverse effect on us and our Mississippi gaming operations. The failure
to comply with the rules and regulations of the Mississippi Commission could have a material, adverse impact on our business,
financial condition and results of operations.
The ownership and operation of casino gaming facilities in the State of Maine is subject to extensive state and local regulation,
but primarily the licensing and regulatory control of the Maine Gambling Control Board (the “MGCB”). The laws, regulations
and supervisory procedures of the MGCB are based upon declarations of public policy that are concerned with, among other things:
(1) the regulation, supervision and general control over casinos and the ownership and operation of slot machines and table games;
(2) the investigation of complaints made regarding casinos; (3) the establishment and maintenance of responsible accounting
practices and procedures; (4) the maintenance of effective controls over the financial practices of licensees, including the
establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues, providing for reliable
record keeping; and (5) the prevention of cheating and fraudulent practices. The regulations are subject to amendment and
interpretation by the MGCB. Changes in Maine laws or regulations may limit or otherwise materially affect the types of gaming
that may be conducted and such changes, if enacted, could have an adverse effect on us and our Maine gaming operations. The
failure to comply with the rules and regulations of the MGCB could have a material, adverse impact on our business, financial
condition and results of operations.
The ownership and operation of casino gaming facilities in the State of Florida is subject to extensive state and local regulation,
primarily by the Florida Department of Business and Professional Regulation (the “DBPR”), within the executive branch of
Florida’s state government. The DBPR is charged with the regulation of Florida’s pari-mutuel, cardroom and slot gaming industries,
as well as collecting and safeguarding associated revenues due to the state. The DBPR has been designated by the Florida legislature
as the state compliance agency with the authority to carry out the state’s oversight responsibilities in accordance with the provisions
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outlined in the compact between the Seminole Tribe of Florida and the State of Florida. Changes in Florida laws or regulations
may limit or otherwise materially affect the types of gaming that may be conducted and such changes, if enacted, could have an
adverse effect on us and our Florida gaming operation. The laws and regulations of Florida are based on policies of maintaining
the health, welfare and safety of the general public and protecting the video gaming industry from elements of organized crime,
illegal gambling activities and other harmful elements, as well as protecting the public from illegal and unscrupulous gaming to
ensure the fair play of devices. The failure to comply with the rules and regulations of the DPBR could have a material, adverse
impact on our business, financial condition and results of operations.
Video Lottery was introduced in the State of Ohio in 2012 when the Governor of Ohio signed Executive Order 2011-22K, which
authorized the Ohio Lottery Commission ("the OLC") to amend and adopt rules necessary to implement a video lottery program
at Ohio’s seven horse racing facilities. The ownership and operation of VLT facilities in the State of Ohio is subject to extensive
state and local regulation, but primarily the licensing and regulatory control of the OLC. The laws, regulations and supervisory
procedures of the OLC include 1) regulating the licensing of video lottery sales agents (VLSA), key gaming employees and VLT
manufacturers; 2) collecting and disbursing VLT revenue; and 3) maintaining compliance in regulatory matters. Changes in Ohio
laws or regulations may limit or otherwise materially affect the types of gaming that may be conducted and such changes, if
enacted, could have an adverse effect on us and our Ohio gaming operation. The failure to comply with the rules and regulations
of the OLC could have a material adverse impact on our business, financial condition and results of operations.
K. Competition
We operate in a highly competitive industry with a large number of participants, some of which have financial and other resources
that are greater than ours. The industry faces competition from a variety of sources for discretionary consumer spending including
spectator sports and other entertainment and gaming options. Competitive casino activities include traditional and Native American
casinos, video lottery terminals, state-sponsored lotteries and other forms of legalized gaming in the U.S. and other jurisdictions.
Additionally, Internet-based interactive gaming and wagering, both legal and, we believe, illegal, is growing rapidly and affecting
competition in our industry. We anticipate competition in this area will become more intense as new Internet-based ventures enter
the industry and as state and federal regulations on Internet-based activities are clarified.
Legalized gambling is currently permitted in various forms in many states and Canada. Other jurisdictions could legalize gambling
in the future, and established gaming jurisdictions could award additional gaming licenses or permit the expansion of existing
gaming operations. If additional gaming opportunities become available near our racing or gaming operations, such gaming
opportunities could have a material, adverse impact on our business, financial condition and results of operations.
All of our racetracks face competition in the simulcast market. Approximately 41,000 thoroughbred horse races are conducted
annually in the U.S. Of these races, we host approximately 3,030 races each year, or about 7.4% of the total. As a content provider,
we compete for wagering dollars in the simulcast market with other racetracks conducting races at or near the same times as our
races. As a racetrack operator, we also compete for horses with other racetracks running live racing meets at or near the same
time as our races. Our ability to compete is substantially dependent on field and purse size. In recent years, this competition has
increased as more states legalize gaming, allowing slot machines at racetracks with mandatory purse contributions. Over 89
percent of pari-mutuel handle is bet at off-track locations, either at other racetracks, OTBs, casinos, or through ADW channels.
As a content distributor, we compete for these dollars to be wagered at our racetracks, OTBs, casinos and via our ADW business.
Louisville, Kentucky
Churchill Downs faces competition from free-standing casinos and racetracks which are combined with casinos (“racinos”) in
neighboring states. Currently, three Indiana casinos compete for customers in the Louisville market. These casinos include
Horseshoe Indiana, located in Elizabeth, Indiana, Belterra, a Pinnacle Entertainment casino located between Louisville and
Cincinnati and the resort casino at French Lick, located about 60 miles northwest of Louisville. Additionally, Hoosier Park operates
2,000 slot machines, and Indiana Grand Racing & Casino operates 1,900 slot machines which has resulted in increased purses at
those Indiana racetracks. During 2009, Ohio voters passed a referendum to allow four casinos in Ohio, and, during 2011, the state
legislature passed legislation allowing Ohio’s seven racetracks to apply for video lottery licenses. Separate casino projects in
Columbus, Toledo, Cleveland and Cincinnati opened during 2012, 2013 and during 2014, all seven Ohio racetracks offered VLT
facilities. We believe that the expansion of gaming at Ohio racetracks could provide a competitive advantage to those racetracks
and may enable Ohio racetracks to increase their purses.
On October 28, 2011, Aqueduct Racetrack opened a gaming facility with more than 2,400 video lottery terminals and electronic
table games. An additional 2,500 gaming machines were added in December 2011 as part of a further expansion of the facility.
As a result of the addition of gaming activities, New York purse payments were enhanced compared to their historical levels.
These enhanced purses could affect our ability to attract horses and trainers and could have a material, adverse impact on our
business, financial condition and results of operations.
These developments may result in Ohio and New York racetracks attracting horses that would otherwise race at Kentucky racetracks,
including Churchill Downs, thus negatively affecting the number of starters and purse size which, in turn, may have a negative
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effect on handle. In addition, we believe the opening of four land-based, free-standing casinos in Ohio may likewise have a
material, adverse impact on our business, financial condition and results of operations.
Miami, Florida
On January 22, 2010, Calder Casino commenced operations and features approximately 1,140 slot machines. Calder Casino
competes with three established casinos in Broward County just to the north of Miami-Dade County, and three additional casinos
in Miami-Dade County. We also face competition from Native American casinos, such as the Seminole Hard Rock facility, and
popular gambling cruises-to-nowhere. Due to the high tax rates in Florida for gaming facilities, Native American casinos, which
are not taxed at the same rates, are generally able to spend more money marketing their facilities to consumers.
Florida legislators continue to debate the expansion of Florida gaming to include Las Vegas-style destination resort casinos. Such
casinos may be subject to taxation rates lower than the current taxation structure for gaming facilities. Should such legislation be
enacted, it could increase competition and have a material, adverse impact on our business, financial condition and results of
operations.
Chicago, Illinois
Arlington competes in the Chicago market against a variety of entertainment options. In addition to other racetracks in the area
such as Hawthorne Park and Maywood Park, there are ten riverboat casino operations that draw from the Chicago market including
Rivers Casino, which opened in July 2011, in Des Plaines, Illinois. Additionally, Native American gaming operations in Wisconsin
may adversely affect Arlington.
New Orleans, Louisiana
Fair Grounds competes in the New Orleans area with two riverboat casinos and one land-based casino. With approximately 620
slot machines, Fair Grounds competes with Harrah’s land-based casino, which is the largest and closest competitor to Fair Grounds.
Additionally, Fair Grounds faces significant gambling competition along the Mississippi Gulf Coast. Fair Grounds also competes
with video poker operations located at various OTBs, truck stops and restaurants in the area.
Oxford, Maine
Oxford, which opened during June 2012, competes in the State of Maine with one other casino in Bangor, Maine known as
Hollywood Slots, which opened in November 2005. Oxford is located approximately 120 miles south of Hollywood Slots. Oxford
also anticipates it will compete with the Massachusetts gaming market which legalized gaming in November 2011, through
legislation authorizing three resort style casinos and one slot machine parlor in the state. Massachusetts has not yet commenced
any gaming operations.
Greenville, Mississippi
Harlow’s competes in Mississippi with a variety of riverboat and land-based casinos. Our principal local competitor in Greenville
is Trop Casino, which underwent a renovation of its facilities in 2014. Harlow’s also faces regional competition from a casino in
Lula, Mississippi and from two locations in Arkansas. Both Arkansas locations offer pari-mutuel wagering on live and simulcast
racing and other electronic games of skill such as blackjack, video poker, and electronic roulette. In addition, historical racing
machines are offered at one of the Arkansas locations.
Vicksburg, Mississippi
Riverwalk competes in the Vicksburg area and is the newest and the only land-based casino in the local market. Our principal
local competitors are Ameristar Casino, which is the largest local competitor, and Lady Luck Casino, which is the closest competitor,
in Vicksburg. In addition, Riverwalk faces regional competition from two locations in Natchez, Mississippi, including Magnolia
Bluff Casino which opened during December 2012 and from Pearl River Resort in Philadelphia, Mississippi.
From time to time, potential competitors have proposed the development of additional casinos. The Mississippi Gaming Control
Act does not limit the number of licenses that may be granted, and there are a number of additional sites located in the Gulf Coast
region that are in various stages of development. Any significant licensure could have a material, adverse impact on our business,
financial condition and results of operations.
Advance Deposit Wagering
TwinSpires competes with other ADW businesses for both customers and racing content, and TwinSpires also competes with
online gaming sites. Our competitors include, but are not limited to, Betfair Limited (d/b/a TVG), the Stronach Group (d/b/a
XpressBet), Premier Turf Club, Lien Games, AmWest Entertainment, The New York Racing Association (d/b/a NYRA Rewards),
Connecticut OTB, Penn National Gaming Inc. and Racing2Day LLC. We also own an information services data business that
sells handicapping and pedigree information to wagering customers and horsemen in the industry. This data may give us a
competitive advantage as we are able to provide promotional products to our ADW customers that other ADW businesses cannot
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provide. As a data provider, we compete with companies such as Equibase and the Daily Racing Form by selling handicapping
data to wagering customers.
In response to increased competition from other gaming options, we continue to seek new sources of revenue. We are focused on
product innovation, marketing initiatives and customer relationships. We also seek to offer the widest array of racing content from
throughout the world, and where available, we will take advantage of geographical expansion. All of our activities are highly
dependent on the regulatory environment and legal developments on both the federal and state level.
Totalisator Business
We acquired United Tote through our acquisition of Youbet on June 2, 2010. United Tote provides totalisator services, which
accumulate wagers, record sales, calculate payoffs and display wagering data in a secure manner to patrons who wager on horseraces.
Our competitors are primarily Sportech and AmTote International, Inc. Our competition outside of North America is more
fragmented, with competition also being provided by several international and regional companies. United Tote competes primarily
on the basis of the design, performance, reliability and pricing of its products and services.
United Tote has contracts to provide totalisator services to a significant number of racetracks, OTBs and other pari-mutuel wagering
businesses. Errors by United Tote technology or personnel may subject us to liabilities, including financial penalties under our
totalisator service contracts, which could have a material, adverse impact on our business, financial condition and results of
operations.
Big Fish Games
We face significant competition in all aspects of our business. Specifically, we compete for the leisure time, attention and
discretionary spending of our players with casual game developers on the basis of a number of factors, including quality of player
experience, brand awareness and access to distribution channels.
We believe we compete favorably on these factors. However, our industry is evolving rapidly and is becoming increasingly
competitive. Other developers and distributors of casual premium paid and free-to-play games could develop more compelling
content that competes with our games and adversely affects our ability to attract and retain players and their entertainment time.
These competitors, including companies of which we may not be currently aware, may take advantage of social networks, access
to a larger user base and their network effects to grow rapidly and virally.
Our social casino games compete in a rapidly evolving market against an increasing number of competitors including Caesars
Interactive, GSN, IGT and Zynga. Our casual premium game customers may also play other games on PCs and mobile devices,
as well as on console devices, and some of these games may include unique social and community features that our games do not
have. Finally, given the open nature of the development and distribution of games for smartphones and tablets, our free-to-play
business competes with a vast number of developers and distributors who are able to create and launch games and other content
for these devices using relatively limited resources and with relatively limited start-up time or expertise. For example, it has been
estimated that more than 1.4 million applications, including more than 314,000 active games, were available on Apple’s U.S. App
Store as of December 31, 2014. The proliferation of titles makes it potentially difficult for us to differentiate ourselves from other
developers and to compete for customers who download and purchase content for their devices without substantially increasing
our marketing and other development and distribution costs.
L.
Legislative Changes
Federal
Federal Internet Gaming
On February 4, 2015, the Restoration of America’s Wire Act was reintroduced for consideration in the House of Representatives
during the 114th Congress ("HR 707"). HR 707 is identical to the Restoration of America's Wire Act legislation proposed in 2014
and is crafted to reverse a 2011 decision by the Justice Department which interpreted the Wire Act of 1961 (the "Wire Act") to not
apply to interstate transmissions of wire communications except when related to sports betting. As written, HR 707 would restore
the interpretation of the Wire Act prior to the 2011 Justice Department decision and effectively prohibit online gaming. The
legislation does not grandfather in states currently operating Internet gaming, but does allow for online wagering on horseracing
placed in compliance with the Interstate Horseracing Act of 1978 to continue. On March 26, 2014, the Restoration of America's
Wire Act ("S2159 and "HR4301") was introduced in the U.S. Senate and House of Representative but failed to be considered prior
to the conclusion of the 113th Congress.
On November 14, 2013, Washington Representative Jim McDermott introduced the Internet Gambling Regulation and Tax
Enforcement Act of 2013 (“HR 3491”) to tax federally-sanctioned Internet wagering potentially made legal by the Internet Gambling
Regulation, Enforcement, and Consumer Protection Act of 2013 ("HR 2282") or similar legislation. HR 3491 would create up to
a 12% deposit tax on amounts deposited by players for Internet wagering, an amount to be paid by licensed operators, not by
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players. The federal government would collect 4% of the tax, with up to 8% going to the state or Indian tribe where the wager is
placed.
On July 16, 2013, a subcommittee of the U.S. Senate Commerce Committee held a hearing which focused on the ramifications
of the December 23, 2011 Department of Justice opinion that reversed a long-held interpretation of the Wire Act of 1961 (the
“Wire Act”), which had historically narrowed the scope of the Wire Act to sports wagering. The Department of Justices’ opinion
permitted individual states to offer online games of chance and skill on an intrastate basis.
On July 11, 2013, Texas Representative Joe Barton introduced the Internet Poker Freedom Act of 2013. The proposed legislation
would create a federal regulatory and licensing structure that would allow established commercial and tribal casinos as well as
gaming suppliers to obtain a license to offer interstate online poker. The U.S. Department of Commerce and National Indian
Gaming Commission, as well as qualified state and tribal regulators, would be given oversight authority under the terms of the
legislation. States would be allowed to “opt-out” of the federal system.
On June 6, 2013, New York Representative Peter King introduced HR 2282 to legalize all forms of Internet wagering, with the
exception of sports betting. HR 2282 would establish a federal structure to license and regulate providers of Internet gaming.
Under the proposed legislation, Internet gaming operators would be able to obtain licenses from the Department of Treasury or
state or tribal authorities authorizing them to accept wagers over the Internet from individuals in the U.S. or outside the U.S.
Individual states would be able to “opt-out” and prohibit or limit Internet gambling within their borders by notifying the Secretary
of Treasury.
The 113th Congress adjourned on January 3, 2015 without consideration of legislation related to Internet gaming. It is difficult to
assess the probability of legislation passing at the federal level, the form of any final legislation, or its impact on our business,
financial condition or results of operations.
Wire Act of 1961 - Federal Clarification
On December 23, 2011, the U.S. Department of Justice clarified its position on the Wire Act, which had historically been interpreted
to outlaw all forms of gambling across states lines. The department’s Office of Legal Counsel determined, in a written memorandum,
that the Wire Act applied only to a sporting event or contest but did not apply to other forms of Internet gambling, including online
betting unrelated to sporting events. The Justice Department opinion could be interpreted to allow Internet gaming on an intrastate
basis. Since the issuance of this opinion, there have been actions taken by various state legislatures to either further enable or
further limit Internet gaming opportunities for their residents and businesses, and we anticipate that other states may follow. At
this point, we do not know to what extent intrastate Internet gaming could affect our business, financial condition and results of
operations.
Kentucky
Expanded Gaming Legislation
On February 13, 2015, Senate Bill 199, a proposed constitutional amendment to allow the Kentucky legislature to authorize gaming
expansion in the state by general law, was filed for consideration. If passed, the legislation could have a material impact on our
business, financial condition and results of operations.
On February 5, 2015, House Bill 300, a constitutional amendment authorizing casino gaming in Kentucky, was introduced for
consideration during the 2015 legislative session. The amendment would allow for six casinos in the state to be approved by local
referendum and limited to counties with populations of at least 85,000. The Kentucky Lottery Corporation is authorized to regulate
and to operate casino facilities. If passed, the legislation could have a material impact on our business, financial condition and
results of operations.
In January 2014, two House bills related to the authorization of expanded gaming in Kentucky were filed for consideration during
the 2014 legislative session. House Bill 67, a proposed constitutional amendment, would have authorized casino gaming in the
state and required a three-fifths majority vote in both chambers of the Kentucky General Assembly in order to appear before the
voters on the November 2014 ballot. House Bill 68 would have created the Kentucky Gaming Commission to issue licenses and
serve as the regulatory body for casino gaming; stipulated casino gaming may be conducted at the state’s five existing racetracks
as well as at three standalone locations; established a minimum $50 million licensing fee; provided for the distribution of gaming
revenues received by the state and would have required racetracks with a casino license to set aside 14.5 percent of gambling
revenues for purses and breeders incentives as well as required these tracks to increase the number of live racing days by ten
percent for the first five years of casino gaming licensure.
Senate Bill 33 was also filed during January 2014 and would have amended the Kentucky Constitution to allow up to seven casino
locations in the state and would have created an Equine Excellence Fund, into which ten percent of gross gaming revenues would
have been directed. Senate Bill 33 failed to garner the required three-fifths majority vote in both chambers of the legislature in
order to appear on the November 2014 ballot.
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The 2014 session ended without consideration of any legislation related to expanded gaming in Kentucky. Should similar future
legislation be enacted into law, it could have a material impact on our business, financial condition and results of operations.
Historical Racing Machines
During 2010, the Kentucky Horse Racing Commission ("KHRC") approved a change in state regulations that would allow racetracks
to offer pari-mutuel Historical Racing Machines (“HRMs”), which base their payouts on the results of previously-run races at
racetracks across North America. During 2012, Kentucky Downs Racetrack operated an HRM facility with approximately 275
HRMs and Ellis Park Racetrack opened a HRM facility with 177 HRMs. On April 4, 2013, the KHRC approved 40 additional
HRMs for use at Kentucky Downs Racetrack.
Despite the approval by the KHRC, challenges remain as to the legality of the enacted regulations. A declaratory judgment action
was filed in Franklin Circuit Court on behalf of the Commonwealth of Kentucky and all Kentucky racetracks to ensure proper
legal authority. The Franklin Circuit Court entered a declaratory judgment upholding the regulations in their entirety. The
intervening adverse party filed a notice of appeal, and the KHRC and the racetracks filed a motion to transfer that appeal directly
to the Supreme Court of Kentucky. On April 21, 2011, the Supreme Court of Kentucky denied the request to hear the case before
the appeal was heard by the Kentucky Court of Appeals. On September 1, 2011, the intervening adverse party filed an injunction
action with the Kentucky Court of Appeals to grant emergency relief that would prevent Kentucky Downs Racetrack from operating
its HRMs. The intervening adverse party’s motions were denied by the Kentucky Court of Appeals. On June 15, 2012, the
Kentucky Court of Appeals vacated the lower court’s decision and remanded the declaratory judgment action back to the Franklin
County Circuit Court. On July 16, 2012, the Kentucky racetracks, the KHRC and the Kentucky Department of Revenue filed
motions for discretionary review with the Supreme Court of Kentucky asking the court to overturn the Kentucky Court of Appeals’
decision and address the merits of the case. On August 21, 2013, the Supreme Court of Kentucky heard oral arguments on the
legality of HRMs. On February 20, 2014, the Supreme Court of Kentucky issued its ruling on the motions for discretionary review
affirming, in part, and reversing, in part, the Kentucky Court of Appeals. In issuing its opinion, the Supreme Court of Kentucky
held that the KHRC has the statutory authority to license and regulate the operation of pari-mutuel wagering on historic horse
racing. The Supreme Court of Kentucky further held that the Kentucky Department of Revenue does not have the authority to
collect excise tax on the wagering handle generated by historic horse racing. On the issue of whether the operation of wagering
on historic horse racing violates the gambling provisions of the Kentucky Penal Code, the Supreme Court of Kentucky remanded
the case back to the Franklin County Circuit Court for further proceedings. On April 10, 2014, the Governor of Kentucky signed
House Bill 445 into law, and it became effective on August 1, 2014. The legislation imposes a 1.5% tax on all handle wagered on
historical races and will apply both retroactively and prospectively. At this time it is unclear the extent to which this development
will materially impact our business, financial condition and results of operations.
ADW Regulations
During April 2014, House Bill 445, which imposes a 0.5% tax on all ADW wagers made by Kentucky residents, was signed into
law. The bill became effective on August 1, 2014. The bill is not expected to have a material negative impact on our business,
financial condition and results of operations.
Illinois
Expanded Gaming Legislation
During the 2013 legislative session, Senate Bill 1739 ("SB 1739") was introduced in the Illinois General Assembly to expand
casino gaming to Illinois racetracks and to add five additional casinos within the state, including one in Chicago with 4,000 gaming
positions. SB 1739 won approval in the Illinois Senate but was not considered by the House of Representatives. In March 2014,
two amendments to SB 1739 were filed. One amendment provides for a Chicago casino with 4,000 to 10,000 gaming positions
but does not include language for additional casinos in the state or gaming positions at racetracks. The second amendment would
authorize five new casinos, including a Chicago casino with 4,000 to 6,000 gaming positions. Racetracks in Cook County, which
includes Arlington, would be authorized to receive 600 gaming positions and most racetracks outside of Cook County would each
be eligible for 450 positions. In May 2014, an amendment to SB 1739 was filed authorizing 1,200 machines at Cook County
racetracks and 900 machines for racetracks in other areas of the state, the same number of gaming positions currently provided
for in SB 1739. The amendment does not address the authorization of additional casinos. SB 1739 failed to be considered prior
to the end of the 2014 legislative session. Should similar future legislation be enacted, it could have a material effect on our
business, financial condition and results of operations.
ADW Legislation
On January 28, 2015, House Bill 335 was introduced for consideration during the 2015 legislative session. Under the proposed
bill, January 31, 2017 is deleted as the statutory end date of ADW authorization effectively making ADW operation in Illinois no
longer contingent on legislative approval. If enacted, the proposed bill could have a positive material effect on our business,
financial condition and results of operation.
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House Bill 11, which permits advance deposit wagering by Illinois residents through January 31, 2017 was approved by the Illinois
legislature and signed by the Governor on January 29, 2014. House Bill 11 provides funding for the Illinois Racing Board, provides
for quarter horse purses through a new temporary surcharge of 0.2% on winning pari-mutuel wagers, creates a temporary optional
0.5% surcharge on winning wagers by individual tracks to support their track operation and purses as well as reactivates six OTB
licenses. We expect approval of the legislation to continue to result in a favorable impact to our business, financial condition and
results of operation.
Horse Racing Equity Trust Fund
During 2006, the Illinois General Assembly enacted Public Act 94-804, which created the HRE Trust Fund. During November
2008, the Illinois General Assembly passed Public Act 95-1008 to extend Public Act 94-804 for a period of three years beginning
December 12, 2008. The HRE Trust Fund was funded by a 3% “surcharge” on revenues of Illinois riverboat casinos that met a
certain revenue threshold. The riverboats paid all monies required under Public Acts 94-804 and 95-1008 into a special protest
fund account which prevented the monies from being transferred to the HRE Trust Fund. The funds were moved to the HRE Trust
Fund and distributed to the racetracks, including Arlington, in December 2009.
Beginning in 2009, we received payments from the HRE Trust Fund related to subsidies paid by the original nine Illinois riverboat
casinos in accordance with Illinois Public Acts 94-804 and 95-1008. The HRE Trust Fund was established to fund operating and
capital improvements at Illinois racetracks. The funds were to be distributed with approximately 58% of the total to be used for
horsemen’s purses and the remaining monies to be distributed to Illinois racetracks. The monies received from the Public Acts
were placed into an Arlington Park escrow account due to a temporary restraining order (“TRO”) pending the resolution of a
lawsuit brought by certain Illinois casinos that were required to pay funds to the HRE Trust Fund. In August 2011, the stay of
dissolution expired and the TRO was dissolved, which terminated the restrictions on our ability to access the funds from the HRE
Trust Fund held in the escrow account.
As of December 31, 2013, we had received $46.1 million in proceeds, of which $26.5 million was designated for Arlington purses.
We used the remaining $19.6 million of the proceeds to improve, market, and maintain or otherwise operate the Arlington racing
facility in order to conduct live racing. No additional proceeds related to the HRE Trust Fund are expected to be received.
Horse Racing Equity Trust Fund – Tenth Riverboat License
Under legislation enacted in 1999, the HRE Trust Fund was scheduled to receive amounts equal to 15% of the adjusted gross
receipts generated by a tenth riverboat casino license to be granted in Illinois. The funds were to be distributed to racetracks in
Illinois for purses as well as racetrack discretionary spending. During December 2008, the Illinois Gaming Board awarded the
tenth riverboat license to a casino in Des Plaines, Illinois. This casino opened during July 2011, entitling the Illinois racing industry
to receive an amount equal to 15% of the adjusted gross receipts of this casino from the gaming taxes generated by that casino,
once the accumulated funds were appropriated by the state.
On July 10, 2013, the Governor of Illinois signed Illinois House Bill 214 into law, providing for the release of $23.0 million of
funds collected from the tenth riverboat licensee since its opening during 2011. During July 2013, Arlington received $7.9 million
as its share of the proceeds, of which $3.6 million was designated for Arlington purses. The remaining $4.2 million was recognized
as miscellaneous other income in our Consolidated Statements of Comprehensive Income during the year ended December 31,
2013. No additional proceeds related to future funds of the tenth riverboat are expected to be distributed to Illinois racetracks
under the provisions of House Bill 214.
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Purse Recapture
Pursuant to the Illinois Horse Racing Act, Arlington and all other Illinois racetracks are permitted to receive a payment commonly
known as purse recapture. Generally, in any year that wagering on Illinois horse races at Arlington is less than 75% of wagering
both in Illinois and at Arlington on Illinois horse races in 1994, Arlington is permitted to receive 2% of the difference in wagering
in the subsequent year. The payment is funded from the Arlington purse account. Under the Illinois Horse Racing Act, the Arlington
purse account is to be repaid via an appropriation by the Illinois General Assembly from the Illinois General Revenue Fund.
However, this appropriation has not been made since 2001. Subsequently, Illinois horsemen unsuccessfully petitioned the IRB to
prevent Illinois racetracks from receiving this payment in any year that the Illinois General Assembly did not appropriate the
repayment to the racetrack’s purse accounts from the General Revenue Fund. Further, the Illinois horsemen filed lawsuits seeking,
among other things, to block payment to Illinois racetracks, as well as to recover the 2002 and 2003 amounts already paid to the
Illinois racetracks. These lawsuits filed by the Illinois horsemen challenging the 2002 and 2003 reimbursements have been resolved
in favor of Arlington and the other Illinois racetracks. Several bills were filed in the 2003, 2004, 2005 and 2009 sessions of the
Illinois legislature that, in part, would eliminate the statutory right of Arlington and the other Illinois racetracks to continue to
receive this payment. None of these bills passed. Since the statute remains in effect, Arlington continues to receive the recapture
payment from the purse account. If Arlington loses the statutory right to receive this payment, there could be a material, adverse
impact on our business, financial condition and results of operations.
Host Days
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During January, February and a portion of March each year, when there is no live racing in Illinois, the IRB designates a thoroughbred
racetrack as the host track in Illinois, for which the host track receives a higher percentage of earnings from pari-mutuel wagering
activity throughout Illinois. In January 2015, the IRB appointed Arlington the host track in Illinois for 23 simulcast host days,
which was consistent with 2014. Arlington was awarded one additional live host day during 2015, as compared to the prior year.
Arlington’s future designation as the host track is subject to the annual designation by the IRB. A change in the number of days
Arlington is designated host track could have a material, adverse impact on our business, financial condition and results of
operations.
Ohio
Gaming Legislation
In November 2009, Ohio voters passed a referendum to allow four casinos in Ohio, with opening dates from 2012 through 2013.
On June 28, 2011, both houses of the Ohio General Assembly passed House Bill 277 (“HB 277”) allowing all seven state racetracks
to apply for video lottery licenses. The Governor of Ohio signed HB 277 into law on July 15, 2011. In addition, on June 23, 2011,
the Ohio legislature passed legislation allowing the relocation of Ohio racetracks with video lottery terminal licenses. In October
2011, the Ohio Roundtable filed a lawsuit seeking to prevent racetracks from relocating and prohibiting video lottery terminals.
In May 2012, the Common Pleas Court ruled against the Ohio Roundtable, indicating it did not have legal standing to sue the State
over the 2011 legislation. On June 28, 2012, the Ohio Roundtable filed an appeal against this ruling. Oral arguments on the appeal
were heard by the Franklin County Court of Appeals on January 17, 2013. In March 2013, the Ohio Tenth Circuit Court of Appeals
upheld the lower court’s ruling, at which time the Ohio Roundtable appealed the appellate court ruling to the Ohio Supreme Court.
On July 24, 2013, the Ohio Supreme Court agreed to hear the matter. At this time, we do not know how this legislation or the
related litigation could affect our business, financial condition and results of operations.
Florida
ADW
In November 2014, Senate Bill 124 related to advance deposit wagering was filed for consideration during the 2015 legislative
session. Under the terms of the bill, the Department of Business and Professional Regulation is granted regulatory authority to
authorize advance deposit wagering in the state. At this time it is difficult to assess the possible impact this legislation or similar
legislation will have on our business, financial condition and results of operations.
Expanded Gaming
In March 2014, House Bill 1383 was filed for consideration during the 2014 legislative session. The proposed bill would have
created a new regulatory structure under a Gaming Control Commission. A similar proposal, Senate Bill 7052, which also aimed
to restructure the state's existing gaming laws under a proposed Department of Gaming Control, would have allowed for two
destination resort casinos in Miami-Dade and Broward counties. Constitutional amendments requiring voter approval for any
additional gaming expansion to occur in the state were filed for consideration in both the House and Senate chambers. The 2014
legislative session concluded without consideration of any legislation related to expanded gaming. It is unclear to what extent
similar future legislation could have on our business, financial condition and results of operations.
Maine
Expanded Gaming
On September 27, 2013, the Maine Gaming Study Commission, whose statutorily defined mission is to examine the state’s existing
gaming market as well as assess expansion opportunities, voted to recommend gaming be expanded beyond the current market.
Subsequent to the vote, the Commission was disbanded by the Chairman. During January 2014, the Veterans and Legal Affairs
Committee, the legislative committee of jurisdiction for gaming related issues, considered legislation that would allow for further
gaming expansion to occur in Maine. The Committee voted to negatively recommend to the House and Senate each of the proposed
expanded gaming bills with the exception of a bill that, if approved, will allow up to three slot machines in an estimated 40 veterans
halls throughout the state. Ultimately, all legislation related to gaming expansion died in the Senate.
In April 2014, a proposal authorizing the state to hire a third-party to conduct a market analysis on the feasibility of expanded
gaming in Maine was approved by the legislature. On August 31, 2014 the third-party study was released which concluded that
Maine’s current gaming market would allow for up to two additional casinos. According to the study, the market has additional
capacity for one integrated dining, entertainment and gaming property in Southern Maine. The study further suggested that a
fourth casino location would be possible near the Canadian border. Should gaming expansion occur in Maine it could negatively
impact our business, financial condition and results of operations.
New York
Gaming Legislation
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During 2012, the Governor of New York and legislative leaders agreed to legalize casino gaming and seek an amendment to the
state constitution that would authorize such gaming and during 2013, New York voters approved a constitutional amendment
authorizing up to seven casinos in the state. On May 13, 2014, we entered into a 50% joint venture with SHRI to bid on the
development, construction and operation of the Capital View Casino & Resort located in the Capital Region near Albany, New
York. On December 17, 2014, the Gaming Facility Location Board (the "Location Board") announced the award of three casino
licenses in the state and awarded the Capital Region license to another bidder, but it did not award a fourth available license in the
Southern Region. In December 2014, the Governor of New York appealed to the Location Board to reconsider awarding the fourth
license in the state. During January 2015, the Location Board reopened the bidding process for casino license applications for the
fourth license. At this time it is unknown if, or when, the fourth casino license will be awarded. An expansion of gaming in New
York includes incentives for the horse racing industry. At this time it is difficult to determine the impact casino gaming could have
on our business, financial condition and results of operations.
California
Exchange Wagering
During 2010, California became the first state to approve exchange wagering on horseracing at California racetracks. Exchange
wagering differs from pari-mutuel wagering in that it allows customers to propose their own odds on certain types of wagers on
horseracing, including betting that a horse may lose, which may be accepted by a second customer.
During 2012, the California Horse Racing Board (the “CHRB”) heard testimony on exchange wagering and approved draft proposed
exchange wagering regulations which were submitted for public comment. In November 2012, the CHRB granted approval for
rules governing exchange wagering. The regulations were submitted to the Office of Administrative Law (“OAL”) during February
2013 for review and final approval. On March 20, 2013, the OAL disapproved the proposed regulations. In June 2013, the CHRB
approved and resubmitted the proposed regulations to the OAL, which approved the regulations during August 2013. However,
the CHRB has not set a time frame for accepting applications or for the implementation of exchange wagering in California.
Exchange wagering may have a negative impact on our current pari-mutuel operations, including our ADW business. Furthermore,
California’s approval of exchange wagering may set a precedent for other states to approve exchange wagering, creating additional
risk of a negative impact on our pari-mutuel wagering business.
Internet Poker
On February 21, 2014, Senate Bill 1366 (“SB 1366”) was introduced, which would allow Indian tribes and cardrooms to apply
for a ten year license to operate Internet poker in the state. Under the terms of the legislation, the state would be allowed to opt-
into or out of a federal Internet poker framework or enter into agreements to offer Internet poker across state boarders. Also
introduced on February 21, 2014 was Assembly Bill 2291 ("AB 2291") which would allow qualified Indian tribes and cardrooms
to apply for a ten year license. The proposed legislation would require the state to opt-out of any federally created Internet poker
framework and would be precluded from entering into Internet poker agreements with other states or foreign jurisdictions. The
2014 legislative session concluded without consideration of legislation related to Internet poker. The potential effects of SB 1366
and AB 2291 on our business, financial condition and results of operations cannot be determined at this time.
In December 2014, Assembly Bill 9 (“AB 9”) was introduced for consideration during the 2015 legislative session. The bill would
allow cardrooms and Indian tribes to apply for a ten year license to operate Internet poker in California. Entities who knowingly
engaged in unlawful Internet gaming after December 31, 2006 would be prohibited from obtaining an Internet poker license. The
bill provides that the state must affirmatively opt-in to federal Internet gambling regulations. The legislature is authorized to enter
into Internet gambling agreements between states or foreign jurisdictions. The potential effects of AB 9 on our business, financial
condition and results of operations cannot be determined at this time.
On January 22, 2015, Assembly Bill 167 (“AB 167”) was introduced and would allow racetracks, cardrooms and Indian tribes to
offer Internet poker. While the bill does not specifically preclude entities who knowingly engaged in unlawful Internet gaming
after December 31, 2006 from obtaining an Internet poker license, AB 167 provides that a person who has defied a legislative
investigative body when that body is investigating crimes related to poker, corruption related to poker activities, criminal profiteering
or organized crime would be prohibited from obtaining a license to conduct Internet poker in California. The potential effects of
AB 167 on our business, financial condition and results of operations cannot be determined at this time.
Louisiana
Smoking Ban
In October 2014, a proposal banning smoking in bars and public places, including casinos, in Orleans Parrish was submitted to
the New Orleans City Council for consideration. On January 22, 2015, the New Orleans City Council approved the smoking ban
which will take effect on April 22, 2015. The smoking ban is expected to have a negative impact on our business, financial
condition and results of operations.
Slot Machine Revenues
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On April 1, 2014, House Bill 1223 ("HB 1223") was introduced for consideration by the Louisiana legislature. HB 1223 would
have required 10% of net slot machine revenues after purse contributions and taxes to be used for capital improvement projects
at Fair Grounds as a condition of slot machine licensure. Capital projects include improvements to the frontside, backside,
grandstands, stables and racetrack surfaces. Under the terms of the legislation, proposed plans for capital improvements would
be submitted to and approved by the Louisiana State Racing Commission ("LSRC"). When reviewing the proposed plans, the
LSRC would be directed to consider standards and technology features present at other racetracks comparable in historical
significance to Fair Grounds. Certification of completion of the projects would be submitted to the Louisiana Gaming Control
Board. On April 14, 2014, HB 1223 was passed by the Louisiana House of Representatives and referred to the Senate Judiciary
Committee where the legislation failed to progress. Should similar future legislation be enacted into law, it could have a negative
material impact on our business, financial condition and results of operations.
Sweepstakes
In February 2014, House Bill 293 was filed to prohibit the operation of electronic sweepstakes devices in Louisiana. The bill,
which provides a definition of electronic sweepstakes devices and creates a specific prohibition against the operation of such
devices, was signed by the Governor of Louisiana in May 2014 and became effective August 1, 2014. We expect the legislation
to result in a favorable impact to our business, financial condition and results of operation.
Louisiana Racing Commission
In May 2014, Senate Bill 53, which grants increased authority to the LSRC as it relates to fines and suspension or revocation of
racing licensure, was passed by the legislature and signed into law by the Governor of Louisiana. Specifically, the bill allows the
LSRC to assess fines up to $100,000 and suspend or revoke a racetrack's racing license for failure to meet specific criteria. The
bill maintains current law as it relates to grounds for suspension and revocation of licensure as well as provides for new conditions
such as failure to maintain suitable racing surfaces as determined by the LSRC, failure or inability to conduct racing in a manner
that is in the best interest of racing as determined by the LSRC and failure to respond to inquiries made by the LSRC as it relates
to the status or progress of matters related to racing. The LSRC may also require a racetrack to submit a written report which
outlines a plan of operation for each fiscal year as it relates to customer service, marketing and promotions related to racing, as
well as capital improvement and facility maintenance. The bill became effective August 1, 2014. At this time it is unclear to what
extent the legislation will impact our business, financial condition and results of operation.
Mississippi
On January 12, 2015, House Bill 306 (“HB 306”), authorizing existing licensees in the state to qualify to operate Internet casino
gaming, was introduced for consideration in the 2015 legislative session. Licensure is from one to five years subject to the
determination of the Mississippi Commission. The state is authorized to enter into interstate and international online gaming
compacts. Language precluding entities which engaged in unlawful Internet gaming after December 31, 2006 from qualifying for
licensure is not included in the draft bill. The bill died in Committee on February 3, 2015 after failing to advance past the first
committee deadline for the 2015 legislative session. The potential impact of this bill or similar legislation on our business, financial
condition and results of operation cannot be determined at this time.
On January, 22, 2015, House Bill 782 (“HB 782”) permitting existing gaming licensees to offer Internet poker in the state was
introduced. The state is authorized to enter into interstate and international compacts that are limited to poker only. Language
precluding entities that engaged in unlawful Internet gaming after December 31, 2006 from qualifying for licensure is not included
in the draft bill. The bill died in Committee on February 3, 2015 after failing to advance past the first committee deadline for the
2015 legislative session. The potential impact of this bill or similar legislation on our business, financial condition and results of
operation cannot be determined at this time.
New Jersey
Exchange Wagering
On May 14, 2014, the New Jersey Racing Commission ("NJRC") approved the publication of rules that would govern exchange
wagering within the state. The rules were subject to a sixty-day public comment period which ended on July 16, 2014. The NJRC
may enact the rules as written or consider amendments to the rules, but to date, no action has occurred. Should exchange wagering
be enacted in New Jersey and other states, it may have a negative impact on our current pari-mutuel operations including our ADW
business.
Sports Betting
During 2011, New Jersey voters passed a non-binding referendum permitting sports betting in New Jersey. In 2012, legislation
authorizing sports betting in Atlantic City casinos and at racetracks passed the House and Senate legislatures and was signed by
the Governor of New Jersey. The National Football League, National Basketball Association, National Hockey League and
National Collegiate Athletic Association filed suit against the state to prohibit the state from moving forward with the legislation,
citing a federal ban against sports betting. On December 21, 2012, a federal judge denied New Jersey’s request to have the lawsuit
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dismissed. The judge agreed that expanding legal sports betting into New Jersey would negatively impact the perception of sporting
games. The New Jersey Division of Gaming Enforcement issued final sports betting regulations, but the Division noted that no
license would be issued prior to January 2013. In June 2014, the U.S. Supreme Court denied hearing New Jersey’s appeal of a
federal sports betting ban. In October 2014 the Governor of New Jersey signed Senate Bill 2460 which clarified that sports
wagering at casinos and racetracks is not unlawful gambling under New Jersey law. Subsequently, a U.S. District Judge issued a
temporary restraining order preventing casinos and racetracks from accepting sports bets in the state. The issue remains on appeal.
The potential impact of sports betting in New Jersey on our business, financial condition and results of operation cannot be
determined at this time.
Pennsylvania
On January 28, 2015, Senate Bill 352 (“SB 352”) was introduced for consideration during the 2015 legislative session. The bill
contains provisions specifically related to racing oversight as well as provides authority to the Pennsylvania Gaming Board to
grant licensure allowing Pennsylvania racetracks to operate their own ADW business. SB 352 is identical to Senate Bill 1188
which was filed during the 2014 legislative session but failed to be considered prior to the end of the session. The potential impact
of this bill on our business, financial condition and results of operation cannot be determined at this time.
Virginia
In January 2015, legislation was filed in Virginia to change the distribution of revenue generated by ADWs to various in state
racing interests, and the legislation remains pending before the Virginia legislature. Should the legislation be drafted into law, it
could have a negative impact on our business, financial condition and results of operations.
Washington
House Bill 1114 (“HB 1114”) authorizing Internet poker in the state was filed for consideration on January 12, 2015.
Specifically, the bill would allow firms, partnerships or corporations registered to do business in Washington to apply for
licensure to operate an Internet poker network and/or operate an Internet poker room. The state, at the discretion of the
Governor of Washington, may enter into multistate agreements related to Internet poker. Language precluding entities which
accepted bets on Internet gaming after December 31, 2006 from being eligible for licensure is not included in the draft bill. The
potential impact of this bill on our business, financial condition and results of operation cannot be determined at this time.
M. Environmental Matters
We are subject to various federal, state and local environmental laws and regulations that govern activities that may have adverse
environmental effects, such as discharges to air and water, as well as the management and disposal of solid, animal and hazardous
wastes and exposure to hazardous materials. These laws and regulations, which are complex and subject to change, include United
States Environmental Protection Agency and state laws and regulations that address the impacts of manure and wastewater generated
by Concentrated Animal Feeding Operations (“CAFO”) on water quality, including, but not limited to, storm and sanitary water
discharges. CAFO and other water discharge regulations include permit requirements and water quality discharge standards.
Enforcement of these regulations has been receiving increased governmental attention. Compliance with these and other
environmental laws can, in some circumstances, require significant capital expenditures. For example, we may incur future costs
under existing and new laws and regulations pertaining to storm water and wastewater management at our racetracks. Moreover,
violations can result in significant penalties and, in some instances, interruption or cessation of operations.
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In the ordinary course of our business, we at times receive notices from regulatory agencies regarding our compliance with CAFO
regulations that may require remediation at our facilities. On December 6, 2013, we received a notice from the United States
Environmental Protection Agency regarding alleged CAFO non-compliance at Fair Grounds. We do not expect that remediating
these items will cause a disruption in our operations at Fair Grounds, although it may require us to incur certain capital expenditures
costs which we do not expect to be material.
We also are subject to laws and regulations that create liability and cleanup responsibility for releases of hazardous substances
into the environment. Under certain of these laws and regulations, a current or previous owner or operator of property may be
liable for the costs of remediating hazardous substances or petroleum products on its property, without regard to whether the owner
or operator knew of, or caused, the presence of the contaminants, and regardless of whether the practices that resulted in the
contamination were legal at the time they occurred. The presence of, or failure to remediate properly, such substances may
materially adversely affect the ability to sell or rent such property or to borrow funds using such property as collateral. Additionally,
the owner of a property may be subject to claims by third parties based on damages and costs resulting from environmental
contamination emanating from the property.
Compliance with environmental laws has not materially affected our ability to develop and operate our properties, and we are not
otherwise subject to any material compliance costs in connection with federal or state environmental laws.
N.
Service Marks and Internet Properties
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We hold numerous state and federal service mark registrations on specific names and designs in various categories including the
entertainment business, apparel, paper goods, printed matter, housewares and glass. We license the use of these service marks
and derive revenue from such license agreements.
O.
Employees
As of December 31, 2014, we employed approximately 4,825 full-time and part-time employees Company-wide. Due to the
seasonal nature of our live racing business, the number of seasonal and part-time persons employed will vary throughout the year.
P.
Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and other
Securities and Exchange Commission (“SEC”) filings, and any amendments to those reports and any other filings that we file with
or furnish to the SEC under the Securities Exchange Act of 1934 are made available free of charge on our website
(www.churchilldownsincorporated.com) as soon as reasonably practicable after we electronically file the materials with the SEC
and are also available at the SEC’s website at www.sec.gov. These reports may also be obtained from the SEC's Public Reference
Room at 100 F Street, NE, Washington, DC 20549 or by calling the SEC at (800) SEC-0330.
ITEM 1A.
RISK FACTORS
Risks Related to the Company
In addition to risks and uncertainties in the ordinary course of business that are common to all businesses, important factors that
are specific to our industry and Company could materially impact our future performance and results. The factors described
below are the most significant risks that could materially impact our business, financial condition and results of operations.
General economic trends may impact our operations
Economic conditions improved during 2013 and 2014 from a previous period of adverse conditions in local, regional, national
and global markets, however there remains risk that a downturn may resume. Our access to, or cost of, credit may be impacted
to the extent global and U.S. credit markets are affected by downward trends. Additionally, our ability to respond to periods of
economic contraction may be limited, as certain of our costs remain fixed or even increase, when revenues decline. Accordingly,
any persistence of poor economic conditions, or further deterioration, could have a material, adverse impact on our business,
financial condition and results of operations.
Our business is sensitive to consumer confidence and reductions in consumers’ discretionary spending, which may result from
the challenging economic conditions, unemployment levels and other changes we cannot accurately predict
Demand for entertainment and leisure activities is sensitive to consumers’ disposable incomes, which have been adversely
affected by recent economic conditions and the persistence of elevated levels of unemployment. Further declines in the residential
real estate market, changes in consumer confidence, increases in individual tax rates, and other factors that we cannot accurately
predict may reduce the disposable income of our customers. This could result in fewer patrons visiting our racetracks, gaming
and wagering facilities, online wagering sites and our casual gaming site, or downloading our casual games, and/or may impact
our customers’ ability to wager with the same frequency and maintain their wagering level profiles. Decreases in consumer
discretionary spending could affect us even if it occurs in other markets. For example, reduced wagering levels and profitability
at racetracks from which we carry racing content could cause certain racetracks to cancel races or cease operations and therefore
reduce the content we could provide to our customers. Accordingly, any significant loss of customers or decline in wagering
could have a material adverse impact on our business, financial condition and results of operations.
We are vulnerable to additional or increased taxes and fees
We believe that the prospect of raising significant additional revenue through taxes and fees is one of the primary reasons that
certain jurisdictions permit legalized gaming. As a result, gaming companies are typically subject to significant taxes and fees
in addition to the normal federal, state, provincial and local income taxes, and such taxes and fees may be increased at any time.
From time to time, legislators and officials have proposed changes in tax laws, or in the administration of such laws, affecting
the gaming industry. Moreover, many states and municipalities, including ones in which we operate, are currently experiencing
budgetary pressures that may make it more likely they would seek to impose additional taxes and fees on our operations. It is
not possible to determine with certainty the likelihood of any such changes in tax laws or fee increases, or their administration;
however, if enacted, such changes could have a material adverse effect on our business, financial condition and results of
operations.
Our debt facilities contain restrictions that limit our flexibility in operating our business
Our debt facilities contain, and any future indebtedness of ours would likely contain, a number of covenants that impose significant
operating and financial restrictions on us, including restrictions on our and our subsidiaries’ ability to, among other things:
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•
•
incur additional debt or issue certain preferred shares;
pay dividends on or make distributions in respect of our capital stock, repurchase common shares or make other
restricted payments;
• make certain investments;
•
•
•
•
sell certain assets or consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
create liens on certain assets;
enter into certain transactions with our affiliates; and
designate our subsidiaries as unrestricted subsidiaries.
As a result of these covenants, we are limited in the manner in which we conduct our business, and we may be unable to engage
in favorable business activities or finance future operations or capital needs.
We have pledged and will pledge a significant portion of our assets as collateral under our debt facilities. If any of these lenders
accelerate the repayment of borrowings, there can be no assurance that we will have sufficient assets to repay our indebtedness
and our lenders could proceed against the collateral we have granted them.
Under our debt facilities, we are required to satisfy and maintain specified financial ratios. Our ability to meet those financial
ratios can be affected by events beyond our control, and there can be no assurance that we will meet those ratios. A failure to
comply with the covenants contained in our debt facilities or our other indebtedness could result in an event of default under
the facilities or the existing agreements, which, if not cured or waived, could have a material adverse impact on our business,
financial condition and results of operations. In the event of any default under our debt facilities or our other indebtedness, the
lenders thereunder:
• will not be required to lend any additional amounts to us;
•
could elect to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be due
and payable and terminate all commitments to extend further credit; or
require us to apply all of our available cash to repay these borrowings.
•
If the indebtedness under our debt facilities or our other indebtedness were to be accelerated, there can be no assurance that our
assets would be sufficient to repay such indebtedness in full.
We may not be able to identify and complete acquisition, expansion or divestiture projects on time, on budget or as planned
We expect to pursue expansion, acquisition and divestiture opportunities, and we regularly evaluate opportunities for
development, including acquisitions or other strategic corporate transactions which may expand our business operations.
We could face challenges in identifying development projects that fit our strategic objectives, identifying potential acquisition
or divestiture candidates and/or development partners, finding buyers, negotiating projects on acceptable terms, and managing
and integrating the acquisition or development projects. The integration of new operations and any other properties we may
acquire or develop will require the dedication of management resources that may temporarily divert attention from our day-to-
day business. The process of integrating new properties or projects may also interrupt the activities of those businesses, which
could have a material, adverse impact on our business, financial condition and results of operations. The divestiture of existing
businesses may be affected by our ability to identify potential buyers. Furthermore, current or future regulation may postpone
a divestiture pending certain resolutions to federal, state or local legislative issues. We cannot assure that any new properties
or developments will be completed or integrated successfully.
Management of new properties or business operations, especially those in new lines of business or different geographic areas,
may require that we increase our managerial resources. We cannot assure that we will be able to manage the combined operations
effectively or realize any of the anticipated benefits of our acquisitions or developments.
We may experience difficulty in integrating recent or future acquisitions into our operations
We have completed acquisition transactions in the past and we may pursue acquisitions from time to time in the future. The
successful integration of newly acquired businesses, including our recent acquisitions of Big Fish Games and Oxford, into our
operations has required and will continue to require the expenditure of substantial managerial, operating, financial and other
resources and may also lead to a diversion of our attention from our ongoing business concerns. We may not be able to successfully
integrate new businesses or realize projected revenue gains, cost savings and synergies in connection with those acquisitions on
the timetable contemplated, if at all. Furthermore, the costs of integrating businesses we acquire could significantly impact our
short-term operating results. These costs could include:
•
•
restructuring charges associated with the acquisitions;
non-recurring acquisition costs, including accounting and legal fees, investment banking fees and recognition of
transaction-related costs or liabilities; and
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costs of imposing financial and management controls (such as compliance with Section 404 of the Sarbanes-Oxley
Act of 2002) and operating, administrative and information systems.
Although we perform financial, operational and legal diligence on the businesses we purchase, in light of the circumstances of
each transaction, an unavoidable level of risk remains regarding the actual condition of these businesses and our ability to
continue to operate them successfully and integrate them into our existing operations. In any acquisition we make, we face risks
which include:
•
•
•
•
•
•
•
•
the risk that the acquired business may not further our business strategy or that we paid more than the business
was worth;
the potential adverse impact on our relationships with partner companies or third-party providers of technology
or products;
the possibility that we have acquired substantial undisclosed liabilities for which we may have no recourse against
the sellers or third party insurers;
costs and complications in maintaining required regulatory approvals or obtaining further regulatory approvals
necessary to implement the acquisition in accordance with our strategy;
the risks of acquiring businesses and/or entering markets in which we have limited or no prior experience;
the potential loss of key employees or customers;
the possibility that we may be unable to retain or recruit managers with the necessary skills to manage the acquired
businesses; and
changes to legal and regulatory guidelines, which may negatively affect acquisitions.
If we are unsuccessful in overcoming these risks, it could have a material adverse impact on our business, financial condition
and results of operations.
Our business strategy is premised, in part, on the legalization of online real money gaming in the United States and our ability
to predict and capitalize on any such legalization
In the last few years, Delaware, Nevada, California, Florida, Mississippi, Hawaii, Massachusetts, New Jersey, Iowa, Illinois,
Washington D.C. and the Federal government have considered legislation that would legalize online real money gaming. To
date, only Nevada, Delaware and New Jersey have enacted such legislation. If a large number of additional states or the Federal
government enact online real money gaming legislation and we are unable to obtain the necessary licenses to operate online real
money gaming websites in United States jurisdictions where such games are legalized, our future growth in real money gaming
could be materially impaired. In addition, states or the Federal government may legalize online real money gaming in a manner
that is unfavorable to us. For example, several states and the Federal government are considering draft laws that require online
casinos to also have a license to operate a brick-and mortar casino, either directly or indirectly through an affiliate. If, like Nevada
and New Jersey, state jurisdictions enact legislation legalizing online real money casino gaming subject to this brick-and-mortar
requirement, we may be unable to offer online real money gaming in such jurisdictions if we are unable to establish an affiliation
with a brick-and-mortar casino in such jurisdiction. There also exists in the online real money gaming industry a significant
“first mover” advantage. Our ability to compete effectively in respect of a particular style of online real money gaming in the
United States may be premised on introducing a style of gaming before our competitors. Failing to do so (“move first”) could
materially impair our ability to grow in the online real money gaming space. In addition to the risk that online real money gaming
will be legalized in a manner unfavorable to us, we may fail to accurately predict when online real money gaming will be
legalized in significant jurisdictions. The legislative process in each state and at the Federal level is unique and capable of rapid,
often unpredictable change. If we fail to accurately forecast when and how, if at all, online real money gaming will be legalized
in additional state jurisdictions, such failure could impair our readiness to introduce online real money gaming offerings in such
jurisdictions, which could have a material adverse effect on our business, financial condition and results of operations.
Failure to comply with laws requiring us to block access to certain individuals, based upon their geographic location, may result
in legal penalties or an impairment to our ability to offer online real money gaming, in general
Individuals in jurisdictions in which online real money gaming is illegal may nonetheless seek to engage our online real money
gaming products. While we take steps to block access by individuals in such jurisdictions, those steps may be unsuccessful. In
the event that individuals in jurisdictions in which online real money gaming is illegal engage our online real money gaming
systems, we may be subject to criminal sanctions, regulatory penalties, the loss of existing or future licenses necessary to offer
online real money gaming or other legal liabilities, any one of which could have a material adverse effect on us, and therefore
our businesses, financial condition and results of operations. For example, gambling laws and regulations in many jurisdictions
require gaming industry participants to maintain strict compliance with various laws and regulations. If we are unsuccessful in
blocking access to our online real money gaming products by individuals in a jurisdiction where such products are illegal, we
could lose or be prevented from obtaining a license necessary to offer online real money gaming in a jurisdiction in which such
products are legal. Furthermore, our inability to restrict illegal access could materially impact our other gaming licenses as well.
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We may adversely infringe on the intellectual property rights of others
In the course of our business, we may become aware of potentially relevant patents or other intellectual property rights held by
other parties. Many of our competitors as well as other companies and individuals have obtained, and may obtain in the future,
patents or other intellectual property rights that concern products or services related to the types of products and services we
currently offer or may plan to offer in the future. We evaluate the validity and applicability of these intellectual property rights
and determine in each case whether we must negotiate licenses to incorporate or use the proprietary technologies in our products.
Claims of intellectual property infringement may also require us to enter into costly royalty or license agreements. However,
we may not be able to obtain royalty or license agreements on terms acceptable to us or at all. We also may be subject to
significant damages or injunctions against the development and sale of our products and services if we become subject to litigation
relating to intellectual property infringement.
Our results may be affected by the outcome of litigation within our industry and the protection and validity of our intellectual
property rights. Any litigation regarding patents or other intellectual property could be costly and time consuming and could
divert our management and key personnel from our business operations. The complexity of the technology involved and the
uncertainty of litigation surrounding it has the effect of increasing the risks associated with certain of our product offerings,
particularly in the areas of advance deposit wagering, or ADW, and casual gaming. There can be no assurance that we would
not become a party to litigation surrounding our ADW or casual gaming businesses or that such litigation would not cause us
to suffer losses or disruption in our business strategy.
We are susceptible to unauthorized disclosure of our source code
We may not be able to protect our computer source code from being copied if there is an unauthorized disclosure of source code.
We take significant measures to protect the secrecy of large portions of our source code. If unauthorized disclosure of a significant
portion of our source code occurs, we could potentially lose future trade secret protection for that source code. This could make
it easier for third parties to compete with our products by copying functionality; which could adversely affect our revenue and
operating margins. Unauthorized disclosure of source code also could increase security risks.
We depend on key personnel
Our continued success and our ability to maintain our competitive position is largely dependent upon, among other things, the
skills and efforts of our senior executives and management team including Robert L. Evans, our Chairman of the Board, and
William C. Carstanjen, our Chief Executive Officer. We cannot guarantee that these individuals will remain with us, and their
retention is affected by the competitiveness of our terms of employment and our ability to compete effectively against other
companies. In addition, certain of our key employees are required to file applications with the gaming authorities in each of the
jurisdictions in which we operate and are required to be licensed or found suitable by these gaming authorities. If the gaming
authorities were to find a key employee unsuitable for licensing, we may be required to sever the employee relationship.
Furthermore, the gaming authorities may require us to terminate the employment of any person who refuses to file appropriate
applications. Either result could significantly impair our operations. Our inability to retain key personnel could have a material,
adverse impact on our business, financial condition and results of operations.
Catastrophic events could cause a significant and continued disruption to our operations
A disruption or failure in our systems or operations in the event of a major earthquake, weather event, cyber-attack, terrorist
attack or other catastrophic event could interrupt our operations, damage our properties and reduce the number of customers
who visit our facilities in the affected areas. For example, Churchill Downs, Harlow’s, Riverwalk, Fair Grounds and its related
OTBs and Calder could all be adversely affected by flooding or hurricanes. Furthermore, our TwinSpires and Big Fish Games
locations may be affected by earthquakes. While we maintain insurance coverage that may cover certain of the costs that we
incur as a result of some natural disasters, our coverage is subject to deductibles, exclusions and limits on maximum benefits.
There can be no assurance that we will be able to fully collect, if at all, on any claims resulting from extreme weather conditions
or other disasters. If any of our properties are damaged or if their operations are disrupted or face prolonged closure as a result
of natural disasters in the future, or if natural disasters adversely impact general economic or other conditions in the areas in
which our properties are located or from which they draw their patrons, the disruption could have a material, adverse impact on
our business, financial condition and results of operations.
Although we have “all risk” property insurance coverage for our operating properties, which covers damage caused by a casualty
loss (such as fire, natural disasters, acts of war, or terrorism), each policy has certain exclusions. Our level of property insurance
coverage, which is subject to policy maximum limits, may not be adequate to cover all losses in the event of a major casualty.
In addition, certain casualty events may not be covered at all under our policies. Therefore, certain acts could expose us to
substantial uninsured losses.
We renew our insurance policies on an annual basis. The cost of coverage may become so high that we may need to further
reduce our policy limits or agree to certain exclusions from our coverage.
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Our debt instruments and other material agreements require us to meet certain standards related to insurance coverage. Failure
to satisfy these requirements could result in an event of default under these debt instruments or material agreements.
Work stoppages and other labor problems could negatively impact our future plans
Some of our employees are represented by labor unions. A strike or other work stoppage at one of our properties could have an
adverse effect on our business and results of operations. From time to time, we have also experienced attempts to unionize
certain of our non-union employees. We cannot provide any assurance that we will not experience additional and more successful
union activity in the future.
We process, store and use personal information and other data, which subjects us to governmental regulation and other legal
obligations related to privacy, and our actual or perceived failure to comply with such obligations could harm our business
We receive, store and process personal information and other customer data. There are numerous federal, state and local laws
regarding privacy and the storing, sharing, use, processing, disclosure and protection of personal information and other data.
Any failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to customers or other
third parties, or our privacy-related legal obligations, or any compromise of security that results in the unauthorized release or
transfer of personally identifiable information or other player data, may result in governmental enforcement actions, litigation
or public statements against us by consumer advocacy groups or others and could cause our customers to lose trust in us, which
could have an adverse effect on our business. While the Company maintains insurance coverage specific to cyber-insurance
matters, any failure on our part to maintain adequate safeguards may subject us to significant liabilities. Additionally, if third
parties we work with, such as vendors, violate applicable laws or our policies, such violations may also put our customers’
information at risk and could in turn have an adverse effect on our business. The Company is also subject to payment card
association rules and obligations under its contracts with payment card processors. Under these rules and obligations, if
information is compromised, the Company could be liable to payment card issuers for the associated expense and penalties. In
addition, if the Company fails to follow payment card industry security standards, even if no customer information is
compromised, the Company could incur significant fines or experience a significant increase in payment card transaction costs.
In the area of information security and data protection, many states have passed laws requiring notification to customers when
there is a security breach for personal data, such as the 2002 amendment to California’s Information Practices Act, or requiring
the adoption of minimum information security standards that are often vaguely defined and difficult to practically implement.
The costs of compliance with these laws may increase in the future as a result of changes in interpretation. Furthermore, any
failure on our part to comply with these laws may subject us to significant liabilities.
Improper disclosure of personal data could result in liability and harm to our reputation
We store and process increasingly large amounts of personally identifiable information of our customers, which may include
names, addresses, phone numbers, social security numbers, email addresses, contact preferences and payment account
information. For example, we store personal information from TwinSpires.com account holders, from our gaming customers’
rewards accounts and from ticket sales at our racetracks. It is possible our security controls over personal data, our training of
employees and vendors on data security, and other practices we follow may not prevent the improper disclosure of personally
identifiable information. Improper disclosure of this information could harm our reputation, lead to legal exposure to customers
or subject us to liability under laws that protect personal data, resulting in increased costs or loss of revenue.
Our business is subject to online security risk, including security breaches
We store and transmit users' proprietary information, and security breaches could expose us to a risk of loss or misuse of this
information, litigation and potential liability. Because the techniques used to obtain unauthorized access, disable or degrade
service, or sabotage systems, change frequently and often are not recognized until launched against a target, we may be unable
to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived breach of our security
occurs, public perception of the effectiveness of our security measures could be harmed and we could lose users and be exposed
to litigation or potential liability for us. Although we have developed systems and processes that are designed to protect customer
information and prevent data loss and other security breaches, including systems and processes designed to reduce the impact
of a security breach at a third party vendor, such measures cannot provide absolute security.
System failures or damage from earthquakes, fires, floods, power loss, telecommunications failures, cyber-attack or other
unforeseen events could harm our business
Our ADW and casual gaming businesses depend upon our communications hardware and our computer hardware. We have
built certain redundancies into our systems to avoid downtime in the event of outages, system failures or damage; however,
certain risks still exist. Thus, our systems remain vulnerable to damage or interruption from floods, fires, power loss,
telecommunication failures, terrorist cyber-attacks, hardware or software error, computer viruses, computer denial-of-service
attacks and similar events. Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated
problems could result in lengthy interruptions in our services. Any unscheduled interruption in the availability of our website
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and our services results in an immediate, and possibly substantial, loss of revenue. Interruptions in our services or a breach of
customers’ secure data could cause current or potential users to believe that our systems are unreliable, leading them to switch
to our competitors or to avoid our site, and could permanently harm our reputation and brand. These interruptions also increase
the burden on our engineering staff, which, in turn, could delay our introduction of new features and services on our websites
and in our games. We have property and business interruption insurance covering damage or interruption of our systems.
However, this insurance might not be sufficient to compensate us for all losses that may occur.
Security breaches, computer viruses and computer hacking attacks could harm our business and results of operations
Security breaches, computer malware and computer hacking attacks have become more prevalent in our industry. Many
companies, including ours, have been the target of such attacks. Any security breach caused by hacking, which involves efforts
to gain unauthorized access to information or systems, or to cause intentional malfunctions or loss or corruption of data, software,
hardware or other computer equipment, and the inadvertent transmission of computer viruses could harm our business, financial
condition and results of operations. Though it is difficult to determine what harm may directly result from any specific interruption
or breach, any failure to maintain performance, reliability, security and availability of our network infrastructure to the satisfaction
of our players may harm our reputation and our ability to retain existing players and attract new players.
We carry insurance covering many of these risks, including network security, first party extortion threats and business
interruptions, but there are certain exclusions to this coverage and the insurance limits may not be sufficient to fully mitigate
all financial damage to the Company. We renew our insurance policies on an annual basis. The cost of coverage may become
so high that we may need to further reduce our policy limits or agree to certain exclusions from our coverage.
We may not be able to respond to rapid technological changes in a timely manner, which may cause customer dissatisfaction
The gaming sector is characterized by the rapid development of new technologies and continuous introduction of new products.
Our main technological advantage versus potential competitors is our software lead-time in the market and our experience in
operating an Internet-based wagering network. However, we may not be able to maintain our competitive technological position
against current and potential competitors, especially those with greater financial resources. Our success depends upon new
product development and technological advancements, including the development of new wagering platforms and features.
While we expend resources on research and development and product enhancement, we may not be able to continue to improve
and market our existing products or technologies or develop and market new products in a timely manner. Further technological
developments may cause our products or technologies to become obsolete or noncompetitive.
We are subject to payment-related risks, such as risk associated with the fraudulent use of credit or debit cards, which could
have adverse effects on our business or results of operations due to chargebacks from customers
We allow funding and payments to accounts using a variety of methods, including electronic funds transfer (“EFT”), and credit
and debit cards. As we continue to introduce new funding or payment options to our players, we may be subject to additional
regulatory and compliance requirements. We also may be subject to the risk of fraudulent use of credit or debit cards, or other
funding and/or payment options. For certain funding or payment options, including credit and debit cards, we may pay interchange
and other fees, which may increase over time and, therefore, raise operating costs and reduce profitability. We rely on third
parties to provide payment processing services and it could disrupt our business if these companies become unwilling or unable
to provide these services to us. We are also subject to rules and requirements governing EFT, which could change or be reinterpreted
to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to
fines and higher transaction fees or possibly lose our ability to accept credit, debit cards, or other forms of payment from
customers, which could have a material adverse effect on our business, financial condition and results of operations.
Chargebacks occur when customers seek to void credit card or other payment transactions. Cardholders are intended to be able
to reverse card transactions only if there has been unauthorized use of the card or the services contracted for have not been
provided. In our business, customers occasionally seek to reverse their online gaming losses through chargebacks. Although we
place great emphasis on control procedures to protect from chargebacks, these control procedures may not be sufficient to protect
us from adverse effects on our business or results of operations.
Any violation of the Foreign Corrupt Practices Act or applicable anti-money laundering regulations could have a negative impact
on us
We are subject to regulations imposed by the Foreign Corrupt Practices Act (the “FCPA”), which generally prohibits U.S.
companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining
business. Any violation of FCPA regulations could have a material, adverse impact on our business, financial condition and
results of operations.
We also deal with significant amounts of cash in our operations and are subject to various reporting and anti-money laundering
regulations. Any violation of anti-money laundering laws or regulations by any of our properties could have a material, adverse
impact on our business, financial condition and results of operations.
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A lack of confidence in the integrity of our core businesses could affect our ability to retain our customers and engage with new
customers
The integrity of the horseracing, gaming and pari-mutuel wagering industries must be perceived as fair to patrons and the public
at large. To prevent cheating or erroneous payouts, the necessary oversight processes must be in place to ensure that such
activities cannot be manipulated. A loss of confidence in the fairness of our industries could significantly lower attendance,
amounts wagered and reduce revenues.
Risks Related to Our Racing Business
Our racing operations are highly regulated, and changes in the regulatory environment could adversely affect our business
Our racing business is subject to extensive state and local regulation, and we depend on continued state approval of legalized
gaming in states where we operate. Our wagering and racing facilities must meet the licensing requirements of various regulatory
authorities, including authorities in Kentucky, Illinois, Louisiana and Florida. To date, we have obtained all governmental
licenses, registrations, permits and approvals necessary for the operation of our racetracks. However, we may be unable to
maintain our existing licenses. The failure to attain, loss of or material change in our racing business licenses, registrations,
permits or approvals may materially limit the number of races we conduct, and could have a material adverse impact on our
business, financial condition and results of operations.
In addition to licensing requirements, state regulatory authorities can have a significant impact on the operation of our business.
For example, in Illinois the IRB has the authority to designate racetracks as “host track” for the purpose of receiving host track
revenues generated during periods when no racetrack is conducting live races. Racetracks that are designated as “host track”
obtain and distribute out of state simulcast signals for the State of Illinois. Under Illinois law, the “host track” is entitled to a
larger portion of commissions on the related pari-mutuel wagering. Should Arlington cease to be a “host track” during this
period, the loss of hosting revenues could have an adverse impact on our business, financial condition and results of operations.
In addition, Arlington is statutorily entitled to recapture as revenues monies that are otherwise payable to Arlington’s purse
account. These statutorily or regulatory established revenue sources are subject to change every legislative session, and their
reduction or elimination could have an adverse impact on our business, financial condition and results of operations.
We are also subject to a variety of other rules and regulations, including zoning, environmental, construction and land-use laws
and regulations governing the serving of alcoholic beverages. If we are not in compliance with these laws, it could have a
material, adverse effect on our business, financial condition and results of operations.
Economic trends specific to the horse racing industry are unfavorable
Horseracing and related activities, as well as the gaming services we provide, are similar to other leisure activities in that they
represent discretionary expenditures likely to decline during economic downturns. In some cases, even the perception of an
impending economic downturn or the continuation of a recessionary climate can be enough to discourage consumers from
spending on leisure activities. These economic trends can impact the financial viability of other industry constituents, making
collection of amounts owed to us uncertain. For example, during the year ended December 31, 2010, we recognized $1.1 million
of bad debt expense, net of purses, resulting from the bankruptcy filing of New York City Off-Track Betting Corporation. We
will continue to closely monitor participants’ operational viability within the industry and any related collection issues which
could potentially have a material, adverse impact on our business, financial condition or results of operations.
Our racing business faces significant competition, and we expect competition levels to increase
All of our racetracks face competition from a variety of sources, including spectator sports and other entertainment and gaming
options. Competitive gaming activities include traditional and Native American casinos, video lottery terminals, state-sponsored
lotteries and other forms of legalized and non-legalized gaming in the U.S. and other jurisdictions, and we expect the number
of competitors to increase. See subheading “K. Competition” in Item 1. “Business” of this Annual Report on Form 10-K for
further discussion of racing industry competition.
All of our racetracks face competition in the simulcast market. Approximately 41,280 thoroughbred horse races are conducted
annually in the United States. Of these races, we host approximately 3,030 races each year, or about 7.3% of the total. As a
content provider, we compete for wagering dollars in the simulcast market with other racetracks conducting races at or near the
same times as our races. As a racetrack operator, we also compete with other racetracks running live meets at or near the same
time as our horse races. In recent years, this competition has increased as more states have allowed additional, automated gaming
activities, such as slot machines, at racetracks with mandatory purse contributions.
Competition from web-based businesses presents additional challenges for our racing business. Unlike most online and web-
based gaming companies, our racetracks require significant and ongoing capital expenditures for both their continued operations
and expansion. Our racing business also faces significantly greater costs in operating our racing business compared to costs
borne by these gaming companies. Our racing business cannot offer the same number of gaming options as online and Internet-
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based gaming companies. Many online and web-based gaming companies are based off-shore and avoid regulation under U.S.
state and federal laws. These companies may divert wagering dollars from pari-mutuel wagering venues, such as our racetracks.
Our inability to compete successfully with these competitors could have a material, adverse impact on our business, financial
condition and results of operations.
The popularity of horse racing is declining
There has been a general decline in the number of people attending and wagering on live horse races at North American racetracks
due to a number of factors, including increased competition from other wagering and entertainment alternatives as discussed
above. According to industry sources, pari-mutuel handle declined 27% from 2007 to 2011 and has been relatively stable since
experiencing a cumulative decline of approximately 2% between 2011 and 2014. We believe lower interest in racing may have
a negative impact on revenues and profitability in our racing business, as well as our ADW business, which is dependent on
racing content provided by our racing business and other track operators. Our business plan anticipates that we will attract new
customers to our racetracks, OTBs and ADW operations. A continued decrease in attendance at live events and in on-track
wagering, or a continued generalized decline in interest in racing, could have a material, adverse impact on our business, financial
condition and results of operations.
Our racing business is geographically concentrated and experiences significant seasonal fluctuations in operating results
We conduct our racing business at three racetracks: Churchill Downs, Fair Grounds and Arlington. A significant portion of our
racing revenues are generated by two events, the Kentucky Derby and the Kentucky Oaks. If a business interruption were to
occur and continue for a significant length of time at any of our racetracks, particularly one occurring at Churchill Downs at a
time that would affect the Kentucky Derby or Kentucky Oaks, it could have a material, adverse impact on our business, financial
condition and results of operations.
In addition, we experience significant fluctuations in quarterly and annual operating results due to seasonality and other factors.
We have a limited number of live racing days at our racetracks, and the number of live racing days varies from year to year.
The number of live racing days we are able to offer directly affects our results of operations. A significant decrease in the number
of live racing days and/or live races offered during our Kentucky Derby and Kentucky Oaks week could have a material, adverse
impact on our business, financial condition and results of operations.
We may not be able to attract a sufficient number of horses and trainers to achieve full field horseraces
We believe that patrons prefer to wager on races with a large number of horses, commonly referred to as full fields. A failure
to offer races with full fields results in less wagering on our horseraces. Our ability to attract full fields depends on several
factors. It depends on our ability to offer and fund competitive purses and it also depends on the overall horse population available
for racing. Various factors have led to declines in the horse population in certain areas of the country, including competition
from racetracks in other areas, increased costs and changing economic returns for owners and breeders, and the spread of various
debilitating and contagious equine diseases such as the neurologic form of Equine Herpes Virus-I and Strangles. If any of our
racetracks is faced with a sustained outbreak of a contagious equine disease, it would have a material impact on our profitability.
Finally, if we are unable to attract horse owners to stable and race their horses at our racetracks by offering a competitive
environment, including improved facilities, well-maintained racetracks, better conditions for backstretch personnel involved in
the care and training of horses stabled at our racetracks and a competitive purse structure, our profitability could also decrease.
We also face increased competition for horses and trainers from racetracks that are licensed to operate slot machines and other
electronic gaming machines that provide these racetracks an advantage in generating new additional revenues for race purses
and capital improvements. For example, Churchill Downs and Arlington are experiencing heightened competition from racinos
in Indiana, Pennsylvania, Delaware and West Virginia whose purses are supplemented by gaming revenues. The opening of the
Genting New York Resort at Aqueduct racetrack has enhanced the purse structure at New York racetracks as compared to
historical levels. Ohio has authorized four land-based casinos by voter referendum and video lottery terminals at seven Ohio
racetracks through executive order. Our failure to attract full fields could have a material, adverse impact on our business,
financial condition and results of operations.
Inclement weather and other conditions may affect our ability to conduct live racing
Since horseracing is conducted outdoors, unfavorable weather conditions, including extremely high and low temperatures, high
winds, storms, tornadoes and hurricanes, could cause events to be canceled and/or attendance to be lower, resulting in reduced
wagering. Our operations are subject to reduced patronage, disruptions or complete cessation of operations due to weather
conditions, natural disasters and other casualties. If a business interruption were to occur due to inclement weather and continue
for a significant length of time at any of our racetracks, it could have a material, adverse impact on our business, financial
condition and results of operations.
We depend on agreements with industry constituents including horsemen and other racetracks
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The IHA, as well as various state racing laws, require that we have written agreements with the horsemen at our racetracks in
order to simulcast races, and, in some cases, conduct live racing. Certain industry groups negotiate these agreements on behalf
of the horsemen (the “Horsemen’s Groups”). These agreements provide that we must receive the consent of the Horsemen’s
Groups at the racetrack conducting live races before we may allow third parties to accept wagers on those races. In addition,
the agreements between other racetracks and their Horsemen’s Groups typically provide that those racetracks must receive
consent from the Horsemen’s Groups before we can accept wagers on their races. For example, from time to time, the
Thoroughbred Owners of California, the Horsemen’s Group representing horsemen in California, the Florida Horsemen’s
Benevolent and Protective Association, Inc. (the “FHBPA”) which represents horsemen in Florida and the Kentucky Horsemen’s
Benevolent and Protective Association (“KHBPA”) have withheld their consent to send or receive racing signals among
racetracks. Further, the IHA and various state laws require that we have written agreements with Horsemen’s Groups at our
racetracks in order to simulcast races on an export basis. In addition, our simulcasting agreements are generally subject to the
consent of these Horsemen’s Groups. Failure to receive the consent of these Horsemen’s Groups for new and renewing simulcast
agreements could have a material, adverse impact on our business, financial condition and results of operations.
We also have written agreements with the Horsemen’s Groups with regards to the proceeds of gaming machines in Louisiana
and Florida. Florida law requires Calder Casino to have an agreement with the FHBPA governing the contribution of a portion
of revenues from slot machine gaming to purses on live thoroughbred races conducted at Calder and an agreement with the
Florida Thoroughbred Breeders and Owners Association (the “FTBOA”) governing the contribution of a portion of revenues
from slot machines gaming to breeders’, stallion, and special racing awards on live thoroughbred races conducted at Calder
before Calder can receive a license to conduct slot machine gaming.
It is not certain that we will be able to maintain agreements with, or to obtain required consent from, Horsemen’s Groups. We
currently negotiate formal agreements with the applicable Horsemen’s Groups at our racetracks on an annual basis. The failure
to maintain agreements with, or obtain consents from, our horsemen on satisfactory terms or the refusal by a Horsemen’s Group
to consent to third parties accepting wagers on our races or our accepting wagers on third parties’ races could have a material,
adverse impact on our business, financial condition and results of operations.
In addition, we have agreements with other racetracks for the distribution of racing content through both the import of other
racetracks’ signals for wagering at our properties and the export of our racing signal for wagering at other racetracks’ facilities.
From time to time, we are unable to reach agreements on terms acceptable to us. As a result, we may be unable to distribute
our racing content to other locations or to receive other racetracks’ racing content for wagering at our racetracks. The inability
to distribute our racing content could have a material, adverse impact on our business, financial condition and results of operations.
Horse racing is an inherently dangerous sport and our racetracks are subject to personal injury litigation
Although we carry jockey accident insurance at each of our racetracks to cover personal jockey injuries which may occur during
races or daily workouts, there are certain exclusions to our insurance coverage, and we are still subject to litigation from injured
participants. We renew our insurance policies on an annual basis. The cost of coverage may become so high that we may need
to further reduce our policy limits or agree to certain exclusions from our coverage. Our results may be affected by the outcome
of litigation, as this litigation could be costly and time consuming and could divert our management and key personnel from
our business operations.
Ownership and development of real estate requires significant expenditures and is subject to risk
Our racing operations require us to own extensive real estate holdings. All real estate investments are subject to risks including:
general economic conditions, such as the availability and cost of financing; local and national real estate conditions, such as an
oversupply of residential, office, retail or warehousing space, or a reduction in demand for real estate in the area; governmental
regulation, including taxation of property and environmental legislation; and the attractiveness of properties to potential
purchasers or tenants. The real estate industry is also capital intensive and sensitive to interest rates. Further, significant
expenditures, including property taxes, mortgage payments, maintenance costs, insurance costs and related charges, must be
made throughout the period of ownership of real property, which expenditures negatively impact our operating results.
In addition, we are subject to a variety of federal, state and local governmental laws and regulations relating to the use, storage,
discharge, emission and disposal of hazardous materials. Environmental laws and regulations could hold us responsible for the
cost of cleaning up hazardous materials contaminating real property that we own or operate (or previously owned or operated)
or properties at which we have disposed of hazardous materials, even if we did not cause the contamination. If we fail to comply
with environmental laws or if contamination is discovered, a court or government agency could impose severe penalties or
restrictions on our operations or assess us with the costs of taking remedial actions.
Our business depends on utilizing and providing totalisator services
Our customers utilize information provided by United Tote and other totalisator companies that accumulates wagers, records
sales, calculates payoffs and displays wagering data in a secure manner to patrons who wager on our horseraces. The failure to
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keep technology current could limit our ability to serve patrons effectively, limit our ability to develop new forms of wagering
and/or affect the security of the wagering process, thus affecting patron confidence in our product. A perceived lack of integrity
in the wagering systems could result in a decline in bettor confidence and could lead to a decline in the amount wagered on
horseracing. In addition, a totalisator system failure could cause a considerable loss of revenue if betting machines are unavailable
for a significant period of time or during an event with high betting volume.
United Tote also has licenses and contracts to provide totalisator services to a significant number of racetracks, OTBs and other
pari-mutuel wagering businesses. Its totalisator systems provide wagering data to the industry in a secure manner. Errors by
United Tote technology or personnel may subject us to liabilities, including financial penalties under our totalisator service
contracts, which could have a material, adverse impact on our business, financial condition and results of operations.
Risks Related to Our Casino Business
Our gaming business is highly regulated and changes in the regulatory environment could adversely affect our business
Our gaming operations exist at the discretion of the states where we conduct business, and are subject to extensive state and
local regulation. Like all gaming operators in the jurisdictions in which we operate, we must periodically apply to renew our
gaming licenses or registrations and have the suitability of certain of our directors, officers and employees approved. While we
have obtained all governmental licenses, registrations, permits and approvals necessary for the operation of our gaming facilities,
we cannot assure you that we will be able to obtain such renewals or approvals, or that we will be able to obtain future approvals
that would allow us to continue to operate or to expand our gaming operations.
Regulatory authorities also have input into important aspects of our operations, including hours of operation, location or relocation
of a facility, numbers and types of machines and loss limits. Regulators may also levy substantial fines against or seize our
assets or the assets of our subsidiaries or the people involved in violating gaming laws or regulations. Any of these events could
have an adverse effect on our business, financial condition and results of operations. The high degree of regulation in the gaming
industry is a significant obstacle to our growth strategy.
Our gaming business faces significant competition, and we expect competition levels to increase
Our gaming operations operate in a highly competitive industry with a large number of participants, some of which have financial
and other resources that are greater than our resources. The gaming industry faces competition from a variety of sources for
discretionary consumer spending including spectator sports and other entertainment and gaming options. Our gaming operations
also face competition from Native American casinos, video lottery terminals, state-sponsored lotteries and other forms of legalized
gaming in the U.S. and other jurisdictions. We do not enjoy the same access to the gaming public or possess the advertising
resources that are available to state-sponsored lotteries or other competitors, which may adversely affect our ability to compete
effectively with them. Additionally, web-based interactive gaming and wagering is growing rapidly and affecting competition
in our industry as federal regulations on web-based activities are clarified. We anticipate that competition will continue to grow
in the web-based interactive gaming and wagering channels because of ease of entry. In addition, Florida legislators continue
to debate the expansion of Florida gaming to include Las Vegas-style destination resort casinos. Such casinos may be subject
to taxation rates lower than the current gaming taxation structure. Should such legislation be enacted, it could have a material,
adverse impact on our business, financial condition and results of operations. See subheading “K. Competition” in Item 1.
“Business” of this Annual Report on Form 10-K for further discussion of gaming industry competition.
Our gaming business is geographically concentrated
We conduct our gaming business at six principal locations: Oxford in Oxford, Maine, Riverwalk in Vicksburg, Mississippi,
Harlow’s in Greenville, Mississippi, Calder Casino in Miami Gardens, Florida, Fair Grounds Slots in New Orleans, Louisiana,
and at our joint venture, Miami Valley Gaming and Racing in Lebanon, Ohio. We also operate video poker machines throughout
Louisiana through our subsidiary, VSI. If a business interruption were to occur and continue for a significant length of time at
any of our principal gaming operations, or if economic or regulatory conditions were to become unfavorable in one or more of
the regions in which they operate, it could have a material, adverse impact on our business, financial condition and results of
operations.
The development of new gaming venues and the expansion of existing facilities is costly and susceptible to delays, cost overruns
and other uncertainties
The Company may decide to develop, construct and open hotels, casinos or other gaming venues in response to opportunities
that may arise. Future development projects and acquisitions may require significant capital commitments, the incurrence of
additional debt, the incurrence of contingent liabilities and an increase in amortization expense related to intangible assets, which
could have a material, adverse impact on our business, financial condition and results of operations.
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The concentration and evolution of the slot machine manufacturing industry or other technological conditions could impose
additional costs on us
The majority of our gaming revenues are attributable to slot and video poker machines operated by us at our casinos and wagering
facilities. It is important for competitive reasons that we offer the most popular and up-to-date machine games with the latest
technology to our guests. In recent years, the prices of new machines have escalated faster than the rate of inflation. In recent
years, for example, slot machine manufacturers have frequently refused to sell slot machines featuring the most popular games,
instead requiring participating lease arrangements in order to acquire the machines. Participation slot machine leasing
arrangements typically require the payment of a fixed daily rental. Such agreements may also include a percentage payment of
coin-in or net win. Generally, a participating lease is substantially more expensive over the long term than the cost to purchase
a new machine. For competitive reasons, we may be forced to purchase new slot machines or enter into participating lease
arrangements that are more expensive than the costs associated with the continued operation of our existing slot machines.
We materially rely on a variety of hardware and software products to maximize revenue and efficiency in our operations.
Technology in the gaming industry is developing rapidly, and we may need to invest substantial amounts to acquire the most
current gaming and hotel technology and equipment in order to remain competitive in the markets in which we operate. We
rely on a limited number of vendors to provide video poker and slot machines and any loss of our equipment suppliers could
impact our operations. Ensuring the successful implementation and maintenance of any new technology acquired is an additional
risk.
Risks Related to Our TwinSpires Business
Our ADW business is highly regulated and changes in the regulatory environment could adversely affect our business
TwinSpires, our ADW business, accepts advance deposit wagers from customers of certain states who set up and fund an account
from which they may place wagers via telephone, mobile device or through the Internet at TwinSpires.com. The ADW business
is heavily regulated, and laws governing advance deposit wagering vary from state to state. Some states have expressly authorized
advance deposit wagering by their own residents, some states have expressly prohibited pari-mutuel wagering and/or advance
deposit wagering and other states have expressly authorized pari-mutuel wagering but have neither expressly authorized nor
expressly prohibited their residents from placing wagers through advance deposit wagering hubs located in different states. We
believe that an ADW business may open accounts on behalf of and accept wagering instructions from residents of states where
pari-mutuel wagering is legal and where providing wagering instructions to ADW businesses in other states is not expressly
prohibited by statute, regulations, or other governmental restrictions. However, state attorneys general, regulators, and other
law enforcement officials may interpret state gaming laws, federal statutes, constitutional principles, and doctrines, and the
related regulations in a different manner than we do. In the past, certain state attorneys general and other law enforcement
officials have expressed concern over the legality of interstate advance deposit wagering.
Our expansion opportunities with respect to advance deposit wagering may be limited unless more states amend their laws or
regulations to permit advance deposit wagering. Conversely, if states take affirmative action to make advance deposit wagering
expressly unlawful, this could have a material, adverse impact on our business, financial condition and results of operations.
For example, previously existing ADW regulations in Illinois expired on December 31, 2012, and we ceased accepting wagers
from Illinois residents in January 2013 until June 2013, when Illinois ADW regulations were extended. Furthermore, we ceased
accepting wagers from Texas residents in September 2013, due to the enforcement of an existing Texas law prohibiting ADW
wagering. In addition, the regulatory and legislative processes can be lengthy, costly and uncertain. We may not be successful
in lobbying state legislatures or regulatory bodies to obtain or renew required legislation, licenses, registrations, permits and
approvals necessary to facilitate the operation or expansion of our ADW business. From time to time, the United States Congress
has considered legislation that would either inhibit or restrict Internet gambling in general or inhibit or restrict the use of certain
financial instruments, including credit cards, to provide funds for advance deposit wagering.
Furthermore, many states have considered and are considering interactive and Internet gaming legislation and regulations, which
may inhibit our ability to do business in such states. Anti-gaming conclusions and recommendations of other governmental or
quasi-governmental bodies could form the basis for new laws, regulations, and enforcement policies that could have a material,
adverse impact on our business, financial condition and results of operations. The extensive regulation by both state and federal
authorities of gaming activities also can be significantly affected by changes in the political climate and changes in economic
and regulatory policies. Such effects could have a material, adverse impact to the success of our advance deposit wagering
operations.
Our ADW business is subject to a variety of U.S. and foreign laws, many of which are unsettled and still developing and which
could subject us to claims or otherwise harm our business
We are subject to a variety of laws in the United States and abroad, including laws regarding gaming, consumer protection and
intellectual property that are continuously evolving and developing. The scope and interpretation of the laws that are or may
be applicable to us are often uncertain and may be conflicting. For example, laws relating to the liability of providers of online
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services for activities of their users and other third parties are currently being tested by a number of claims, including actions
based on invasion of privacy and other torts, unfair competition, copyright and trademark infringement, and other theories. It
is also likely that as our business grows and evolves we will become subject to laws and regulations in additional jurisdictions.
If we are not able to comply with these laws or regulations or if we become liable under these laws or regulations, we could be
directly harmed, and we may be forced to implement new measures to reduce our exposure to this liability. This may require
us to expend substantial resources or to modify our online services, which could harm our business, financial condition and
results of operations. In addition, the increased attention focused upon liability issues as a result of lawsuits and legislative
proposals could harm our reputation or otherwise impact the growth of our business.
It is possible that a number of laws and regulations may be adopted or construed to apply to us in the United States and elsewhere
that could restrict the online and mobile industries, including player privacy, advertising, taxation, content suitability, copyright,
distribution and antitrust. Furthermore, the growth and development of electronic commerce and virtual goods may prompt
calls for more stringent consumer protection laws that may impose additional burdens on companies such as ours conducting
business through the Internet and mobile devices. We anticipate that scrutiny and regulation of our industry will increase and
we will be required to devote legal and other resources to addressing such regulation. If that were to occur, we may be required
to seek licenses, authorizations or approvals from relevant regulators, the granting of which may be dependent on us meeting
certain capital and other requirements and we may be subject to additional regulation and oversight, all of which could significantly
increase our operating costs. Changes in current laws or regulations or the imposition of new laws and regulations in the United
States or elsewhere regarding these activities may lessen the growth of online gaming and impair our business.
Our ADW business faces strong competition, and we expect competition levels to increase
Our ADW business is sensitive to changes and improvements to technology and new products and faces strong competition
from other web-based interactive gaming and wagering businesses. Our ability to develop, implement and react to new technology
and products for our ADW business is a key factor in our ability to compete with other ADW businesses. In addition, we face
competition from a new wagering product called exchange wagering, a variation of pari-mutuel wagering in which bettors wager
directly against one another, establishing their own odds on a horserace. Both California and New Jersey legislatures have
approved exchange wagering. Some of our competitors may have greater resources than we do. In addition, we believe that
new competitors may enter the ADW business with relative ease because of the low cost of entry. As a result, we anticipate
increased competition in our ADW business. It is difficult to predict the impact of increased competition on our ADW business.
See subheading “K. Competition” in Item 1. “Business” of this Annual Report on Form 10-K for further discussion of ADW
industry competition.
A clarification on the impact of the Federal Wire Act of 1961 on Internet gaming could increase competition
During 2011, the U.S. Department of Justice clarified its position on the Wire Act of 1961 (the “Wire Act”), which had historically
been interpreted to outlaw all forms of gambling across states lines. The department’s Office of Legal Counsel determined that
the Wire Act applied only to a sporting event or contest, but did not apply to other forms of Internet gambling, including online
betting unrelated to sporting events. The Justice Department indicated that many forms of online gambling could become legal
under federal law, which could include legalized poker and generalized gaming including state lottery wagering. As a result,
we anticipate increased competition to our ADW business from various other forms of online gaming. It is difficult to predict
the level of increased competition and the impact of increased competition on our ADW business.
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Our inability to retain our core customer base or our failure to attract new customers could harm our business
We utilize technology and marketing relationships to retain current customers and attract new customers. If we are unable to
retain our core customer base through robust content offerings and other popular features, if we lose customers to our competitors,
or if we fail to attract new customers, our businesses would fail to grow or would be adversely affected.
Risks Related to Big Fish Games
We operate in an evolving and highly competitive market segment
The market segments in which we operate are highly competitive and the barriers to entry are low. The business of developing,
distributing and marketing downloadable and mobile games is characterized by frequent product introductions and rapidly
emerging platforms and technologies. We compete with other game developers and content providers for the leisure time,
attention, and discretionary spending of our players based on a number of factors, including game design, brand and consumer
reviews, quality of gameplay experience and access to distribution channels. We also compete with other content providers to
acquire rights to game properties developed or licensed by third parties, including with respect to royalty and other economic
terms, porting and localization abilities, speed of execution and distribution capabilities and breadth.
Many of our primary competitors have dedicated greater financial, marketing and other resources to the development, distribution
and promotion of their games. In addition, given the open nature of the development process and relatively low barriers to entry,
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we are also faced with competition from a vast number of small, independent developers that have access to the same third party
platforms as we do to market and distribute their titles.
The competitive landscape is further complicated by frequent shifts and advancements in free-to-play games for smartphones,
tablets and other next-generation platforms. Free-to-play games are games that a player can download and play for free, but
which allow players to access a variety of additional content and features for a fee and to engage with various advertisements
and in-game offers that generate revenue for us. Our efforts to develop free-to-play games may prove unsuccessful or, even if
successful, may take more time than we anticipate to achieve significant revenues because, among other reasons:
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free-to-play games have a relatively limited history, and it is unclear how popular this style of game will become or
remain, or its future revenue potential;
our free-to-play strategy assumes that a large number of players will download our games because they are free, and
that we will then be able to effectively monetize the games. However, players may not widely download our games
for a variety of reasons, including poor consumer reviews or other negative publicity, ineffective or insufficient
marketing efforts, lack of sufficient community features, lack of prominent featuring on the platforms where they are
marketed, or our inability to add or update engaging content on a relatively frequent basis;
even if our free-to-play games are widely downloaded, a significant portion of the revenues generated from these titles
are derived from a relatively small concentration of players and we may fail to retain these or other users, or optimize
the monetization of these games, for a variety of reasons, including game design or quality, lack of community features,
or adequate customer support, gameplay issues such as game unavailability, long load times or an unexpected
termination of the game due to data server or other technical issues, our inability to add or updated engaging content
on a relatively frequent basis, or our failure to effectively respond and adapt to changing user preferences through
game updates;
the billing and other capabilities of some smartphones and tablets are currently not optimized to enable users to purchase
games or make in-app purchases, which may make it difficult for users of these devices to purchase our games or make
in-app purchases, and could reduce our addressable customer base, at least in the short term; and
the Federal Trade Commission has indicated that it intends to review issues related to in-app purchases, particularly
with respect to games that are marketed primarily to minors, and the Commission might issue rules significantly
restricting or even prohibiting in-app purchases.
We derive material revenues from distribution of our titles through third party mobile platforms, and if we are unable to maintain
relationships with the owners of these platforms or if our access to these platforms was limited or unavailable for any prolonged
period of time, our business could be adversely affected
If we are unable to maintain good relationships with third party mobile platform providers, such as Apple and Google, or our
access to these platforms was limited or suspended based on any change in terms or policies that made the continued distribution
of our titles on these platforms unfeasible or less profitable, or that required us to spend significantly more on marketing campaigns
or other means to enhance the discoverability of our titles on these platforms, our business, operating results and financial
condition could be harmed.
Our ability to transact business through these platforms is subject to our compliance with their standard terms and conditions,
which may be unilaterally amended at any time. For example, the owners of these platforms set the revenue share they are
entitled to receive, and may change that without input from or advance notice to us. In addition, the standard terms and conditions
of these platforms may impose restrictions on the types of content they will allow to be sold, the ways in which the content is
offered and promoted, and the process and timing of accepting content for distribution. Such restrictions could impair our ability
to successfully market and sell our mobile games. Furthermore, if any of the providers of these platforms determines that we
are in violation of their standard terms and conditions, we may be prohibited from distributing our titles through these platforms,
which could harm our business, operating results and financial condition.
We also rely on the ongoing availability of these platforms. If they experience prolonged periods of unavailability, it could have
a material impact on our ability to generate revenue through these platforms, and our business and operating results could be
harmed. In addition, if these platforms fail to provide adequate levels of service, our customers' ability to access our games may
be impacted, or customers may not receive any virtual items for which they have paid, which may adversely affect our brand
and consumer good will.
If we fail to develop and publish mobile games that achieve market acceptance, or continue to enhance our existing games, our
revenues may suffer
Our business depends on developing and publishing free-to-play and premium paid casual and mobile games that consumers
will download and spend time and money on consistently. We continue to invest significant resources in research and
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development, analytics and marketing to introduce new games and update our existing titles. Our success depends, in part, on
unpredictable factors beyond our control, including consumer preferences, competing games and other forms of entertainment,
and the emergence of new platforms. If our games do not meet consumer expectations, or they are not brought to market in a
timely and effective manner, our business, operating results and financial condition could be harmed. Furthermore, even if our
games are successfully introduced and initially adopted, a failure to continue to update them with compelling content or any
shift in the entertainment preferences of consumers could materially impact our operating results.
If the use of smartphones and tablet devices to facilitate game platforms generally does not increase, our business could be
adversely affected
While the number of people using mobile devices, such as smartphones and tablet devices, has increased dramatically in the
past few years, the mobile market, particularly the market for mobile games, is still emerging and it may not grow as rapidly or
robustly as we anticipate. Our future success is partially dependent upon the continued growth and application of mobile devices
for games. In addition, new and emerging technologies could make the mobile devices on which some of our games are currently
released obsolete, requiring us to transition our business model to develop games for other next-generation platforms.
If we are unable to secure new or ongoing content from third party development partners on favorable terms, or at all, our
business could be adversely affected
In addition to the games we develop internally, we acquire or license games, including some of our most successful games, from
third party development partners located around the world. Our success depends in part on our ability to attract and retain
talented and reliable development partners to source new content and update existing content. Our agreements with these
development partners are in some instances not exclusive to us and will expire at various times. If we are unable to renew these
agreements on terms favorable to us or at all, or if our development partners enter into similar agreements with our competitors
or choose to publish their own titles, our business, operating results and financial condition could be harmed.
In addition, certain of our development partners are located in geographic regions of the world that continue to experience
military and insurgency conflict, and political turmoil and unrest. Any of these factors could impact the ability of these
development partners to create and deliver content to us in a timely fashion or at all, and could restrict or prohibit our ability to
remit payments to these development partners. If we are unable to deliver compelling content to our customers or update existing
content based on these occurrences, our ongoing business, operating results and financial condition could be harmed.
If our games contain programming errors or flaws, if a significant number of customers experience technical difficulties
downloading or launching our games, or if we fail to continue to provide our customers with a high-quality customer experience,
it could harm our business, results of operations and financial condition, and impair our ability to successfully execute our
business strategy.
A critical component of our strategy is providing a high-quality customer experience to our customers. Our games may contain
errors, bugs, flaws or corrupted data, and these defects may only become apparent after their launch, particularly as we launch
new games under tight time constraints. Porting games to new devices or languages may also result in the creation of errors
that did not exist in the game as originally released. In addition, our customers may experience technical difficulties downloading
and launching our games due to the effects of third-party software on their computers, which we do not control. We cannot
provide assurances that our customer service team can resolve these types of technical difficulties, and if a significant number
of our customers cannot download or launch our games, it would harm our business, results of operations and financial condition.
We believe that if our customers have a negative experience with our games, they may be less inclined to continue or resume
playing our games or recommend our games to other potential customers. Undetected programming errors, game defects, data
corruption and issues with third-party software can disrupt our operations, adversely affect the game experience of our customers,
harm our reputation, cause our customers to stop playing our games and divert our resources, any of which could result in legal
liability to us or harm our reputation, business, results of operations and financial condition.
We may be unable to adequately protect our intellectual property, which could harm the value of our brand and our business,
results of operations and financial condition.
Our business is based upon the creation, acquisition, use and protection of intellectual property. Some of this intellectual property
is in the form of software code, patented and other technologies and trade secrets that we use to develop and market our games.
Other intellectual property that we create includes audio-visual elements, such as graphics, music and storylines. We rely on
trademark, copyright and patent law, trade secret protection and contracts to protect our intellectual property rights. If we are
not successful in protecting these rights, the value of our brand and our business, results of operations and financial condition
could be harmed.
While we believe that our issued patents or pending patent applications help to protect our business, we cannot assure you that
our products, services or operations do not, or will not, infringe valid, enforceable patents of third parties, or that competitors
will not devise new methods of competing with us that are not covered by our patents or patent applications. In addition, we
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cannot assure you that our patent applications will be approved, that any patents issued will adequately protect our intellectual
property or ongoing business strategies, or that such patents will not be challenged by third parties or found to be invalid or
unenforceable. Moreover, we rely on intellectual property and technology developed by or licensed from third parties, and we
may not be able to obtain licenses and technologies from these third parties on reasonable terms or at all.
Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our
games and other products and services may be provided. The laws of certain countries do not protect proprietary rights to the
same extent as the laws of the United States and, therefore in certain jurisdictions, we may be unable to protect our intellectual
property and proprietary technologies adequately against unauthorized copying or use, which could harm our competitive
position. We have licensed in the past, and expect to license in the future, certain of our proprietary rights, such as trademarks
or copyrighted material, to third parties. These licensees may take actions that could diminish the value of our proprietary rights
or harm our reputation, even if we have agreements prohibiting such activity. To the extent third parties are obligated to indemnify
us for breaches of our intellectual property rights, these third parties may be unable to meet these obligations. Any of these
events could harm our business, results of operations and financial condition.
We depend on key and highly skilled personnel to operate our business, and if we are unable to retain our current personnel or
hire additional personnel, our ability to develop and successfully grow our business could be harmed
We believe that our success depends in part on our highly-skilled employee base, and our ability to hire, develop, motivate and
retain highly qualified and skilled employees throughout our organization. This includes software developers and engineers,
IT staff, game designers and producers, marketing specialists, analytics professionals, and customer service staff. If we do not
successfully hire, develop, motivate and retain highly qualified and skilled employees, it is likely that we could experience
significant disruptions in our operations and our ability to develop and successfully grow our business could be impaired, which
could harm our business, operating results and financial condition.
Competition for the type of talent we seek to hire is increasingly intense in the geographic areas in which we operate. As a
result, we may incur significant costs to attract and retain highly-skilled employees. We may be unable to attract and retain the
personnel necessary to sustain our business or support future growth.
All of our officers and other employees in the United States are at-will employees, which means they may terminate their
employment relationship with us at any time, and their knowledge of our business and industry would be difficult to replace.
In addition, the loss of any key employees or the inability to attract or retain qualified personnel could delay the development
and distribution of, and impair our ability to sell, our games and other products and services, harm our reputation and impair
our ability to execute our business plans.
“Cheating” programs, scam offers, black-markets and other actions by third parties that seek to exploit our games and our players
may affect our reputation and harm our operating results
Third parties have developed, and may continue to develop, “cheating” programs, scam offers, black-markets and other offerings
that could decrease the revenues we generate from our virtual economies, divert our players from our games or otherwise harm
us. Cheating programs enable players to exploit vulnerabilities in our games to obtain virtual currency or other items that would
otherwise generate in-app purchases for us, play the games in automated ways or obtain unfair advantages over other players.
In addition, third parties may attempt to scam our players with fake offers for virtual goods or other game benefits. We devote
significant resources to discover and disable these programs and activities, but if we are unable to do so quickly or effectively,
it could damage our reputation and impact our business and results of operations.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
On October 19, 2011, the Company entered into a ten-year lease agreement for approximately 37,000 square feet of office space
in Louisville, Kentucky and occupied the property during the second quarter of 2012. The space serves as the Company’s
corporate headquarters. Other significant rental agreements for administrative facilities include leases by Big Fish Games and
TwinSpires for office space in Seattle, Washington; Oakland and Mountain View, California and Luxembourg totaling
approximately 177,000 square feet.
Additional information concerning property owned by us required by this Item is incorporated by reference to the information
contained in the subheadings “C. Racing,” “D. Simulcasting,” “F. Casinos” and "G. Big Fish Fames" in Item 1. “Business” of
this Annual Report on Form 10-K.
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Our real and personal property (but not including the property of UT Canada, Bluff, Velocity, MVG, NASRIN or Kentucky
Downs) is encumbered by liens securing our $500 million Senior Secured Credit Facility. The shares of stock of and ownership
interests in certain of our subsidiaries are also pledged to secure this debt facility.
The Kentucky Derby Museum is located on property that is adjacent to, but not owned by, Churchill Downs. The Museum is
owned and operated by the Kentucky Derby Museum Corporation, a tax-exempt organization under Section 501(c)(3) of the
Internal Revenue Code of 1986.
ITEM 3.
LEGAL PROCEEDINGS
The Company records an accrual for legal contingencies to the extent that it concludes that it is probable that a liability has been
incurred and the amount of the loss can be reasonably estimated. Except as disclosed below, no estimate of the possible loss or
range of loss in excess of amounts accrued, if any, can be made at this time regarding the matters specifically described below.
We do not believe that the final outcome of these matters will have a material adverse impact on our business, financial condition
and results of operations.
LOUISIANA HORSEMENS' PURSES
On April 21, 2014, John L. Soileau and other individuals filed a Petition for Declaratory Judgment, Permanent Injunction, and
Damages - Class Action styled John L. Soileau, et. al. versus Churchill Downs Louisiana Horseracing, LLC, Churchill Downs
Louisiana Video Poker Company, LLC (Suit No. 14-3873) in the Parish of Orleans, State of Louisiana. The petition defines the
“alleged plaintiff class” as quarter-horse owners, trainers and jockeys that have won purses at the “Fair Grounds Race Course
& Slots” facility in New Orleans, Louisiana since the first effective date of La. R.S. 27:438 and specifically since 2008. The
petition alleges that Churchill Downs Louisiana Horseracing, L.L.C. and Churchill Downs Louisiana Video Poker Company,
L.L.C. (“Fair Grounds”) have collected certain monies through video draw poker devices that constitute monies earned for purse
supplements and all of those supplemental purse monies have been paid to thoroughbred horsemen during Fair Grounds’ live
thoroughbred horse meets while La. R.S. 27:438 requires a portion of those supplemental purse monies to be paid to quarter-
horse horsemen during Fair Grounds’ live quarter-horse meets. The petition requests that the Court declare that Fair Grounds
violated La. R.S. 27:438, issue a permanent and mandatory injunction ordering Fair Grounds to pay all future supplements due
to the plaintiff class pursuant to La. R.S. 27:438, and to pay the plaintiff class such sums as it finds to reasonably represent the
value of the sums due to the plaintiff class. On August 14, 2014, the plaintiffs filed an amendment to their petition naming the
Horsemen’s Benevolent and Protective Association 1993, Inc. (“HBPA”) as an additional defendant and alleging that HBPA is
also liable to plaintiffs for the disputed purse funds. On October 9, 2014, HBPA and Fair Grounds filed exceptions to the suit,
including an exception of primary jurisdiction seeking a referral to the Louisiana Racing Commission. By Judgment dated
November 21, 2014, the District Court granted the exception of primary jurisdiction and referred the matter to the Louisiana
Racing Commission. On January 26, 2015, the Louisiana Fourth Circuit Court of Appeals denied the plaintiffs’ request for
supervisory review of the Judgment. This matter is currently awaiting review by the Louisiana Racing Commission.
ILLINOIS DEPARTMENT OF REVENUE
In October 2012, the Company filed a verified complaint for preliminary and permanent injunctive relief and for declaratory
judgment (the “Complaint”) against the Illinois Department of Revenue (the “Department”). The Company's complaint was
filed in response to Notices of Deficiency issued by the Department on March 18, 2010, and September 6, 2012. In response
to said Notices of Deficiency, the Company, on October 4, 2012, issued a payment in protest in the amount of $2.9 million (the
“Protest Payment”) under the State Officers and Employees Money Disposition Act and recorded this amount in other assets.
The Company subsequently filed its complaint in November 2012 alleging that the Department erroneously included handle,
instead of the Company's commissions from handle, in the computation of the Company's sales factor (a computation of the
Company's gross receipts from wagering within the State of Illinois) for determining the applicable tax owed. On October 30,
2012, the Company's Motion for Preliminary Injunctive Relief was granted, which prevents the Department from depositing
any monies from the Protest Payment into the State of Illinois General Fund and from taking any further action against the
Company until the Circuit Court takes final action on the Company's Complaint. If successful with its Complaint, the Company
will be entitled to a full or partial refund of the Protest Payment from the Department. On December 3, 2014, the Company
filed its Motion for Summary Judgment on all material aspects of its case. Also on December 3, 2014, the Department, by and
through its counsel, the Illinois Attorney General, filed its Cross-Motion for Summary Judgment. This matter remains pending
before the Tax and Miscellaneous Remedies Section of the Circuit Court of Cook County. Oral arguments on the parties’ Motions
for Summary Judgment are scheduled for March 5, 2015.
KENTUCKY DOWNS
On September 5, 2012, Kentucky Downs Management, Inc. (“KDMI”) filed a petition for declaration of rights in Kentucky
Circuit Court located in Simpson County, Kentucky styled Kentucky Downs Management Inc. v. Churchill Downs Incorporated
(Civil Action No. 12-CI-330) (the “Simpson County Case”) requesting a declaration that the Company does not have the right
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to exercise its put right and require Kentucky Downs, LLC (“Kentucky Downs”) and/or Kentucky Downs Partners, LLC (“KDP”)
to purchase the Company’s ownership interest in Kentucky Downs. On September 18, 2012, the Company filed a complaint in
Kentucky Circuit Court located in Jefferson County, Kentucky, styled Churchill Downs Incorporated v. Kentucky Downs, LLC;
Kentucky Downs Partners, LLC; and Kentucky Downs Management Inc. (Civil Action No. 12-CI-04989) (the “Jefferson County
Case”) claiming that Kentucky Downs and KDP had breached the operating agreement for Kentucky Downs and requesting a
declaration that the Company had validly exercised its put right and a judgment compelling Kentucky Downs and/or KDP to
purchase the Company’s ownership interest in Kentucky Downs pursuant to the terms of the applicable operating agreement.
On October 9, 2012, the Company filed a motion to dismiss the Simpson County Case and Kentucky Downs, KDP and KDMI
filed a motion to dismiss the Jefferson County Case. A hearing for the motion to dismiss in the Simpson County Case occurred
November 30, 2012. At that hearing the Company’s motion to dismiss the Simpson County Case was denied. Subsequently,
Kentucky Downs, KDMI and KDP’s motion to dismiss the Jefferson County Case was granted on January 23, 2013, due to the
Simpson County Circuit Court’s assertion of jurisdiction over the dispute. On May 16, 2013, Kentucky Downs, KDP and KDMI
filed a Motion for Summary Judgment against the Company and Turfway Park, LLC. On September 19, 2013, the Company
filed its response to the Motion for Summary Judgment. A hearing occurred before the Simpson County Circuit Court on
September 23, 2013, on the Kentucky Downs, KDP and KDMI Motion for Summary Judgment. All parties appeared before
the Simpson County Court and oral arguments were heard. On October 31, 2013, the Simpson County Court entered an Order
Denying Petitioners’ (Kentucky Downs Management Inc. et al.) Motion for Summary Judgment. The case will now move
forward through discovery and to trial. No trial date has been set.
TEXAS PARI-MUTUEL WAGERING
On September 21, 2012, the Company filed a lawsuit in the United States District Court for the Western District of Texas styled
Churchill Downs Incorporated; Churchill Downs Technology Initiatives Company d/b/a TwinSpires.com v. Chuck Trout, in his
official capacity as Executive Director of the Texas Racing Commission; Gary P. Aber, Susan Combs, Ronald F. Ederer, Gloria
Hicks, Michael F. Martin, Allan Polunsky, Robert Schmidt, John T. Steen III, Vicki Smith Weinberg, in their official capacity as
members of the Texas Racing Commission (Case No. 1:12-cv-00880-LY) challenging the constitutionality of a Texas law requiring
residents of Texas that desire to wager on horseraces to wager in person at a Texas race track. In addition to its complaint, on
September 21, 2012, the Company filed a motion for preliminary injunction seeking to enjoin the state from taking any action
to enforce the law in question. In response, on October 9, 2012, counsel for the state assured both the Company and the court
that the state would not enforce the law in question against the Company without prior notice, at which time the court could
then consider the motion for preliminary injunction. On April 15, 2013, both parties filed their opening briefs, and a trial was
held on May 2, 2013. On September 23, 2013, the United States District Court for the Western District of Texas ruled against
the Company and upheld the Texas law at issue. Subsequently, on September 25, 2013, the Company ceased taking wagers
from Texas residents via TwinSpires.com and returned deposited funds to Texas residents. The Company filed a motion for an
expedited hearing in the United States Court of Appeals, which was granted on October 17, 2013. The Texas Racing Commission,
et. al., filed an appellate brief on December 13, 2013. The Company filed its brief in reply on December 30, 2013. Oral arguments
were heard before the United States Court of Appeals for the Fifth Circuit on February 4, 2014. On September 25, 2014, the
United States Court of Appeals for the Fifth Circuit issued an unpublished opinion affirming the United States District Court
for the Western District of Texas and its ruling in favor of the Texas Racing Commission.
There are no other material pending legal proceedings.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
40
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Shareholders, Market Information and Dividends
Our common stock is traded on the NASDAQ Global Market under the symbol CHDN. As of February 16, 2015, there were
approximately 3,205 shareholders of record.
The following table sets forth the high and low sale prices, as reported by the NASDAQ Global Market, and dividend declaration
information for our common stock during the last two years:
High Sale
Low Sale
Dividends per share:
1st
$ 96.74
$ 85.07
2014 - By Quarter
2nd
$ 92.58
$ 83.71
3rd
$ 99.25
$ 85.65
2013 - By Quarter
1st
$ 70.73
$ 63.61
2nd
$ 86.38
$ 68.26
3rd
$ 89.81
$ 78.95
4th
$ 105.53
$ 90.83
$
1.00
4th
$ 90.77
$ 82.42
$
0.87
Purchases of Company Common Stock
The following table provides information with respect to shares of common stock repurchased by the Company during the
quarter ended December 31, 2014:
Total Number of
Shares
Purchased (1)
Average Price
Paid Per Share
9,355 (1) $
$
9,355
95.30
95.30
Total Number of
Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
Average Price
Per Share
Purchased as
Part of Publicly
Announced
Plans or
Programs
Approximate
Dollar Value of
Shares That
May Yet Be
Purchased
under the Plans
or Programs
—
—
—
—
$
—
—
—
—
$
$
38,438,810
—
—
38,438,810 (2)
Period
10/1/14-10/31/2014
11/1/14-11/30/2014
12/1/14-12/31/2014
Total
(1)
Shares of common stock were repurchased from grants of restricted stock in payment of income taxes to satisfy income
tax withholding obligations on the related compensation.
(2) Maximum dollar amount of shares of common stock that may yet be repurchased under the Company's stock repurchase
program.
Shareholder Return Performance Graph
Set forth below is a line graph comparing the cumulative total return of our common stock, including reinvested dividends,
against the cumulative total return of peer group indices, the S&P 500 Index and the Russell 2000 Index for the period of
five fiscal years commencing December 31, 2009, and ending December 31, 2014. The peer group indices used by the Company
include the Dow Jones US Gambling Index, which is a published industry peer index of companies engaged in the leisure and
gaming industries, and an index of certain companies in our peer group ("Peer Group"), which is comprised of Penn National
Gaming Inc., Boyd Gaming Corporation, Pinnacle Entertainment Inc., and Isle of Capri Casinos Inc. The broad equity market
indices used by the Company are the Russell 2000 Index, which measures the performance of small and middle capitalization
companies and the S&P 500 Index, which measures the performance of large capitalization companies. The graph and table
depict the result of an investment on December 31, 2009, of $100 in the Company, the Russell 2000 Index, the S&P 500 Index,
the Dow Jones US Gambling Index and our Peer Group. Because we have historically paid dividends on an annual basis, the
performance graph assumes that dividends were reinvested annually.
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Churchill Downs Inc.
Russell 2000 Index
S&P 500 Index - Total Returns
Dow Jones US Gambling Index
Peer Group
12/31/2009
100.00
$
12/31/2010
117.51
$
12/31/2011
142.83
$
12/31/2012
184.21
$
12/31/2013
251.02
$
12/31/2014
269.60
$
$
$
$
$
100.00
100.00
100.00
100.00
$
$
$
$
126.81
115.06
173.11
133.22
$
$
$
$
121.52
117.49
160.92
120.54
$
$
$
$
141.42
136.30
177.84
152.66
$
$
$
$
196.32
180.44
305.42
206.52
$
$
$
$
205.93
205.14
247.97
200.20
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ITEM 6.
SELECTED FINANCIAL DATA
(In thousands, except per common share data)
Operations:
Net revenues
Operating income
Earnings from continuing operations
Discontinued operations, net of income taxes:
(Loss) gain from operations
(Loss) gain on sale of assets
Net earnings
Basic net earnings from continuing operations per
common share
Basic net earnings per common share
Diluted net earnings from continuing operations per
common share
Diluted net earnings per common share
Dividends paid per common share
Balance sheet data at period end:
Total assets
Working capital deficiency
Current maturities of long-term debt
Long-term debt
Convertible note payable, related party
Other Data:
Shareholders’ equity
Shareholders’ equity per common share
Additions to property and equipment, exclusive of
business acquisitions, net
Cash flow data at period end:
Net cash provided by operating activities
Maintenance-related capital expenditures
Free cash flow(9)
Years Ended December 31,
2014(1)
2013(2) (3)
2012(4) (5)
2011(6)
2010(7) (8)
$ 812,934
$ 779,325
$ 731,296
$ 696,854
$ 585,345
90,393
46,357
$
$
90,100
55,033
$
$
96,550
58,152
$
$
$
$
$
$
$
$
$
$
— $
— $
$
46,357
(50) $
(83) $
$
54,900
2.67
2.67
2.64
2.64
1.00
$
$
$
$
$
3.13
3.12
3.07
3.06
0.87
$
$
$
$
$
$
$
$
124
— $
$
58,276
3.38
3.39
3.33
3.34
0.72
$
$
$
$
$
81,010
60,795
$
$
31,566
19,557
(1) $
$
$
3,561
64,355
(5,827)
2,623
16,353
3.59
3.80
3.55
3.76
0.60
$
$
$
$
$
1.27
1.06
1.26
1.05
0.50
$1,352,261
$1,017,719
$1,114,337
$2,360,274
$ (92,292) $ (52,491) $ (259,506) $ (28,989) $ (18,556)
—
$
— $ 209,728
$ 948,022
11,250
— $
$
$
$ 759,105
$ 369,191
$
— $ 127,563
$ 265,117
$
— $
— $
— $
— $
15,075
$ 700,001
$ 704,789
$ 644,295
$ 584,030
$ 506,214
$
$
40.06
54,486
$
$
39.27
48,771
$
$
36.93
41,298
$
$
34.00
22,667
$ 141,619
$ 144,915
$ 144,098
$ 172,995
$
22,733
$
16,879
$
17,158
$
14,845
$ 118,886
$ 128,036
$ 126,940
$ 158,150
$
$
$
$
$
30.55
61,952
59,857
14,709
45,148
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The selected financial data presented above is subject to the following information:
(1) On December 16, 2014, we completed the acquisition of Big Fish Games, whose results are presented in 2014 from the
date of acquisition through December 31, 2014.
(2) On July 17, 2013, we completed the acquisition of Oxford, whose results are presented in 2013 from the date of acquisition
through December 31, 2013.
(3) During 2013, we recognized $4.5 million as miscellaneous other income for our final share of proceeds from the Horse
Racing Equity Trust Fund ("HRE Trust Fund"). Furthermore, we recognized a gain of $0.4 million from insurance
recoveries, net of losses, related to losses sustained at Churchill Downs during 2012 from hail damage. Partially offsetting
these items, we recognized an expense of $2.5 million as the collectibility of a third-party deposit associated with an
Internet gaming license was not deemed probable.
(4) On October 23, 2012, we completed the acquisition of Riverwalk, whose results are presented in 2012 from the date of
acquisition through December 31, 2012.
(5) During 2012, we recognized a gain of $7.0 million from insurance recoveries, net of losses, related to losses sustained at
Harlow's during 2011 from wind and flood damage and at Churchill Downs during 2012 from hail damage.
(6) During 2011, we recognized $19.3 million as miscellaneous other income for our share of proceeds from the HRE Trust
Fund. In addition, during 2011, we recognized $2.7 million of miscellaneous other income and $1.4 million of interest
expense as a result of the conversion and the elimination of a short forward contract liability and long put option asset
43
through the issuance of 452,603 shares of common stock associated with a convertible note payable. Finally, during
2011, we recognized a gain in discontinued operations of $3.4 million, net of income taxes, as the final settlement of the
contingent consideration provision associated with the sale of our ownership interest in Hoosier Park L.P. during 2007.
In addition, we recognized an additional gain in discontinued operations of $0.2 million, net of income taxes, on the sale
of Hollywood Park related to the final expiration of an indemnity of certain contractual obligations related to the sale.
(7) During 2010, Churchill Downs Entertainment Group ("CDE") ceased operations and recognized a loss from operations
before income tax benefit of $9.1 million ($5.8 million, net of income taxes) in discontinued operations. In addition,
during 2010, we recognized a gain of $2.6 million, net of income taxes, on the sale of Hollywood Park, upon the partial
expiration of an indemnity of certain contractual obligations related to the sale.
(8) On December 16, 2010, we completed the acquisition of Harlow's, whose results are presented in 2010 from the date of
(9)
acquisition through December 31, 2010.
Free cash flow, a non-GAAP financial measure, is defined as net cash provided by operating activities less maintenance-
related (replacement) capital expenditures. Please refer to the subheading “Liquidity and Capital Resources” in Item 7.
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on
Form 10-K for a further description of free cash flow and a reconciliation to the most closely related GAAP measure.
44
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information set forth in this discussion and analysis contains various “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Private Securities
Litigation Reform Act of 1995 (the “Reform Act”) provides certain “safe harbor” provisions for forward-looking statements.
All forward-looking statements made in this Annual Report on Form 10-K are made pursuant to the Reform Act. The reader is
cautioned that such forward-looking statements are based on information available at the time and/or management’s good faith
belief with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to
differ materially from those expressed in the statements. Forward-looking statements speak only as of the date the statement
was made. We assume no obligation to update forward-looking information to reflect actual results, changes in assumptions or
changes in other factors affecting forward-looking information. Forward-looking statements are typically identified by the use
of terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “predict,” “project,”
“should,” “will,” and similar words, although some forward-looking statements are expressed differently. Although we believe
that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations
will prove to be correct. Important factors that could cause actual results to differ materially from expectations include those
factors described in Item 1A. “Risk Factors” of this Annual Report on Form 10-K.
You should read this discussion with the financial statements and other financial information included in this report. Our
significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in Item 8 of this
Annual Report on Form 10-K.
Overview
We are a diversified provider of pari-mutuel horseracing, online account wagering on horseracing and casino gaming. We are
also one of the world's largest producers and distributors of online and mobile casual games.
We operate in five operating segments as follows:
1. Racing, which includes:
•
•
•
•
Churchill Downs Racetrack (“Churchill Downs”) in Louisville, Kentucky, an internationally known
thoroughbred racing operation and home of the Kentucky Derby since 1875;
Arlington International Race Course (“Arlington”), a thoroughbred racing operation in Arlington Heights
along with ten off-track betting facilities (“OTBs”) in Illinois;
Fair Grounds Race Course (“Fair Grounds”), a thoroughbred and quarterhorse racing operation in New Orleans
along with twelve OTBs in Louisiana; and
Calder Race Course (“Calder”), a thoroughbred racing facility in Miami Gardens, Florida, where, as of July
1, 2014, we ceased pari-mutuel operations, except for limited operations conducted by a third party.
2. Casinos, which includes:
•
•
•
•
•
•
Oxford Casino ("Oxford") in Oxford, Maine, which we acquired on July 17, 2013. Oxford operates
approximately 860 slot machines, 26 table games and various dining facilities;
Riverwalk Casino Hotel ("Riverwalk") in Vicksburg, Mississippi, which we acquired on October 23, 2012.
Riverwalk operates approximately 690 slot machines, 15 table games, a five story, 80-room attached hotel,
multi-functional event center and dining facilities;
Harlow’s Casino Resort & Spa (“Harlow’s”) in Greenville, Mississippi, which operates approximately 750
slot machines, 13 table games, a five-story, 105-room attached hotel, multi-functional event center, pool, spa
and dining facilities;
Calder Casino, a slot facility in Florida adjacent to Calder, which operates approximately 1,130 slot machines
and included a poker room operation branded “Studz Poker Club” which ceased operations on June 30, 2014;
Fair Grounds Slots, a slot facility in Louisiana adjacent to Fair Grounds, which operates approximately 620
slot machines;
Video Services, LLC (“VSI”), the owner and operator of approximately 710 video poker machines in southeast
Louisiana which are located within ten of our OTBs; and
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•
Our equity investment in Miami Valley Gaming LLC ("MVG"), a 50% joint venture harness racetrack and
video lottery terminal facility in Lebanon, Ohio, which opened December 12, 2013. MVG has approximately
1,580 video lottery terminals, a racing simulcast center and a harness racetrack.
3. TwinSpires, which includes:
•
•
•
•
•
•
TwinSpires, an Advance Deposit Wagering (“ADW”) business that is licensed as a multi-jurisdictional
simulcasting and interactive wagering hub in the state of Oregon;
Fair Grounds Account Wagering (“FAW”), an ADW business that is licensed in the state of Louisiana;
Velocity, a business that is licensed in the British Dependency Isle of Man focusing on high wagering-volume
international customers;
Bloodstock Research Information Services (“BRIS”), a data service provider for the equine industry;
Our equity investment in HRTV, LLC (“HRTV”), a horseracing television channel, which was divested on
January 2, 2015; and
Luckity, an ADW business that offered real-money bingo with outcomes based on and determined by pari-
mutuel wagers on live horseraces which ceased operations on November 4, 2014.
4. Big Fish Games, Inc. ("Big Fish Games") which:
•
Is headquartered in Seattle, Washington with locations in Oakland, California and Luxembourg, which we
acquired on December 16, 2014. Big Fish Games is a producer of premium paid, casual free-to-play and
casino-style games for PCs and mobile devices.
5. Other Investments, which includes:
•
•
•
•
United Tote Company and United Tote Canada (collectively “United Tote”), which manufactures and operates
pari-mutuel wagering systems for racetracks, OTBs and other pari-mutuel wagering businesses;
Capital View Casino & Resort, a 50% joint venture with Saratoga Harness Racing, Inc. ("SHRI") to bid on
the development and management of a destination casino and resort in the Capital Region of New York;
Bluff Media ("Bluff"), a multimedia poker content brand and publishing company, acquired by the Company
on February 10, 2012; and
Our other minor investments.
In order to evaluate the performance of these operating segments internally, we use Adjusted EBITDA (defined as earnings
before interest, taxes, depreciation, amortization, and adjusted for insurance recoveries net of losses, HRE Trust Fund proceeds,
share-based compensation expenses, pre-opening expenses, the impairment of assets, Big Fish Games transaction expenses, Big
Fish Games acquisition-related charges, changes in Big Fish Games deferred revenue and other charges or recoveries). Big Fish
Games transaction expenses include legal, accounting and other deal-related expenses. Big Fish Games acquisition-related
charges reflect the change in fair value of the Big Fish Games earnout and deferred consideration liability recorded each reporting
period. Changes in Big Fish Games deferred revenue reflect reductions in revenue from business combination accounting rules
when deferred revenue balances assumed as part of an acquisition are adjusted to their fair values. Fair value approximates the
cost of fulfilling the service obligation, plus a reasonable profit margin. Adjusted EBITDA also includes 50% of the operating
income or loss of our joint venture, MVG. We believe that the use of Adjusted EBITDA as a key performance measure of the
results of operations enables management and investors to evaluate and compare from period to period our operating performance
in a meaningful and consistent manner.
During the year ended December 31, 2014, total handle for the pari-mutuel industry, according to figures published by Equibase,
decreased 2.8% compared to the same period of 2013. TwinSpires handle increased $29.0 million, or 3%, during the year ended
December 31, 2014, as compared to the same period of 2013. Excluding the impact from Illinois and Texas, handle increased
5% primarily due to a 19% increase in unique players.
On January 18, 2013, TwinSpires ceased accepting wagers from Illinois residents due to the expiration of legislation permitting
ADW wagering in the state. On June 7, 2013, TwinSpires resumed accepting wagers from Illinois residents, and on January
29, 2014, the legislature approved a bill extending advance deposit wagering by Illinois residents through January 31, 2017.
During the twelve months ended December 31, 2014, handle wagered by Illinois residents increased $31.0 million compared
to the same period of 2013. As further discussed in Part I Item 3. Legal Proceedings, on September 25, 2013, we suspended
wagering from all Texas accounts and returned deposited funds to Texas residents. During the twelve months ended December
31, 2014, handle wagered by Texas residents decreased $42.2 million, as compared to the same period of 2013.
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Pari-mutuel handle from Racing decreased $335.0 million, or 19%, during the year ended December 31, 2014, compared to the
same period of 2013, primarily due to a 62 day reduction in the number of live race days due to the cessation of pari-mutuel
operations at Calder on July 1, 2014. In addition, field-size challenges and a higher Kentucky take-out rate impacted wagering
levels at our Churchill Downs and Arlington locations as compared to the same period of 2013.
We believe that, despite uncertain economic conditions as well as regulatory and legislative challenges, we are in a strong
financial position. As of December 31, 2014, there was $223.7 million of borrowing capacity available under our senior secured
credit facility. To date, we have not experienced any limitations in our ability to access this source of liquidity.
Recent Developments
Big Fish Games
On December 16, 2014, we completed the acquisition of Big Fish Games for upfront consideration of $485 million plus a working
capital adjustment with an earnout payment up to $350 million. Big Fish Games, which has locations in Seattle, Washington,
Oakland, California and in Luxembourg, employs approximately 580 employees and develops casual games for PCs and mobile
devices worldwide. Big Fish Games operates in three game segments: premium paid, casino and casual free-to-play. We acquired
Big Fish Games to leverage its casino and casual game experience, as well as its assembled workforce, and to position ourself
as a leader in the mobile and online game industry. We financed the acquisition with borrowings under our Amended and
Restated Credit Agreement (the “Senior Secured Credit Facility”) and a $200 million Term Loan Facility (“Term Loan”) added
to our existing Senior Secured Credit Facility.
Saratoga Harness Racing, Inc. ("SHRI") Ventures
SHRI Joint Venture
On May 13, 2014, we entered into a 50% joint venture with SHRI to bid on the development, construction and operation of the
Capital View Casino & Resort located in the Capital Region near Albany, New York. On June 30, 2014, we filed an application
with the New York State Facility Location Board to obtain a license to build and operate a facility with approximately 1,500
slot machines, 56 table games, a 100-room hotel and multiple entertainment and dining options. On December 17, 2014, the
New York State Facility Location Board recommended that the Capital Region license be granted to another bidder.
During the year ended December 31, 2014, we incurred $1.0 million in equity losses in our other investments segment associated
with the license application process and funded $3.3 million to the joint venture. Furthermore, we recorded an impairment loss
of $1.6 million during the fourth quarter of 2014 to reduce the value of our investment in the joint venture to its estimated fair
market value of $1.1 million.
Saratoga Harness Racing, Inc. Equity Investment and Management Agreement
On October 28, 2014, the Company signed a definitive purchase agreement to acquire a 25% ownership interest in Saratoga
Casino Holdings, LLC ("SCH"), a newly formed entity which owns Saratoga Casino and Raceway in Saratoga Springs, NY;
SHRI's controlling interest in Saratoga Casino Black Hawk in Black Hawk, Colorado; SHRI's 50% interest in a joint venture
with Delaware North Companies to manage the Gideon Putnam Hotel and Resort in Saratoga Springs, New York; its interest in
the proposed Capital View Casino & Resort in East Greenbush, New York; and SHRI's interest in a joint venture with Rush
Street Gaming to build the proposed Hudson Valley Casino and Resort in Newburgh, New York.
In addition, the Company signed a five-year management agreement pursuant to which it will manage Saratoga Casino and
Raceway and Saratoga Casino Black Hawk. Both the funding of the equity investment and the commencement of the management
agreement are subject to regulatory approval and licensing requirements in New York and Colorado.
Luckity ADW Operations
On November 4, 2014, we ceased operations of Luckity, our ADW business which offered real-money bingo with outcomes
based on and determined by pari-mutuel wagers on live horseraces. Prior to this date, we were investing in this business and
actively marketing to Luckity customers. We determined that Luckity did not achieve the expected financial returns and was
unlikely to significantly improve its results. During the fourth quarter of 2014, we recorded an impairment charge of $3.2 million
for fixed assets specifically associated with Luckity. We do not expect to incur any additional, material expenditures in connection
with ceasing operations.
Florida Pari-Mutuel Racing Operations
During 2013, Calder and Gulfstream Park began conducting concurrent live thoroughbred racing in certain months, leading to
direct competition for on-track horseracing, in the intrastate and interstate simulcast markets and for horses in South Florida.
This negatively affected Calder’s ability to achieve full field horseraces and to generate handle on live racing. Previously in
Florida, a thoroughbred racetrack conducting a live racing meet had control over hosting out-of-state signals, and received
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commissions on wagers placed at other racetracks throughout the state. There were instances where one or more thoroughbred
racetracks operated live meets concurrently, and in that instance each racetrack had the opportunity to be a “host” track for out-
of-state interstate horseracing signals. When two or more thoroughbred racetracks operated live meets concurrently, other
wagering sites were required to select a live racetrack to host their pari-mutuel wagering. Three Florida thoroughbred racetracks,
including Calder, have historically served as the host track based on their live racing calendar. On May 7, 2013, all of Florida’s
three thoroughbred racetracks began claiming that they were host tracks on a year-round basis.
On May 24, 2013, Calder filed a petition with the Florida Division of Administrative Hearings (the “DOAH”) challenging the
other racetracks' interpretation that they may conduct interstate simulcasting, and whether that was a valid interpretation of state
law and the Interstate Horseracing Act of 1978. During 2013 and 2014, the DOAH and other state legislative bodies held public
hearings and proposed modification to state laws without reaching a definitive resolution.
On July 1, 2014, we finalized an agreement with The Stronach Group (“TSG”) under which TSG will operate, at TSG’s expense,
live racing and maintain certain facilities used for racing and training at Calder. The agreement, which expires on December
31, 2020, involves a lease to TSG of Calder’s racetrack and certain other racing and training facilities, including a portion of
the barns on Calder’s backside consisting of approximately 430 stalls. TSG will operate live horse racing at Calder, under
Calder’s racing permits, in compliance with all applicable laws and licensing requirements. TSG will operate and maintain the
racing and training facilities at Calder on a year-round basis. Furthermore, TSG will be responsible for substantially all of the
direct and indirect costs associated with these activities and receive the associated revenues. We will continue to own and operate
the Calder Casino.
In addition, as part of the agreement, effective July 1, 2014, we amended Calder’s agreement with the Florida Horsemen’s
Benevolent and Protective Association, Inc. (“FHBPA”) which reduced the rate of non-stakes purse supplements payable by the
Calder Casino from 12 percent to 10 percent of slot machine revenue.
As a result of the agreement with TSG, on July 1, 2014, we notified 214 Calder employees of the termination of their employment
which occurred between July 8, 2014, and September 2, 2014. In accordance with the terms of a one-time benefit arrangement,
we recognized $2.3 million of severance and other benefit costs within selling, general and administrative expenses during the
year ended December 31, 2014. We also assessed alternative potential uses of the Calder facility and certain assets not required
to be maintained under the lease agreement and recognized accelerated depreciation expense of $2.4 million, primarily related
to Calder's barns, which are not expected to be utilized subsequent to December 31, 2014. During 2015, the Company will
continue to assess potential alternative uses of the Calder facility not associated with the lease agreement.
HRTV Equity Investment Divestiture
As part of the TSG agreement related to the cessation of Calder pari-mutuel operations, we modified our HRTV operating and
ownership agreement with TSG resulting in the divestiture of the Company’s interest in HRTV effective January 2, 2015. During
January 2015, we received $6.0 million in proceeds from the sale of our ownership interest. We recorded a gain of $5.8 million
during January 2015 from the sale of our remaining investment in HRTV.
Legislative and Regulatory Changes
Please refer to subheading “L. Legislative Changes” in Item 1. “Business” of this Annual Report on Form 10-K for
information regarding legislative and regulatory changes.
Critical Accounting Policies and Estimates
Our Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the
United States. Accordingly, we are required to make estimates, judgments and assumptions that we believe are reasonable based
on our historical experience, contract terms, observance of known trends in our Company and the industry as a whole and
information available from other outside sources. Our estimates affect the reported amounts of assets and liabilities and related
disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those initial estimates.
Our most significant estimates relate to the valuation of property and equipment, goodwill and other intangible assets, which
may be significantly affected by changes in the regulatory environment in which we operate, and to the aggregate costs for self-
insured liability and workers’ compensation claims. Additionally, estimates are used for determining income tax liabilities and
recognition of revenue for Big Fish Games.
Goodwill and Intangible Assets
We review the carrying values of goodwill at least annually during the first quarter of each year or whenever events or changes
in circumstances indicate that the carrying value of these assets may not be recoverable. In 2012, in connection with our annual
impairment test, we adopted ASU No. 2011-08, Intangibles-Goodwill and Other: Testing Goodwill for Impairment which allows
48
an entity the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a
determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after
assessing the totality of events or circumstances, an entity determines it is more likely than not that the fair value of a reporting
unit is less than the carrying amount, then the Company would perform a two step goodwill impairment test. The first step,
used to identify potential impairment, is a comparison of the reporting unit's estimated fair value to its carrying value, including
goodwill. If the fair value of the reporting unit exceeds its carrying value, applicable goodwill is considered not to be impaired.
If the carrying value exceeds fair value, there is an indication of impairment and the second step is performed to measure the
amount of the impairment, if any. The second step requires the Company to calculate an implied fair value of goodwill at the
reporting unit level. If the goodwill assigned to a reporting unit exceeds the implied fair value of the goodwill, an impairment
charge is recorded for the excess.
Our 2014 annual goodwill impairment analysis included an assessment of certain qualitative factors including, but not limited
to, macroeconomic, industry and market conditions; cost factors that have a negative effect on earnings; overall financial
performance; the movement of the Company's share price; and other relevant entity and reporting unit specific events. We
considered the qualitative factors and weighted the evidence obtained and determined that it is not more likely than not that the
fair value of any reporting unit is less than its carrying amount. None of our reporting units were considered to be "at risk" of
failing step one of the 2014 annual goodwill impairment test. Although we believe the factors considered in the impairment
analysis are reasonable, significant changes in any one of our assumptions could produce a significantly different result. In prior
years, our assessment of goodwill impairment was largely dependent on estimates of future cash flows at the aggregated reporting
unit level, and a weighted-average cost of capital. The estimates of these future cash flows were based on assumptions and
projections with respect to future revenues and expenses believed to be reasonable and supportable at the time the annual
impairment analysis was performed. Further they required management's judgments and took into account assumptions about
overall growth rates and increases in expenses.
We consider our slots gaming rights and trademark intangible assets as indefinite-lived intangible assets that do not require
amortization based on our future expectations to operate our gaming facilities and use the Big Fish Games name indefinitely,
as well as our historical experience in renewing these intangible assets at minimal cost with various state gaming commissions.
Rather, these intangible assets are tested annually, or more frequently, if indicators of impairment exist, for impairment by
comparing the fair value of the recorded assets to their carrying amount. If the carrying amount of the slots gaming rights and
trademark intangible assets exceed their fair value, an impairment loss is recognized.
In March 2013, we adopted ASU No. 2012-02, Intangibles-Goodwill and Other: Testing Indefinite-Lived Intangible Assets for
Impairment. ASU 2012-02 simplifies indefinite-lived intangible asset impairment testing by adding a qualitative review step
to assess whether a quantitative impairment analysis is necessary. Under the amended rule, a testing methodology similar to that
which is performed for goodwill impairment testing is acceptable for assessing a company's indefinite-lived intangible assets.
We completed the required annual impairment tests of indefinite-lived intangible assets as of March 31, 2014, and no adjustment
to the carrying value of indefinite-lived intangible assets was required. We assessed our indefinite-lived intangible assets by
qualitatively evaluating events and circumstances that have both positive and negative factors, including macroeconomic
conditions, industry events, financial performance and other changes and concluded that it was more likely than not that the fair
value of our indefinite-lived intangible assets was greater than their carrying value.
We assign estimated useful lives to our definite-lived intangible assets based on the period of time the asset is expected to
contribute directly or indirectly to future cash flows. We consider certain factors when assigning useful lives such as legal,
regulatory, competition and other economic factors. Intangible assets with definite lives are amortized using the straight-line
method.
While we believe that our estimates of future revenues and cash flows are reasonable, different assumptions could materially
affect our assessment of useful lives and fair values. Changes in assumptions may cause modifications to our estimates for
amortization or impairment, thereby impacting our results of operations. If the estimated lives of our definite-lived intangible
assets were to decrease based on the factors mentioned above, amortization expense could increase significantly.
Income Taxes
We also use estimates and judgments for financial reporting to determine our current tax liability, as well as those taxes deferred
until future periods. Net deferred and accrued income taxes represent significant assets and liabilities of the Company. In
accordance with the liability method of accounting for income taxes, we recognize the amount of taxes payable or refundable
for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized
in our consolidated financial statements or tax returns.
Adjustments to deferred taxes are determined based upon changes in differences between the book basis and tax basis of our
assets and liabilities, measured by enacted tax rates we estimate will be applicable when these differences are expected to reverse.
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Changes in current tax laws, enacted tax rates or the estimated level of taxable income or non-deductible expenses could change
the valuation of deferred tax assets and liabilities and affect the overall effective tax rate and tax provision.
Big Fish Games Revenue Recognition
Big Fish Games revenue is primarily derived from the sale of premium paid, casino and casual free-to-play games and virtual
goods within games. Premium game revenue is derived from our subscription business, the Big Fish Game Club, and from the
sale of specific games. Subscribers receive a game credit each month with their subscription. We determined that the price of
a monthly subscription is equivalent to the vendor specific objective evidence (“VSOE”) of the game credit and that the additional
benefits of the monthly subscription are marketing and promotional activities. The value of the game credit is recognized when
a customer redeems the game credit. We also sell game credits on our website that are redeemable for the download of a game.
Revenue is recognized when the customer redeems the game credit for a game.
We record breakage revenue, which is recognized based on historical game credit redemption patterns and represents the balance
of credits where we have determined the likelihood of redemption is remote or the credits have legally expired.
We offer casino and casual games that customers can play at no cost and can purchase virtual goods within games to enhance
the game playing experience. These games are distributed primarily through third party mobile platform providers, including
but not limited to, Apple and Google. Once downloaded, players can purchase in-game virtual currency which is redeemable
in the game for virtual goods. Substantially all of our virtual goods can be consumed by player action. We recognize revenue
when persuasive evidence of an arrangement exists, the service has been provided to the user, the price paid by the user is fixed
or determinable, and collectability is reasonably assured. Determining whether and when some of these criteria have been
satisfied requires judgments that may have a significant impact on the timing and amount of revenue we report in each period.
For the purpose of determining when the service has been provided to the player, we have determined that an implied obligation
exists to the paying user to continue to make available the purchased virtual goods within the game over the estimated life of
the virtual goods. For casino games, the life of the virtual goods is estimated to be the time period over which virtual goods are
consumed or approximately four days. For all other casual games, the average playing period of paying players of approximately
four months represents our best estimate of the average life of virtual goods.
We receive reports from the third party mobile platform providers which break down the virtual goods purchased in our casual
and casino games for a given time period. The proceeds from the sale of virtual goods are recorded as deferred revenue, and
recognized as revenue over the estimated average life of the virtual goods.
We compute our estimated average life of virtual goods at least once each year, and more frequently if qualitative evidence exists
that would indicate a possible change, including consideration of changes in the characteristics of games.
Principal Agent Considerations
In accordance with Accounting Standards Codification (“ASC”) 605-45, Revenue Recognition: Principal Agent Considerations,
we evaluate our digital storefront agreements in order to determine whether or not we are acting as the principal or as an agent
when selling our games, which we consider in determining if revenue should be reported gross or net. We primarily use digital
storefronts for distributing our casino and casual free-to-play games. Key indicators that we evaluate in order to reach this
determination include:
•
•
the terms and conditions of our contracts with the digital storefronts;
the party responsible for billing and collecting fees from the end-users, including the resolution of billing disputes;
• whether we are paid a fixed percentage of the arrangement’s consideration or a fixed fee for each game;
•
•
the party which sets the pricing with the end-user, has the credit risk and provides customer support; and
the party responsible for the fulfillment of the game and that determines the specifications of the game.
Based on the evaluation of the above indicators, we have determined that we are generally acting as a principal and are the
primary obligor to end-users for games distributed through digital storefronts, and we therefore recognize revenue related to
these arrangements on a gross basis.
Fair Value Estimates
We estimated the fair value of the Big Fish Games deferred payment and earnout liability as of December 31, 2014 using a
discounted cash flows analysis over the period in which the obligation is expected to be settled, and applied a discount rate based
on our cost of debt. The cost of debt as of the closing date was based on the observed market yields of our Senior Unsecured
Notes issued in December of 2013 and represents a Level 3 fair value measurement and was adjusted for the difference in
seniority and term of the deferred payment and earnout liability.
50
Foreign Currency
The functional currency of our international subsidiaries is the U.S. dollar, with the exception of our Big Fish Luxembourg
subsidiary, whose functional currency is the Euro. For subsidiaries with a functional currency of the U.S. dollar, foreign currency
denominated monetary assets and liabilities are remeasured into U.S. dollars at current exchange rates and foreign currency
denominated nonmonetary assets and liabilities are remeasured into U.S. dollars at historical exchange rates. Foreign currency
denominated revenue and expenses are remeasured at historical exchange rates. Gains or losses from foreign currency
remeasurement are included in other income and expense. For the Luxembourg subsidiary, assets and liabilities are translated
into U.S. dollars using exchange rates in effect at the end of a reporting period. Income and expense accounts are translated
into U.S. dollars using average rates of exchange. The net gain or loss resulting from translation is recorded as foreign currency
translation adjustment and included in accumulated other comprehensive income (loss) in stockholders' equity.
Insurance Reserves
During the year ended December 31, 2014, our business insurance renewals included substantially the same coverage and
retentions as in previous years. We estimate insurance liabilities for workers’ compensation and general liability losses based
on our historical loss experience, certain actuarial assumptions of loss development factors and current industry trends. Any
changes in our assumptions, actuarial assumptions or loss experience could impact our total insurance cost and overall results
of operations.
Property and Equipment
Our business can be impacted positively and negatively by legislative and regulatory changes, by economic conditions and by
gaming competition. A significant negative impact from these activities could result in a significant impairment of our property
and equipment and/or our goodwill and indefinite-lived intangible assets. We perform reviews for the impairment of long-lived
assets whenever events or changes in circumstances indicate that the carrying amount of an asset, or asset group, may not be
recoverable. If the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual
disposition are insufficient to recover the carrying value of the assets, than an impairment loss is recognized based upon the
excess of the carrying value of the assets over the fair value of the assets. An impairment review incorporates estimates of
forecasted revenue and costs that may be associated with an asset as well as the expected periods that the asset, or asset group,
may be utilized. Fair value is determined based on the highest and best use of the assets considered from the perspective of
market participants, which may be different than our actual intended use of the asset, or asset group. Additional information
regarding how our business can be impacted by competition and legislative changes is included in subheading “K. Competition”
and subheading “L. Legislative Changes”, respectively, in Item 1. “Business” of this Annual Report on Form 10-K.
Our significant accounting policies and recently adopted accounting policies are more fully described in Note 1 to the Consolidated
Financial Statements included in Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-
K.
Consolidated Net Revenues
Our net revenues and earnings are influenced by our racing calendar. Therefore, revenues and operating results for any interim
quarter are not generally indicative of the revenues and operating results for the year, and may not be comparable with results
for the corresponding period of the previous year. We historically have had fewer live racing days during the first quarter of
each year, and the majority of our live racing revenue occurs during the second quarter, with the running of the Kentucky Derby
and Kentucky Oaks. Information regarding racing dates at our facilities for 2015 and 2014 is included in Subheading “C. Racing”
in Item 1. “Business” of this Annual Report on Form 10-K.
Our Consolidated Statements of Comprehensive Income include net revenues and operating expenses associated with our Racing,
Casinos, TwinSpires, Big Fish Games and Other Investments operating segments and are defined as follows:
Racing: net revenues and corresponding operating expenses associated with commissions earned on wagering at the
Company’s racetracks, OTBs and simulcast fees earned from other wagering sites. In addition, amounts include ancillary
revenues and expenses generated by the pari-mutuel facilities including admissions, sponsorships and licensing rights, food
and beverage sales and fees for the alternative uses of its facilities.
Casinos: net revenues and corresponding operating expenses generated from slot machines, table games and video poker.
In addition, it includes ancillary revenues and expenses generated by food and beverage sales, hotel operations revenue and
miscellaneous other revenue.
TwinSpires: net revenues and corresponding operating expenses generated by the Company’s ADW business from wagering
through the Internet, telephone or other mobile devices on pari-mutuel events. In addition, it includes the Company's
information business that provides data information and processing services to the equine industry.
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Big Fish Games: net revenues and corresponding expenses generated by premium paid, casual free-to-play and casino-style
games for PC, Mac, smartphone, tablet and online casual gaming.
Other: net revenues and corresponding operating expenses generated by United Tote, the Company’s provider of pari-mutuel
wagering systems and Bluff.
During the year ended December 31, 2013, we sold Fight! Magazine, a division of Bluff and reported the loss on sale and results
of operations for the year ended December 31, 2013, as discontinued operations. Net revenues, operating expenses and income
tax benefit of Fight! Magazine for the year ended December 31, 2012 have been reclassified to discontinued operations to
conform to the current year presentation.
During the year ended December 31, 2012, the Company merged the operations of Churchill Downs Simulcast Productions
("CDSP"), the Company's provider of television production services, which was previously included in our Other Investments
operating segment, with its Racing operating segment. There was no impact from these reclassifications on consolidated net
revenues, operating income, results of continuing operations, or cash flows.
Racing and TwinSpires:
Pari-mutuel revenues are recognized upon occurrence of the live race that is presented for wagering and after that live race is
made official by the respective state’s racing regulatory body. Other operating revenues such as admissions, programs and
concession revenues are recognized once delivery of the product or service has occurred.
Our customer loyalty programs offer incentives to customers who wager at the Company’s racetracks or through our advance
deposit wagering platform, TwinSpires.com. The TSC Elite program is offered for pari-mutuel wagering at the Company’s
racetracks or through TwinSpires.com. Under the program, customers are able to accumulate points over time that they may
redeem for wagering credits or handicapping products and publications at their discretion under the terms of the programs. As
a result of the ability of the customer to accumulate points, we accrue the cost of points, after consideration of estimated forfeitures,
as they are earned. Under the TSC Elite program, the estimated value of the cost to redeem points is recorded as the points are
earned. To arrive at the estimated cost associated with points, estimates and assumptions are made regarding incremental costs
of the benefits, rates and the mix of goods for which points will be redeemed. The reward point liabilities were $0.7 million and
$0.8 million as of December 31, 2014 and 2013, respectively.
Racing and TwinSpires revenues are generated by pari-mutuel wagering on live and simulcast racing content. Live racing handle
includes patron wagers made on live races at our racetracks and also wagers made on imported simulcast signals by patrons at
our racetracks during live meets. Import simulcasting handle includes wagers on imported signals at our racetracks when the
respective tracks are not conducting live racing meets, at our OTBs and through our ADW providers throughout the year. Export
handle includes all patron wagers made on live racing signals sent to other tracks, OTBs and ADW providers. Advance deposit
wagering consists of patron wagers through an advance deposit account.
We retain as revenue a pre-determined percentage or commission on the total amount wagered, and the balance is distributed
to the winning patrons. The gross percentages earned in 2014 approximated 11% of handle for Racing and 19% of handle for
TwinSpires.
Casinos
Casinos revenues represent net gaming wins, which is the difference between gaming wins and losses. Other operating revenues,
such as concession revenues, are recognized once delivery of the product or service has occurred. Certain key operating statistics
specific to the gaming industry are included in our discussion of performance of the casinos segment. Our slot facilities report
slot handle as a volume measurement, defined as the gross amount wagered or coins placed into slot machines in aggregate for
the period cited. In addition, our slot facilities and video poker operations report net win per unit, which is calculated as gross
gaming revenues, less customer payouts and free play, per machine and per day of operations.
Our customer loyalty program offers incentives to customers who wager at our gaming facilities. The Player’s Club is offered
at the Company’s gaming facilities in Louisiana, Florida, Mississippi, Maine and our 50% joint venture, MVG. Under the
program, customers are able to accumulate points over time that they may redeem for cash, free play, merchandise or food and
beverage items at their discretion under the terms of the program. As a result of the ability of the customer to accumulate points,
we accrue the cost of points, after consideration of estimated forfeitures, as they are earned. To arrive at the estimated cost
associated with points, estimates and assumptions are made regarding incremental costs of the benefits, rates and the mix of
goods and services for which points will be redeemed. Under the Player’s Club program, the retail value of the points-based
cash awards or complimentary goods and services is netted against revenue as a promotional allowance. The reward point
liabilities were $1.0 million and $1.3 million as of December 31, 2014 and 2013, respectively.
Big Fish Games
Big Fish Games revenue is primarily derived from the sale of premium paid, casino and casual free-to-play games and virtual
52
goods within games. Premium game revenue is derived from our subscription business, the Big Fish Game Club, and from the
sale of specific games. Subscribers receive a game credit each month with their subscription. We record breakage revenue,
which is recognized based on historical game credit redemption patterns and represents the balance of credits where we have
determined the likelihood of redemption is remote or the credits have legally expired. We offer casino and casual games that
customers can play at no cost and for which they can purchase virtual goods within games to enhance the game playing experience.
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RESULTS OF OPERATIONS
Pari-mutuel Handle
The following table sets forth, for the periods indicated, pari-mutuel financial handle information (in thousands):
Racing:
Churchill Downs
Total handle
Net pari-mutuel revenues
Commission %
Arlington
Total handle
Net pari-mutuel revenues
Commission %
Calder (3)
Total handle
Net pari-mutuel revenues
Commission %
Fair Grounds
Total handle
Net pari-mutuel revenues
Commission %
Total Racing
Total handle
Commission %
TwinSpires (1) (4)
Total handle
Net pari-mutuel revenues
Commission %
Eliminations (2)
Total handle
Net pari-mutuel revenues
Total
Handle
Year Ended December 31,
‘14 vs. ‘13 Change
‘13 vs. ‘12 Change
2014
2013
2012
$
%
$
%
$
$
$
$
$
$
$
$
580,098
60,139
10.4%
458,756
53,068
11.6%
155,818
16,931
10.9%
276,109
29,090
$
$
$
$
$
$
$
$
663,689
57,002
8.6%
527,339
55,509
10.5%
320,036
32,737
10.2%
294,991
31,123
$
$
$
$
$
$
$
$
596,613
53,538
9.0%
563,220
60,825
10.8%
$
$
$
$
(83,591)
(13)% $
67,076
3,137
6 % $
3,464
11 %
6 %
(68,583)
(13)% $
(35,881)
(2,441)
(4)% $
(5,316)
(6)%
(9)%
533,168
$ (164,218)
(51)% $ (213,132)
61,042
$
(15,806)
(48)% $
(28,305)
(40)%
(46)%
11.4%
333,033
34,018
$
$
(18,882)
(6)% $
(38,042)
(11)%
(2,033)
(7)% $
(2,895)
(9)%
10.5%
10.6%
10.2%
10.8%
9.8%
10.3%
$
$
$
$
897,706
172,221
19.2%
(112,652)
(14,541)
$
$
$
$
868,735
166,933
19.2%
(133,746)
(12,495)
$
$
$
$
859,841
168,795
19.6%
(137,683)
(13,157)
$
$
$
$
28,971
5,288
3 % $
3 % $
8,894
(1,862)
1 %
(1)%
21,094
(16)% $
(2,046)
16 % $
3,937
662
(11)%
(16)%
(3)%
(5)%
(8)%
(9)%
Net pari-mutuel revenues
$
159,228
$
176,371
$
209,423
$
(17,143)
(10)% $
(33,052)
$ 1,470,781
$ 1,806,055
$ 2,026,034
$ (335,274)
(19)% $ (219,979)
$ 2,255,835
$ 2,541,044
$ 2,748,192
$ (285,209)
(11)% $ (207,148)
Net pari-mutuel revenues
$
316,908
$
330,809
$
365,061
$
(13,901)
(4)% $
(34,252)
Commission %
14.0%
13.0%
13.3%
The pari-mutuel activity above is subject to the following information:
(1) Total handle and net pari-mutuel revenues generated by Velocity are not included in total handle and net pari-mutuel revenues from
TwinSpires.
(2) Eliminations include the elimination of intersegment transactions.
(3) Calder ceased pari-mutuel operations on July 1, 2014.
(4) TwinSpires handle from Illinois and Texas, to reflect the impact of recent regulatory developments, as previously described (in
thousands):
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(38)%
(22)%
6 %
1 %
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TwinSpires Handle:
Illinois
Texas
All other
Year Ended December 31,
‘14 vs. ‘13 Change
‘13 vs. ‘12 Change
2014
2013
2012
$
%
$
%
$
71,591
$
40,607
$
65,619
$
30,984
76 % $
(25,012)
—
826,115
42,210
785,918
53,932
740,290
(42,210)
(100)% $
(11,722)
40,197
28,971
5 % $
3 % $
45,628
8,894
Total
$
897,706
$
868,735
$
859,841
$
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Casino Activity
The following table sets forth, for the periods indicated, statistical gaming information (in thousands, except for average daily
information):
Calder Casino
Net casino revenues
Slot handle
Net slot revenues
Average daily net win per slot
machine
Average daily number of slot
machines
Average daily poker revenue
(4)
Fair Grounds Slots and Video
Poker
Net casino revenues
Slot handle
Net slot revenues
Average daily net win per slot
machine
Average daily number of slot
machines
Average daily video poker
revenue
Average daily net win per
video poker machine
Average daily number of video
poker machines
Oxford Casino
Net casino revenues
Slot handle
Net slot revenues
Average daily net win per slot
machine
Average daily number of slot
machines
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Year Ended December 31,
'14 vs. '13
'13 vs. '12
2014
2013 (1)
2012 (2)
$
%
$
%
74,030
$
76,554
$
75,686
$
(2,524)
(3)% $
868
1 %
961,080
$ 1,010,840
$ 1,008,946
$ (49,760)
(5)% $
1,894 — %
73,190
178
$
$
74,008
169
$
$
72,372
164
$
$
(818)
(1)% $
1,636
9
5 % $
5
2 %
3 %
1,127
1,201
1,207
(74)
(6)%
(6) — %
4,148
$
7,233
$
9,303
$
(3,085)
(43)% $
(2,070)
(22)%
$
$
$
$
$
$
$
$
$
$
73,807
428,005
39,627
177
620
94,162
129
728
72,728
675,368
58,368
186
858
$
$
$
$
$
$
$
$
$
$
76,665
436,188
40,880
181
620
98,441
130
756
32,649
262,699
26,689
197
808
$
$
$
$
$
$
76,893
438,095
41,875
185
625
97,613
137
714
(2,858)
(4)% $
(228) — %
(8,183)
(2)% $
(1,907) — %
(1,253)
(3)% $
(995)
(2)%
(4)
(2)% $
—
— %
(4)
(5)
(2)%
(1)%
(4,279)
(4)% $
828
1 %
(1)
(1)% $
(7)
(5)%
(28)
(4)%
42
6 %
— $
40,079
F $
32,649
— $ 412,669
F $ 262,699
— $
31,679
F $
26,689
— $
(11)
(6)% $
—
50
6 %
197
808
F
F
F
F
F
F
F
Average daily net win per table $
1,525
$
1,588
$
— $
(63)
(4)% $
1,588
Average daily number of tables
26
—
3
13 %
23
23
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Year Ended December 31,
'14 vs. '13
'13 vs. '12
2014
2013 (1)
2012 (2)
$
%
$
%
Harlow’s Casino
Net casino revenues
Slot handle
Net slot revenues
Average daily net win per slot
machine
Average daily number of slot
machines
Average daily poker revenue
(3)
$
$
$
$
$
$
$
$
$
47,632
554,910
43,326
159
747
— $
Average daily net win per table $
856
$
Average daily number of tables
13
49,577
604,433
45,349
155
799
754
750
15
Riverwalk Casino
Net casino revenues
Slot handle
Net slot revenues
Average daily net win per slot
machine
Average daily number of slot
machines
$
$
$
$
$
$
$
$
47,391
508,733
43,567
172
692
50,513
591,975
47,405
181
716
$
$
$
$
$
$
$
$
$
$
54,087
$
(1,945)
(4)% $
(4,510)
(8)%
653,406
$ (49,523)
(8)% $ (48,973)
(7)%
$
$
$
$
49,021
163
821
701
875
15
(2,023)
(4)% $
(3,672)
(7)%
4
3 % $
(8)
(5)%
(52)
(7)%
(22)
(3)%
(754)
(100)% $
53
8 %
106
14 % $
(125)
(14)%
(2)
(13)%
— — %
9,914
$
(3,122)
(6)% $
40,599
109,787
$ (83,242)
(14)% $ 482,188
$
$
9,328
181
736
(3,838)
(8)% $
38,077
(9)
(5)% $
— — %
(24)
(3)%
(20)
(3)%
F
F
F
Average daily net win per table $
733
$
596
$
616
$
137
23 % $
(20)
(3)%
Average daily number of tables
15
18
18
(3)
(17)% $
— — %
Total
Net casino revenues
$
315,588
$
285,958
$
216,580
$
29,630
10 % $
69,378
32 %
NM: Not meaningful
U: > 100% unfavorable
F: >100% favorable
The casino activity presented above is subject to the following information:
(1)
On July 17, 2013, we completed the acquisition of Oxford, whose results are presented in 2013 from the date of
acquisition through December 31, 2013.
On October 23, 2012, we completed the acquisition of Riverwalk, whose results are presented in 2012 from the date
of acquisition through December 31, 2012.
Harlow's poker room closed during July 2013.
During December 2013, Calder Casino relocated the poker room within its facility and reduced the number of poker
tables from eleven tables to six tables. On June 30, 2014, Calder Casino ceased operations of its poker room.
(2)
(3)
(4)
57
F
o
r
m
1
0
-
K
Executive Summary
The following table sets forth, for the periods indicated, total consolidated revenues and certain other financial information and
operating data (in thousands, except per common share data and live race days):
No. of live race days
319
374
381
Year Ended December 31,
2013
2012
2014
‘14 vs. ‘13 Change
%
(15)%
(55)
$
‘13 vs. ‘12 Change
%
$
(7)
(2)%
Net revenues:
Racing
Casinos
TwinSpires
Big Fish Games
Other
$ 261,453
329,010
$ 274,269
297,473
$ 302,088
223,112
$ (12,816)
31,537
(5)% $ (27,819)
74,361
11 %
190,333
184,541
183,279
13,855
18,283
—
23,042
—
22,817
5,792
13,855
(4,759)
33,609
293
3 %
F
(21)%
1,262
—
225
4 % $
— % $
48,029
(6,450)
Total net revenues
Operating income
$ 812,934
90,393
$
$ 779,325
90,100
$
$ 731,296
96,550
$
$
$
(9)%
33 %
1 %
NM
1 %
7 %
(7)%
Operating income
margin
Earnings from
continuing operations
Diluted net earnings from
continuing operations per
common share
11%
12%
13%
$
46,357
$
55,033
$
58,152
$
(8,676)
(16)% $
(3,119)
(5)%
$
2.64
$
3.07
$
3.33
Year Ended December 31, 2014, Compared to the Year Ended December 31, 2013
Our total net revenues increased $33.6 million during the year ended December 31, 2014, primarily from the increase in revenues
of $42.2 million from Oxford, which was acquired on July 17, 2013. Casino revenues increased $31.5 million as the addition
of Oxford revenues was partially offset by a decline in revenues at our other properties due to continued regional economic
weaknesses, additional competition and inclement weather negatively affecting visitation. Big Fish Games reflects revenues
from its premium paid, casino and free-to-play casual games since its acquisition on December 16, 2014. TwinSpires revenues
increased $5.8 million due to a 3.3% increase in handle during the year ended December 31, 2014. Organic growth and the
return of Illinois wagering, which was temporarily ceased during 2013 due to the expiration of state legislation, more than offset
the loss of Texas wagering during the period. Revenues generated by Racing decreased $12.8 million on the cessation of Calder's
pari-mutuel operations as well as weaknesses at the Company's other racetracks, which was partially offset by higher revenues
from a strong Kentucky Oaks and Kentucky Derby week. Other revenues declined $4.8 million primarily due to lower United
Tote revenues associated with declining equipment sales and totalisator services.
Our operating income increased $0.3 million due to the incremental results of Oxford and Big Fish Games in addition to the
impact of a successful Kentucky Oaks and Kentucky Derby week. Partially offsetting these increases were severance and other
expenses related to the cessation of pari-mutuel operations at Calder, expenditures related to the development of Internet gaming
technology, acquisition related expenses related to the Big Fish Games acquisition and challenges within our TwinSpires segment
including higher state taxation requirements and the loss of Texas wagering. Further discussion of results by our reported
segments is detailed below.
Year Ended December 31, 2013, Compared to the Year Ended December 31, 2012
Our total net revenues increased $48.0 million during the year ended December 31, 2013, compared to the same period of 2012,
primarily from the continuing expansion of our Casinos segment through the acquisitions of Riverwalk and Oxford. Casino
revenues increased $74.4 million, reflecting $53.6 million in revenues at Riverwalk, which was acquired on October 23, 2012
and $34.4 million in revenues at Oxford, which was acquired on July 17, 2013. Revenues generated by Racing decreased $27.8
million as strong Kentucky Oaks and Kentucky Derby week revenues were more than offset by the loss of Florida hosting
revenues at Calder and the loss of eighteen host days at Arlington during the year ended December 31, 2013. TwinSpires revenues
increased $1.3 million during the year ended December 31, 2013, as increased revenue from organic customer growth at
TwinSpires and Velocity was partially offset by the effect of the temporary expiration of Illinois legislation permitting Illinois
residents to wager online. Furthermore, on September 25, 2013, we ceased accepting wagers from Texas residents due to the
loss of a lawsuit challenging a state law requiring residents to wager in person at a Texas racetrack, further impacting revenues
from TwinSpires.
58
For the year ended December 31, 2013, our operating income decreased by $6.5 million, primarily due to a $6.6 million decrease
in insurance recoveries, a $7.5 million increase in share-based compensation expense associated with the performance of the
Company and the loss of Florida hosting revenues. Partially offsetting these declines was the effect of incremental operating
income from the Riverwalk and Oxford acquisitions and strong Kentucky Oaks and Kentucky Derby week results. Further
discussion of results by our reported segments is detailed below.
Consolidated Operating Expenses
The following table is a summary of our consolidated operating expenses (in thousands):
Purses & pari-mutuel taxes
Casino taxes
Depreciation/amortization
Other operating
expenses
Acquisition related charges
SG&A expenses
Insurance recoveries, net of
losses
Total expenses
Percent of revenue
Year Ended December 31,
2013
$ 111,198
70,481
2012
$ 125,490
52,306
2014
$ 105,303
84,653
‘14 vs. ‘13 Change
%
(5)% $ (14,292)
18,175
20 %
‘13 vs. ‘12 Change
%
(11)%
35 %
$
(5,895)
14,172
$
$
68,257
61,750
55,600
6,507
11 %
6,150
11 %
375,819
362,725
334,527
3,826
85,114
—
83,446
—
73,829
13,094
3,826
1,668
(431)
(375)
$ 722,541
$ 689,225
(7,006)
$ 634,746
(56)
33,316
$
89%
88%
87%
4 %
28,198
100 %
2 %
15 %
—
9,617
6,631
5 % $
54,479
8 %
NM
13 %
95 %
9 %
Year Ended December 31, 2014, Compared to the Year Ended December 31, 2013
Significant items affecting comparability of consolidated operating expenses include:
F
o
r
m
1
0
-
K
•
•
•
•
•
Casino taxes increased $14.2 million, which included an increase of $15.9 million related to our July 2013
acquisition of Oxford. This increase was partially offset by a decline in expenses associated with lower casino
revenues at our other locations during the year ended December 31, 2014.
Other operating expenses increased $13.1 million, primarily reflecting an increase of $13.8 million in expenses
incurred by Big Fish Games since its acquisition on December 16, 2014. In addition, operating expenses increased
$11.7 million due to a full year of operations at Oxford. Furthermore, we incurred an increase of $2.6 million
in operating expenses related to the development of our Internet gaming technology which was partially offset
by a bad debt expense of $2.5 million associated with a third-party deposit recognized during the year ended
December 31, 2013. Finally, we experienced increased content costs of $5.3 million from organic handle growth
and from growth in the TwinSpires' third-party white-label services. Partially offsetting these increases was a
decrease of $11.9 million in Calder operating expenses during the year ended December 31, 2014 due to the
cessation of its pari-mutuel operations on July 1, 2014. In response to declining revenues, we reduced salaries,
contract labor, and marketing and advertising expenses across our segments by $5.9 million.
Purses and pari-mutuel taxes decreased $5.9 million during the year ended December 31, 2014. Calder incurred
lower expenses of $8.1 million primarily due to the conclusion of pari-mutuel operations on July 1, 2014. In
addition, our Illinois and Louisiana properties declined $3.2 million consistent with the declines in revenues.
Partially offsetting these declines, TwinSpires pari-mutuel taxes increased $3.8 million, primarily due to new
taxation requirements in New York. In addition, Churchill Downs Racetrack incurred higher expenses of $1.6
million, due primarily to an increase in purse expense resulting from an increase in its take-out rate.
Acquisition related charges of $3.8 million consist of the non-cash change in the fair values of the Big Fish
Games deferred payment liabilities and earnout liability from the date of acquisition on December 16, 2014
through December 31, 2014. The increase in the fair value of these liabilities was largely determined by a change
in the credit spread associated with our Senior Unsecured Notes during the period subsequent to acquisition.
SG&A expenses increased $1.7 million primarily due to development expenses of $6.4 million associated with
the acquisition of Big Fish Games. Furthermore, we experienced increases of $1.8 million associated with a
full year of Oxford operations and $0.7 million for Big Fish Games expenses subsequent to its acquisition. In
addition, we incurred $2.3 million from non-recurring compensation expenses due to the conclusion of Calder
pari-mutuel operations. Partially offsetting these increases was a decline in share-based compensation expense
59
of $9.6 million as expenses associated with grants made under the New Company LTIP were substantially
recognized during previous periods.
•
Depreciation and amortization expense increased $6.5 million during the year ended December 31, 2014, due,
in part, to the impact of our acquisitions of Big Fish Games and Oxford, which included incremental depreciation
expenses of $2.2 million and $3.3 million, respectively, during the year December 31, 2014. Calder depreciation
expense increased $2.8 million related to the acceleration of expense related primarily to the Calder barns as we
assessed alternative uses of the assets and reviewed the useful lives of the assets as a result of the cessation of
pari-mutuel operations. Partially offsetting these increases was a decrease in depreciation of $1.7 million at our
Louisiana and Mississippi properties primarily associated with fully depreciated assets.
Year Ended December 31, 2013, Compared to the Year Ended December 31, 2012
Significant items affecting comparability of consolidated operating expenses include:
•
•
•
•
•
•
Other operating expenses increased $28.2 million, primarily reflecting an increase of $31.8 million in operating
expenses generated by Riverwalk and Oxford during the year ended December 31, 2013. In addition, salary
expenditures increased $1.7 million, primarily associated with the continued development of the TwinSpires
segment. Furthermore, we incurred operating expenses of $1.1 million associated with a new video poker
location in Louisiana which opened during January 2013. Finally, we incurred $3.1 million in operating expenses
related to the development of Internet gaming technology, including $2.5 million of bad debt expense associated
with a third-party deposit for which collectibility is not probable. Partially offsetting these increases were
decreases in other racing expenses of $5.6 million associated with Calder’s loss of Florida host revenues during
the year ended December 31, 2013. Finally, TwinSpires content expenses declined due to the favorable settlement
of litigation and the cessation of wagering in Texas and Illinois during portions of 2013.
Casino taxes increased $18.2 million, primarily due to our acquisitions of Riverwalk and Oxford, which incurred
casino taxes of $19.4 million during the year ended December 31, 2013.
Purses and pari-mutuel taxes decreased $14.3 million, primarily as the result of the decline in pari-mutuel revenues
within Racing, which corresponds with a 10.9% decrease in pari-mutuel handle compared to the same period of
2012. Calder generated a decline in purses and pari-mutuel taxes of $13.2 million, primarily due to the loss of
Florida hosting revenues. Partially offsetting this decline was an increase in pari-mutuel taxes within TwinSpires,
due to an increase in the number of states which assess pari-mutuel taxes on ADW wagering.
SG&A expenses increased $9.6 million due to our acquisitions of Riverwalk and Oxford, which incurred an
increase of $3.6 million in selling and general expenses during the year ended December 31, 2013. In addition,
we incurred an increase of $7.5 million in share-based compensation expense during the period, which includes
expenditures related to grants made under the New Company LTIP. We recognized a recovery of $0.8 million
in selling and general expenses at Calder Casino during the year ended December 31, 2012, related to a
reimbursement of certain administrative expenditures associated with a slot machine referendum held during
2005. Partially offsetting these increases were reductions in nonrecurring executive compensation expenditures
of $1.6 million and reductions in professional and consulting fees of $0.7 million.
Insurance recoveries, net of losses decreased $6.6 million during the year ended December 31, 2013, primarily
due to the prior year recognition of insurance recoveries associated with 2011 flood and wind damage at Harlow’s.
Partially offsetting this decline was the recognition of recoveries of $0.4 million during the year ended December
31, 2013 associated with 2012 hail damage at Churchill Downs.
Depreciation and amortization expense increased $6.2 million during the year ended December 31, 2013,
primarily due to the acquisitions of Riverwalk and Oxford which incurred expenses of $7.6 million during the
year.
Other Income (Expense) and Provision for Income Taxes
The following table is a summary of our other income (expense) and income tax provision (in thousands):
60
Year Ended December 31,
2013
2012
2014
$
$
20
(20,842)
$
112
(6,231)
$
90
(4,531)
$
(92)
(14,611)
%
(82)% $
U
$
22
(1,700)
%
24 %
(38)%
‘14 vs. ‘13 Change
‘13 vs. ‘12 Change
Interest income
Interest expense
Equity in earnings (loss) of
unconsolidated
investments
Miscellaneous, net
Other income (expense)
6,328
619
(4,142)
5,667
$ (13,875)
$
(4,594)
$
(1,701)
819
(5,323)
10,470
(5,048)
(9,281)
F
(89)%
(2,441)
4,848
U
F
U $
729
14 %
312
1 % $
2,602
8 %
$
$
Income tax provision
Effective tax rate
$ (30,161)
$ (30,473)
39%
36%
$ (33,075)
36%
Year Ended December 31, 2014, Compared to the Year Ended December 31, 2013
Significant items affecting the comparability of other income and expense and the income tax provision include:
•
•
•
•
Interest expense increased during the year ended December 31, 2014, primarily as a result of higher long-term
debt balances outstanding as a result of the Oxford and Big Fish Games acquisitions.
Equity in earnings (loss) of unconsolidated investments increased $10.5 million during the year ended December
31, 2014, primarily due to earnings of $8.9 million from our investment in MVG, which opened during December
2013. In addition, during the year ended December 31, 2013, MVG recognized pre-opening expenses of $3.6
million. Finally, the performance of our investment in HRTV improved $0.8 million during the period. Partially
offsetting these increases were expenses of $1.0 million related to our unsuccessful attempt to secure the license
to develop a casino in the Capital Region of New York and an impairment charge of $1.6 million related to
reducing the carrying value of our Capital View Casino & Resort investment to its expected fair value.
Miscellaneous, net decreased $5.0 million primarily due to the prior year recognition of HRE Trust Fund proceeds
of $4.5 million and a decrease in income associated with a third-party food and beverage provider.
The effective tax rate for the year ended December 31, 2014 was affected by non-deductible Big Fish Games
acquisition related charges and transaction costs.
Year Ended December 31, 2013, Compared to the Year Ended December 31, 2012
Significant items affecting the comparability of other income and expense and the income tax provision include:
•
•
•
•
Miscellaneous other income increased $4.8 million, primarily due to the recognition of the final HRE Trust Fund
proceeds of $4.5 million related to the Illinois riverboat casino surcharge during the year ended December 31,
2013.
Equity in loss of unconsolidated investments increased $2.4 million during the year ended December 31, 2013,
primarily due to preopening expenses of $3.6 million related to our investment in MVG. Partially offsetting
this increase were favorable casino results from MVG of $0.5 million subsequent to its opening on December
12, 2013, and the performance of our investment in HRTV, which improved $0.6 million.
Interest expense increased $1.7 million during the year ended December 31, 2013, primarily as a result of higher
average outstanding debt balance under our Senior Secured Credit Facility required for financing the acquisitions
of Riverwalk, Oxford and MVG development. In addition, amortization of loan origination and debt issuance
costs were $0.7 million during the year ended December 31, 2013.
The effective tax rate for the year ended December 31, 2013 was affected by the recognition of income tax
benefits of $0.9 million related to 2012 and 2013 research and development tax credits.
Net Revenues By Segment
The following table presents net revenues, including intercompany revenues, by our reported segments (in thousands):
F
o
r
m
1
0
-
K
61
Churchill Downs
Arlington
Calder
Fair Grounds
Total Racing
Calder Casino
Fair Grounds Slots
VSI
Harlow’s Casino
Oxford Casino
Riverwalk Casino
Total Casino
TwinSpires
Big Fish Games
Other Investments
Corporate
Eliminations
Year Ended December 31,
2013
2012
2014
‘14 vs. ‘13 Change
%
$
‘13 vs. ‘12 Change
%
$
$
150,229
$
139,531
$
129,847
$
10,698
8 % $
9,684
66,079
20,032
39,714
276,054
77,003
40,774
34,369
50,199
76,526
50,139
329,010
191,291
13,855
21,255
1,158
67,878
37,527
41,828
286,764
78,951
42,156
35,931
52,440
34,350
53,645
297,473
185,394
—
26,308
1,143
(19,689)
(17,757)
$
812,934
$
779,325
$
73,789
66,149
45,460
315,245
77,864
42,881
35,433
56,604
(1,799)
(3)%
(5,911)
(17,495)
(47)% (28,622)
(43)%
(2,114)
(10,710)
(1,948)
(1,382)
(1,562)
(2,241)
(3,632)
(5)%
(4)% (28,481)
(2)%
(3)%
(4)%
(4)%
1,087
(725)
498
(4,164)
—
42,176
F
34,350
10,330
223,112
184,115
(3,506)
31,537
5,897
—
13,855
25,251
1,032
(17,459)
731,296
$
(5,053)
15
(1,932)
33,609
(7)%
11 %
3 %
F
43,315
74,361
1,279
—
(19)%
1,057
(11)%
1 %
111
(298)
4 % $ 48,029
7 %
(8)%
(8)%
(9)%
1 %
(2)%
1 %
(7)%
F
F
33 %
1 %
NM
4 %
11 %
(2)%
7 %
Year Ended December 31, 2014, Compared to the Year Ended December 31, 2013
Significant items affecting comparability of our net revenues by segment include:
•
•
•
Casino revenues increased $31.5 million as incremental revenues from the Oxford acquisition were partially
offset by declines in revenues at our other locations. Calder Casino revenue decreased $1.9 million primarily
from the closure of its poker room on June 30, 2014. We experienced declines at our Mississippi properties,
Harlow's and Riverwalk, whose combined revenues decreased $5.7 million during the period. Both Mississippi
properties continued to be hindered by economic weakness and heightened competition in the region. Further
impacting revenues was a decline in wagering at our Louisiana properties, Fair Grounds Slots and VSI, whose
combined revenues declined $2.9 million during the period. Fair Grounds Slots and VSI experienced visitation
declines of 8% and 14%, respectively, compared to the same period of 2013, as poor weather conditions and a
three-day maintenance closure at Fair Grounds Slots contributed to the decline in net revenues and mirrored a
comparable decrease in the New Orleans market.
TwinSpires revenues grew by $5.9 million, reflecting a 3.3% increase in our TwinSpires pari-mutuel handle as
compared to a total industry handle decline of 2.8%, as reported by Equibase. Organic growth and the
reinstatement of wagering in Illinois partially offset the loss of Texas wagering during the period. Excluding
the net impact of the Illinois and Texas disruptions, TwinSpires handle increased 5.0% during the year ended
December 31, 2014, due, in part, to a 19% increase in unique players and outpacing industry growth by 7.8
percentage points.
Racing revenues decreased $10.7 million, as the cessation of Calder pari-mutuel operations on July 1, 2014 and
weaknesses at Fair Grounds and Arlington more than offset strong Kentucky Oaks and Kentucky Derby week
results at Churchill Downs. Calder revenues declined $17.5 million during the year ended December 31, 2014,
which included a decline of $16.1 million in revenues during the second half of 2014, since the closure of pari-
mutuel operations. The additional loss of revenue at Calder during the first half of 2014 was due to the loss of
hosting revenues and declines in wagering from Florida out-of-state locations partially offset by additional live
race dates during the first quarter. Fair Grounds revenues declined $2.1 million as inclement weather during the
first half of 2014 caused turf races to be removed and negatively impacted wagering and attendance. Partially
offsetting these declines, Kentucky Oaks and Kentucky Derby week revenues improved from the same period
62
•
•
of 2013 due to revenues from a newly opened Grandstand Terrace and Rooftop Garden, an increase in ticket
sales and media revenue and the effect of an increased takeout rate on pari-mutuel wagering.
Other Investments revenues decreased $5.1 million, due to lower United Tote revenues associated with a decrease
in totalisator service revenues from a loss of customers and fewer equipment sales.
Big Fish Games reflects revenues recognized from its premium paid, casino and free-to-play casual games. The
revenues recognized include reductions of $3.4 million resulting from business combination accounting rules
when deferred revenue balances assumed as part of acquisitions are adjusted down to fair value. Fair value
approximates the cost of fulfilling the service obligation, plus a reasonable profit margin. Subsequent to the
acquisition of Big Fish Games, the Company analyzes the amount of revenue that would have been recognized
had Big Fish Games remained independent and had the deferred revenue balances not been adjusted to fair value.
The $3.4 million downward adjustment to revenue for 2014 is reflected in Big Fish Games net revenue presented
on the Company’s Consolidated Statements of Comprehensive Income.
Year Ended December 31, 2013, Compared to the Year Ended December 31, 2012
Significant items affecting comparability of our revenues by segment include:
•
•
•
•
Casino revenues increased $74.4 million, primarily reflecting revenue from the acquisitions of Riverwalk, which
was acquired on October 23, 2012, and Oxford, which was acquired on July 17, 2013. Calder Casino revenues
increased during the period as directed marketing efforts implemented during 2013 and the closure of Florida
Internet cafes offset continued regional competitive pressures from the opening of additional Miami casinos
during January 2012 and August 2013. Partially offsetting these increases was a decrease in net revenues of
$4.2 million at Harlow’s during 2013 due to continued weakness in the region and disruptions from casino floor
modifications to address competitive pressures. Fair Grounds Slots and VSI revenues decreased $0.2 million
compared to the same period of 2012, as local market weakness more than offset additional video poker revenues
from the opening of a new video poker facility during January 2013.
Racing revenues decreased $28.5 million, as strong Kentucky Oaks and Kentucky Derby week results and the
revenues from the new twelve-day September live racing meet at Churchill Downs were more than offset by
weaknesses at the Company’s other racetracks. Kentucky Oaks and Kentucky Derby week revenues improved
from the same period of 2012 due to revenues from a newly opened luxury facility, the Mansion, in addition to
increased ticket sales and sponsorships and other new Kentucky Oaks and Derby week offerings. However,
Calder revenues declined $28.6 million during 2013, primarily due to the loss of Florida hosting revenues of
approximately $21.2 million and fewer live racing days' revenue of $7.4 million, as more fully discussed in
“Item 7. Management's Discussion and Analysis: Recent Developments.” Arlington revenues decreased $5.9
million compared to the same period of 2012, primarily due to the temporary cessation of Illinois ADW wagering,
the loss of eighteen host days and poor weather conditions which hampered attendance and wagering. Host days
are awarded in Illinois by the IRB to racetracks that are not conducting live horseracing, for which a host racetrack
receives a percentage of earnings from pari-mutuel wagering activity at other racetracks throughout Illinois.
Fair Grounds revenues declined $3.6 million during 2013 due to inclement weather conditions unfavorably
impacting both the 2013 live racing meets and Jazz Fest.
TwinSpires revenues increased $1.3 million, as organic customer growth at TwinSpires and Velocity was
primarily offset by the temporary expiration of legislation allowing Illinois residents to wager online. On June
7, 2013, TwinSpires resumed accepting wagers from Illinois residents, which had previously ceased on January
18, 2013. Furthermore, on September 25, 2013, TwinSpires ceased accepting wagers from Texas residents due
to the enforcement of an existing state law which permits Texas residents to wager on pari-mutuel events only
at Texas racetracks. The impact of the Illinois and Texas disruptions represented a 4.3% decline in total handle
during 2013 as compared to the same period of 2012.
Other Investments revenues increased $1.1 million, due primarily to an increase in equipment sales at United
Tote.
Adjusted Segment EBITDA
In order to evaluate the performance of these operating segments internally, we use Adjusted EBITDA (defined as earnings
before interest, taxes, depreciation, amortization, and adjusted for insurance recoveries net of losses, HRE Trust Fund proceeds,
share-based compensation expenses, pre-opening expenses, the impairment of assets, Big Fish Games transaction expenses, Big
Fish Games acquisition-related charges, changes in Big Fish Games deferred revenue and other charges or recoveries). Big Fish
Games transaction expenses include legal, accounting and other deal-related expenses. Big Fish Games acquisition-related
charges reflect the change in fair value of the Big Fish Games earnout and deferred consideration liability recorded each reporting
63
F
o
r
m
1
0
-
K
period. Changes in Big Fish Games deferred revenue reflect reductions in revenue from business combination accounting rules
when deferred revenue balances assumed as part of an acquisition are adjusted to their fair values. Fair value approximates the
cost of fulfilling the service obligation, plus a reasonable profit margin. Adjusted EBITDA also includes 50% of the operating
income or loss of our joint venture, MVG.
We believe that the use of Adjusted EBITDA as a key performance measure of the results of operations enables management
and investors to evaluate and compare from period to period our operating performance in a meaningful and consistent manner.
Adjusted EBITDA is a supplemental measure of our performance that is not required by, or presented in accordance with,
generally accepted accounting principles (“GAAP”). However, Adjusted EBITDA should not be considered as an alternative
to, or more meaningful than, net earnings (as determined in accordance with GAAP) as a measure of our operating results.
On January 1, 2014, we reclassified our equity investment in MVG from Other Investments to Casinos, to coincide with the
first full period of operations for the venture, which opened on December 12, 2013. MVG's results of operations for the year
ended December 31, 2013 have been reclassified to the Casinos segment. The following table presents Adjusted EBITDA by
our operating segments and a reconciliation of EBITDA to comprehensive income (in thousands):
Year Ended December 31,
2013
2012
2014
Racing
Casinos
TwinSpires
Big Fish Games
Other Investments
Corporate
$
61,160
$
50,275
$
101,106
45,282
3,837
(3,857)
(5,037)
80,631
49,122
—
809
(4,606)
Total Adjusted EBITDA
$
202,491
$
176,231
$
54,357
64,231
44,618
—
(117)
(4,834)
158,255
‘14 vs. ‘13 Change
%
22 % $
$
10,885
‘13 vs. ‘12 Change
%
(8)%
$
$
(4,082)
16,400
4,504
—
926
228
20,475
(3,840)
3,837
(4,666)
(431)
26,260
$
25 %
(8)%
F
U
9 %
15 % $
17,976
26 %
10 %
NM
F
(5)%
11 %
Insurance recoveries, net of
losses
Big Fish Games acquisition
charges
Big Fish Games transaction
expenses
Big Fish Games changes in
deferred revenue
HRE Trust Fund proceeds
Share-based compensation
Pre-opening costs
MVG interest expense, net
Asset impairment
Other charges
Depreciation and amortization
Interest income (expense), net
Income tax provision
Earnings from continuing
operations
Discontinued operations, net of
income taxes
Net earnings
Foreign currency translation,
net of tax
Comprehensive Income
$
431
375
7,006
56
15 %
(6,631)
(95)%
(3,826)
(6,367)
(4,497)
—
(11,932)
(27)
(2,546)
(4,843)
(3,287)
(68,257)
(20,822)
(30,161)
—
—
—
4,541
(21,482)
(3,620)
(170)
—
(2,500)
(61,750)
(6,119)
(30,473)
—
—
—
—
(13,993)
—
—
—
—
(55,600)
(4,441)
(33,075)
(3,826)
(6,367)
(4,497)
(4,541)
9,550
3,593
(2,376)
(4,843)
(787)
(6,507)
(14,703)
312
U
U
U
(100)%
(44)%
(99)%
U
U
31 %
11 %
U
(1)%
—
—
—
4,541
(7,489)
(3,620)
(170)
—
(2,500)
(6,150)
(1,678)
2,602
NM
NM
NM
F
54 %
U
U
NM
U
11 %
38 %
(8)%
46,357
55,033
58,152
(8,676)
(16)%
(3,119)
(5)%
—
46,357
(133)
54,900
124
58,276
133
(8,543)
(100)%
(16)%
(257)
(3,376)
(125)
46,232
$
—
54,900
$
—
58,276
$
(125)
(8,668)
U
(16)% $
—
(3,376)
U
(6)%
NM
(6)%
64
Excluding corporate share-based compensation, the table below presents intercompany management fees (expense) income
included in the Adjusted EBITDA of each of the operating segments for the years ended December 31, 2014, 2013 and 2012,
respectively (in thousands).
Racing
Casinos
TwinSpires
Other Investments
Corporate Income
Total management
fees
Year Ended December 31,
2013
2012
2014
$
(6,821) $
(8,129)
(6,978) $
(7,238)
(4,775)
(495)
20,220
(4,428)
(603)
19,247
(8,063)
(5,705)
(4,679)
(627)
19,074
‘14 vs. ‘13 Change
%
$
157
(891)
(347)
108
973
2 % $
(12)%
(8)%
18 %
5 %
$
— $
— $
— $
—
$
$
1,085
(1,533)
251
24
173
—
‘13 vs. ‘12 Change
%
13 %
(27)%
5 %
4 %
1 %
Year Ended December 31, 2014, Compared to the Year Ended December 31, 2013
Significant items affecting comparability of Adjusted EBITDA by segment include:
•
•
•
•
•
Casino Adjusted EBITDA increased $20.5 million, as the increase in Oxford Adjusted EBITDA of $11.8 million,
and our share of the increase in MVG operating income of $11.1 million more than offset unfavorable results
at our other facilities. Fair Grounds Slots and VSI Adjusted EBITDA decreased $1.5 million compared to the
same period of 2013 as market weakness and poor weather conditions hindered visitation and wagering at the
Louisiana properties. Harlow's and Riverwalk Adjusted EBITDA declined $0.6 million as continuing regional
economic weakness negatively impacted results during the year ended December 31, 2014. Finally, Calder
Casino Adjusted EBITDA decreased $0.3 million from exiting poker operations.
Racing Adjusted EBITDA increased $10.9 million due to increased profitability of $8.8 million from the
Kentucky Oaks and Kentucky Derby week driven by the newly opened Grandstand Terrace, an increase in ticket
sales and media revenue and the effect of an increased takeout rate on pari-mutuel wagering. In addition, Adjusted
EBITDA at Calder improved $3.3 million, largely due to cost savings from the closure of pari-mutuel operations,
rental payments from TSG and a gain on sale of certain racing assets. Furthermore, Arlington Adjusted EBITDA
increased $0.9 million in part due to cost controls which were implemented to address declining revenues.
Partially offsetting these increases was a decrease at Churchill Downs, excluding Kentucky Oaks and Kentucky
Derby week, from reductions in pari-mutuel revenue from a declining thoroughbred horse population and starters
per race.
TwinSpires Adjusted EBITDA decreased $3.8 million during the year ended December 31, 2014. The loss of
Texas wagering generated a handle decline of $42.2 million with a corresponding decline in Adjusted EBITDA
of approximately $5.4 million. In addition, the taxation requirements in New York reduced Adjusted EBITDA
by $3.9 million. Finally, we recorded a non-recurring reduction in operating expenses of $3.3 million during
the year ended December 31, 2013 from the favorable settlement of Illinois ADW litigation. These decreases
were partially offset by organic handle growth of 5.0%, the reinstatement of Illinois wagering and improvements
in our investment in HRTV.
Big Fish Games generated Adjusted EBITDA of $3.8 million since its acquisition on December 16, 2014.
Other Investments Adjusted EBITDA decreased $4.7 million due, in part, to the impact of an increase in
expenditures of $3.0 million associated with the development of our Internet gaming platform. In addition,
United Tote Adjusted EBITDA declined $1.7 million due to a decline in totalisator service revenues and lower
equipment sales.
The following other items affected net earnings from continuing operations during the year ended December 31, 2014:
•
Big Fish Games related charges of $14.7 million consist of non-recurring transaction-related expenses of $6.4
million, fair value adjustments of $3.8 million associated with the change in the fair value of the earnout and
deferred founder liabilities recorded since the acquisition date and $4.5 million reflecting the change in Big Fish
Games deferred revenue primarily resulting from business combination accounting rules when deferred revenue
balances assumed as part of acquisitions are adjusted down to fair value.
F
o
r
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1
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65
•
•
•
•
•
•
•
•
HRE Trust Fund proceeds declined $4.5 million as Arlington’s final share of the disbursement of funds related
to the riverboat casino license surcharge were recognized as miscellaneous other income during the year ended
December 31, 2013.
Share-based compensation expense decreased $9.6 million compared to the same period of 2013, primarily due
to expenses associated with grants made under the New Company LTIP during 2013 which were substantially
recognized during 2013. Unrecognized compensation expense attributable to the New Company LTIP awards,
which will be recognized in subsequent periods, was $2.8 million as of December 31, 2014. The weighted
average period over which we expect to recognize the remaining compensation expense under the service period
awards approximates 17 months. There is no remaining unrecognized expense under the market condition
awards.
Pre-opening costs declined $3.6 million associated with our investment in MVG, which opened a video lottery
facility and a harness racing facility on December 12, 2013.
MVG interest expense, net of $2.5 million represents a full year of interest expense for debt outstanding associated
with our Ohio joint venture, which opened during December 2013.
Asset impairment charges of $4.8 million reflect impairment expenses of $3.2 million for our investment in
Luckity, which ceased operations on November 4, 2014, and $1.6 million for our unsuccessful attempt to obtain
a license to build and operate a gaming facility in the Capital Region of New York. As a result, our investment
in the joint venture was reduced to its expected fair market value.
Other charges increased $0.8 million reflecting severance and other benefit costs incurred upon the closure of
Calder pari-mutuel operations and our share of equity losses associated with our Capital Region casino bid of
$3.3 million. Partially offsetting this increase was an expense of $2.5 million for an uncollectible third-party
deposit associated with an Internet gaming license during the year ended December 31, 2013.
Depreciation and amortization expense increased $6.5 million during the year ended December 31, 2014, driven
by the Oxford and Big Fish Games acquisitions. In addition, depreciation expense at Calder increased primarily
due to the acceleration of expense on barns, which are not expected to be utilized subsequent to December 31,
2014.
Interest (expense) income, net increased $14.7 million primarily as a result of higher long-term debt balances
outstanding due to the acquisitions of Oxford and Big Fish Games.
Year Ended December 31, 2013, Compared to the Year Ended December 31, 2012
Significant items affecting comparability of our Adjusted EBITDA by segment include:
•
•
Casinos Adjusted EBITDA increased $16.4 million, driven by an increase in Riverwalk Adjusted EBITDA of
$13.0 million and Oxford Adjusted EBITDA of $9.2 million. Partially offsetting this increase was a decline in
Harlow’s Adjusted EBITDA of $3.6 million as compared to the same period of 2012 driven by general economic
weakness and lower customer discretionary spending in the region. In addition, during 2013, Harlow’s
experienced disruptions from modifying its casino floor to combat competitive pressures in the market and from
expanding its high-stakes slot positions. Calder Casino recognized proceeds during the prior year of $0.8 million
as a reduction to SG&A expense relating to a reimbursement of certain administrative expenditures for a prior
year slot referendum. Excluding the prior year recovery, Calder Casino Adjusted EBITDA improved $0.3 million
compared to the same period of 2012. Calder Casino was favorably impacted by its strategic player marketing
efforts, the closure of Internet cafes in the State of Florida, and a successful advertising campaign, which mitigated
the impact of new, competing casinos which opened during August 2013 and January 2012 in the South Florida
region. Finally, Fair Grounds Slots and VSI Adjusted EBITDA decreased $1.9 million as weakness in the New
Orleans market more than offset the opening of a new video poker facility.
TwinSpires Adjusted EBITDA increased $4.5 million during the year ended December 31, 2013, reflecting a
1.0% increase in our pari-mutuel handle, which was partially offset by an increase in pari-mutuel taxes associated
with additional state legislative requirements. Velocity Adjusted EBITDA increased from both the addition of
a new high volume wagering customer and increased wagering by existing customers. TwinSpires content
expenses declined due to the favorable settlement of litigation. In addition, our investment in HRTV improved
$0.6 million during the year ended December 31, 2013. Finally, TwinSpires incurred $2.2 million in expenses
associated with the continuing development of Luckity, a decrease of $0.4 million as compared to the same
period of 2012. Partially offsetting these improvements was the unfavorable impact from the temporary loss of
Illinois ADW wagering and the exit from Texas ADW wagering, which generated a combined handle decline
66
•
•
of 4.3% and a reduction in Adjusted EBITDA of $2.7 million during the year ended December 31, 2013 compared
to 2012.
Racing Adjusted EBITDA decreased $4.1 million during the year ended December 31, 2013. Churchill Downs
Adjusted EBITDA improved $5.8 million from increased profitability from Kentucky Oaks and Kentucky Derby
week and $2.8 million from its new September live racing meet. In addition, Racing benefited from lower labor
costs and other cost control measures related to renovations at Churchill Downs Racetrack, including a new
simulcasting facility. Offsetting these improvements was a $9.0 million decline in Adjusted EBITDA at Calder
of which approximately $6.3 million was associated with the loss of Florida hosting revenues, approximately
$1.8 million was associated with fewer live racing days and approximately $0.9 million with other ancillary
items during the year ended December 31, 2013. Furthermore, Arlington Adjusted EBITDA declined $2.3 million
due to eighteen fewer host days and a decline in pari-mutuel handle of 6.4%. Finally, Fair Grounds Adjusted
EBITDA decreased $1.4 million due to inclement weather conditions unfavorably impacting both the 2013 racing
meets and Jazz Fest.
Other Investments Adjusted EBITDA increased $0.9 million, primarily due to incremental equipment sales at
United Tote. Partially offsetting this improvement were operating costs of $1.1 million associated with our
Internet gaming initiatives.
The following other items affected earnings from continuing operations during the year ended December 31, 2013:
•
•
•
•
•
•
•
Insurance recoveries, net of losses, decreased $6.6 million during the year ended December 31, 2013, primarily
due to the prior year recognition of insurance recoveries associated with 2011 flood and wind damage at Harlow’s.
HRE Trust Fund proceeds of $4.5 million were recognized as miscellaneous other income during the year ended
December 31, 2013, reflecting Arlington’s final share of the disbursement of funds related to the riverboat casino
license surcharge.
Share-based compensation expense increased $7.5 million compared to the same period of 2012 primarily due
to expenses associated with grants made under the New Company LTIP.
Pre-opening costs of $3.6 million were incurred during the year ended December 31, 2013 associated with our
investment in MVG, which opened a video lottery facility and a new harness racing facility on December 12,
2013.
MVG interest expense, net increased $0.2 million due to our share of financing costs incurred by the joint venture.
Other charges and recoveries, net increased $2.5 million as the collectibility of a third-party deposit associated
with an Internet gaming license was not deemed probable.
Depreciation and amortization expense increased $6.2 million during the year ended December 31, 2013 driven
primarily by the Riverwalk and Oxford acquisitions. Depreciation expense at United Tote decreased $2.0 million
as certain assets acquired in the 2009 acquisition were fully depreciated during 2012.
Discontinued Operations
Fight! Magazine and Hollywood Park Racetrack have been accounted for as discontinued operations. Accordingly, the results
of operations of the sold businesses for all periods presented and the (losses) gains on sold businesses have been classified as
discontinued operations, net of income taxes, in the Consolidated Statements of Comprehensive Income. Set forth below is a
summary of the results of operations of discontinued businesses for the years ended December 31, 2014, 2013 and 2012 (in
thousands):
F
o
r
m
1
0
-
K
67
Year Ended December 31,
2013
2012
2014
‘14 vs. ‘13 Change
%
$
‘13 vs. ‘12 Change
%
$
Net revenues
Operating expenses
Selling, general and
administrative expenses
Operating (loss) gain
Other income (expense)
(Loss) earnings from operations
before income taxes
Income tax benefit (provision)
(Loss) gain from operations
Loss on sale of assets, net of
income taxes
Net (loss) gain
Sale of Fight! Magazine
$
$
— $
—
$
632
857
$
1,087
885
—
—
—
—
—
—
—
(225)
145
(80)
30
(50)
—
202
(2)
200
(76)
124
—
— $
(83)
(133) $
—
124
$
(632)
(857)
—
225
(145)
80
(30)
50
83
133
(100)% $
(100)%
NM
(100)%
(100)%
(100)%
(100)%
(100)%
(100)%
(100)% $
(455)
(28)
—
(427)
147
(280)
106
(174)
(83)
(257)
(42)%
(3)%
NM
U
F
U
F
U
U
U
On December 16, 2013, the Company completed the sale of 100% of the assets of Fight! Magazine ("Fight"), a division of Bluff
which was acquired by the Company in February 2012. Net revenues, operating expenses and the loss on sale of Fight for the
years ended December 31, 2013 and 2012, have been reclassified to discontinued operations. There was no impact from these
reclassifications on net earnings or cash flows.
Hollywood Park Racetrack
In addition, we recognized operating expenses of $0.1 million during the year ended December 31, 2013, from adjustments
related to workers' compensation reserves retained by the Company subsequent to our sale of Hollywood Park Racetrack during
2005.
Consolidated Balance Sheet
The following table is a summary of our overall financial position as of December 31, 2014 and 2013 (in thousands):
Total assets
Total liabilities
Total shareholders’ equity
Year Ended December 31,
2014
2,360,274
1,660,273
700,001
$
$
$
2013
1,352,261
647,472
704,789
$
$
$
$
$
$
Significant items affecting the comparability of our consolidated balance sheets include:
‘14 vs. ‘13 Change
$
1,008,013
%
1,012,801
(4,788)
75 %
U
(1)%
•
•
•
Total assets increased primarily due to assets acquired of $1,000.8 million associated with the Big Fish Games
acquisition. Excluding Big Fish Games, other significant changes within total assets include increases in our
investment in unconsolidated affiliates of $23.4 million reflecting current year MVG capital contributions of
$14.6 million in addition to the Company's share of MVG operating income. Partially offsetting these increases
were decreases in our restricted cash of $10.0 million and other intangibles of $9.1 million during the year ended
December 31, 2014. The decrease in restricted cash is primarily due to the release of the HRE Trust Fund purse
balance at the conclusion of the Arlington meet. The decrease in other intangibles, net is due to the amortization
of definite-lived intangible assets.
Excluding Big Fish Games liabilities assumed, significant changes within total liabilities include increases of
$406.6 million for the Big Fish Games deferred payment and earnout liabilities and increases in total debt of
$401.2 million, primarily to fund the acquisition of Big Fish Games. Partially offsetting these increases were
decreases of $8.3 million in accounts payable and $7.7 million in purses payable. Accounts payable declined
due in part to the timing of settlement related payments. The decline in purses payable is driven by the distribution
of the final Arlington HRE Trust Fund proceeds and the cessation of Calder pari-mutuel operations.
Significant changes within shareholders' equity were decreases of $61.6 million from our common stock
repurchase and $16.5 million from the cancellation of shares for payment of income taxes owed on vested shares.
68
Partially offsetting these amounts were increases from current year net income, the issuance of common shares
for the acquisition of Big Fish Games of $15.8 million, the issuance of common shares from stock option exercises
of $7.5 million, current year amortization expense of $11.9 million on equity compensation and a windfall tax
benefit associated with equity compensation awards of $7.7 million.
Liquidity and Capital Resources
The following table is a summary of our liquidity and cash flows (in thousands):
Cash Flows from:
Operating activities
Investing activities
Financing activities
2014
141,619
Year Ended December 31,
2013
144,915
$
(3,296)
$
$ (440,308) $ (277,680) $ (197,128) $ (162,628)
$ 181,753
$
2012
144,098
140,296
322,049
62,882
$
$
$
$
$
‘14 vs. ‘13 Change
%
‘13 vs. ‘12 Change
%
$
(2)% $
817
(59)% $ (80,552)
77,414
F $
1 %
(41)%
F
Significant items affecting the comparability of our liquidity and capital resources between the years ended December 31, 2014
and 2013 include:
•
•
•
Cash provided by operating activities decreased $3.3 million due to the prior year receipt of HRE Trust Fund
proceeds, the prior year favorable settlement of ADW litigation, severance and other employee benefits costs
related to the closure of Calder's pari-mutuel operations, a decline in profitability at our Mississippi and Louisiana
gaming properties, increased taxation of TwinSpires, investments in our Internet gaming platform, Big Fish
Games transaction and acquisition related-charges and unfavorable timing of collections related to the 2014
Kentucky Derby and Kentucky Oaks. Partially offsetting these declines were increases in operating cash flows
from the acquisitions of Oxford and Big Fish Games, the increased profitability of Kentucky Oaks and Kentucky
Derby week, the 2014 receipt of a 2013 federal income tax refund of $8.3 million and lower 2014 estimated tax
payments, favorable timing of payments within our pari-mutuel simulcasting operations and other favorable net
working capital items. We anticipate that cash flows from operations over the next twelve months will be
adequate to fund our business operations and capital expenditures.
The increase in cash used in investing activities is primarily due to the 2014 acquisition of Big Fish Games for
$366.0 million, net of cash acquired. In addition, property and equipment additions were higher from capital
expenditures at Churchill Downs for projects associated with the 2014 Kentucky Derby and Kentucky Oaks.
Finally, we funded $3.3 million in licensing and development fees for our unsuccessful attempt to secure a New
York gaming license. Partially offsetting these increases was the prior year acquisition of Oxford for $154.9
million, net of cash acquired. In addition, capital contributions to our Ohio joint venture decreased $75.7 million
during the year ended December 31, 2014.
The increase in cash provided by financing activities is due to increased net borrowings under our Senior Secured
Credit Facility during the year ended December 31, 2014 to fund the acquisition of Big Fish Games and capital
contributions to MVG. In addition, cash received in connection with stock option exercises increased $6.3
million. Partially offsetting these increases was the prior year proceeds of $300 million from our bond issuance
and a repurchase of 691,000 shares of common stock in a privately negotiated transaction, at a cost of $61.6
million during the year ended December 31, 2014. Finally, we funded $15.2 million in dividend payments for
our annual dividend declared during 2013.
During 2014, we funded $14.6 million in capital contributions to MVG, and since the joint venture commenced during 2012,
we have funded $105.0 million in capital contributions. In addition, during the year ended December 31, 2014, we funded $3.3
million to our unsuccessful New York joint venture.
Free cash flow, which we reconcile to “Net cash provided by operating activities,” is cash flows from operations reduced by
maintenance-related (replacement) capital expenditures. Maintenance-related capital expenditures are expenditures to replace
existing fixed assets with a useful life greater than one year that are obsolete, worn-out, or no longer cost effective to repair. We
use free cash flow to evaluate our business because, although it is similar to cash flows from operations, we believe it will
typically present a more conservative measure of cash flows, as maintenance-related capital expenditures are a necessary
component of our ongoing operations. Free cash flow is a non-GAAP measure and our definition may differ from other companies’
definitions of this measure.
Free cash flow does not represent the residual cash flow available for discretionary expenditures and does not incorporate the
funding of business acquisitions. This non-GAAP measure should not be considered a substitute for, or superior to, cash flows
from operating activities under GAAP.
69
F
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K
The following is a summary of additions to property and equipment and a reconciliation of free cash flow to the most comparable
GAAP measure, “Net cash provided by operating activities,” for 2014, 2013 and 2012 (in thousands):
Maintenance-related capital expenditures
Capital project expenditures
Year Ended December 31,
2012
2013
$ 17,158
$ 16,879
24,140
31,892
2014
$ 22,733
31,753
Additions to property and equipment
54,486
48,771
41,298
Net cash provided by operating activities
Maintenance-related capital expenditures
Free cash flow
141,619
(22,733)
$ 118,886
144,915
(16,879)
$ 128,036
144,098
(17,158)
$ 126,940
‘14 vs. ‘13 Change
‘13 vs. ‘12 Change
%
35 % $
$
$
5,854
(139) — %
5,715
12 %
(3,296)
(5,854)
$ (9,150)
(2)%
35 %
(7)% $
$
(279)
7,752
7,473
817
279
1,096
%
(2)%
32 %
18 %
1 %
(2)%
1 %
During the year ended December 31, 2014, the increase in maintenance-related capital expenditures as compared to the same
period of 2013 primarily reflects the replacement of slot machines at several Casino properties. During the year ended December
31, 2013, the increase in capital project expenditures as compared to the same period of 2012 primarily reflects capital expenditures
related to the Mansion, Rooftop Garden and Grandstand Terrace projects at Churchill Downs.
Credit Facilities and Indebtedness
5.375% Senior Unsecured Notes
On December 16, 2013, the Company completed an offering of $300 million in aggregate principal amount of 5.375% Senior
Unsecured Notes that mature on December 15, 2021 (the “Senior Unsecured Notes”). The Senior Unsecured Notes were issued
at par, with interest payable on June 15th and December 15th of each year. The Company received net proceeds of $295 million,
after deducting underwriting fees, and used the net proceeds from the offering to repay a portion of its outstanding borrowings,
and accrued and unpaid interest outstanding under its Third Amended and Restated Credit Agreement ("Senior Secured Credit
Facility"). As a result of the issuance, the Company capitalized $6.3 million of debt issuance costs, which is being amortized
as interest expense over the remaining term of the Senior Unsecured Notes.
The Senior Unsecured Notes were issued in a private offering that was exempt from registration under the Securities Act of
1933, as amended, and are senior unsecured obligations of the Company. The Senior Unsecured Notes are guaranteed by each
of the Company’s domestic subsidiaries that guarantee its Senior Secured Credit Facility and will rank equally with the Company’s
existing and future senior obligations. At any time prior to December 15, 2016, the Company may redeem all or part of the
Senior Unsecured Notes at par plus the present value (discounted at the treasury rate plus 50 basis points) of scheduled interest
payments through December 15, 2016, along with accrued and unpaid interest, if any, at the date of redemption. On or after
December 15, 2016, the Company may redeem all or part of the Senior Unsecured Notes at a redemption price of 104.031%
which gradually reduces to par by 2019.
Senior Secured Credit Facility
On December 1, 2014, the Company executed the Fourth Amended and Restated Credit Agreement (the “Senior Secured Credit
Facility”) whereby it added a $200 million Term Loan Facility (“Term Loan”) to the existing Senior Secured Credit Facility and
amended certain definitions and provisions of the credit agreement including Consolidated Funded Indebtedness, EBITDA and
calculation of the Total Leverage Ratio. The Company incurred loan origination costs of $0.9 million in connection with this
amendment, which were capitalized and are being amortized as interest expense over the remaining term of the Senior Secured
Credit Facility.
On May 17, 2013, the Company entered into the Third Amended and Restated Credit Agreement (also referred to as the “Senior
Secured Credit Facility”) which amended certain provisions of the credit agreement including increasing the maximum aggregate
commitment from $375 million to $500 million. The Senior Secured Credit Facility also provides for an accordion feature
which, if exercised, could increase the maximum aggregate commitment by up to an additional $225 million and reduce the
pricing schedule for outstanding borrowings and commitment fees across all leverage pricing levels. The guarantors under the
Senior Secured Credit Facility continue to be a majority of the Company's wholly-owned subsidiaries. The Company incurred
loan origination costs of $2.3 million in connection with this amendment, which were capitalized and are being amortized as
interest expense over the remaining term of the Senior Secured Credit Facility.
The Senior Secured Credit Facility matures on May 17, 2018. The Term Loan matures on December 1, 2019, provided however,
in the event the Senior Secured Credit Facility has not, prior to May 17, 2018, been extended to a maturity date of December 1,
2019, the Term Loan matures on May 17, 2018.
70
Regarding the Term Loan, the Company is required to make quarterly principal payments that commence on March 31, 2015
and are set to occur on the last day of each quarter through September 30, 2019. Payments start at $2.5 million and increase in
increments of $1.25 million on December 31 of each year to reach the final year quarterly payment amount of $7.5 million.
Generally, borrowings made pursuant to the Senior Secured Credit Facility and the Term Loan bear interest at a LIBOR-based
rate per annum plus an applicable margin percentage ranging from 1.125% to 3.0% depending on the Company's total leverage
ratio. In addition, under the Senior Secured Credit Facility, the Company agreed to pay a commitment fee at rates that range
from 0.175% to 0.45% of the available aggregate commitment, depending on the Company's leverage ratio. The Term Loan is
not subject to, nor included in the calculation of, the commitment fee.
The Senior Secured Credit Facility contains customary affirmative and negative covenants for credit facilities of this type,
including limitations on the Company and its subsidiaries with respect to indebtedness, restricted payments, liens, investments,
mergers and acquisitions, disposition of assets, sale-leaseback transactions and transactions with affiliates. The covenants permit
the Company to use proceeds of the credit extended under the agreement for general corporate purposes, restricted payments
and acquisition needs. The Senior Secured Credit Facility also contains financial covenants that require the Company (i) to
maintain an interest coverage ratio (i.e., consolidated adjusted EBITDA to consolidated interest expense) that is greater than 3.0
to 1.0; (ii) not to permit the total leverage ratio (i.e., total consolidated funded indebtedness to consolidated adjusted EBITDA)
to be greater than 4.5 to 1.0, provided that if a certain minimum consolidated adjusted EBITDA is reached then the total leverage
ratio will be increased to 5.0 to 1.0 for such periods that the minimum is maintained; and (iii) not to permit the senior secured
leverage ratio (i.e. senior secured consolidated funded indebtedness to consolidated adjusted EBITDA) to be greater than 3.5 to
1.0. As of December 31, 2014, the Company was in compliance with all covenants under the Senior Secured Credit Facility,
and substantially all of the Company's assets continue to be pledged as collateral under the Senior Secured Credit Facility. At
December 31, 2014, the financial ratios under our Senior Secured Credit Facility were as follows:
Interest Coverage Ratio
Total Leverage Ratio
Senior Secured Leverage Ratio
Contractual Obligations
Actual
Requirement
11.7 to 1
3.5 to 1
2.3 to 1
> 3.0 to 1.0
< 5.0 to 1.0
< 3.5 to 1.0
Our commitments to make future payments as of December 31, 2014, are summarized as follows (in thousands):
Dividends
$
17,419
$
— $
— $
— $
17,419
2015
2016-2017
2018-2019
Thereafter
Total
Tax refund due to Big Fish Games former
equity holders
Big Fish Games deferred payment
Senior Secured Credit Facility
Interest on Senior Secured Credit Facility (1)
Term Loan A
Interest on Term Loan A
Senior Unsecured Notes
Interest on Senior Unsecured Notes
Operating leases
Total
(1)
18,087
28,428
—
5,691
11,250
5,894
—
16,125
11,604
—
56,855
—
—
37,500
9,933
—
32,250
20,320
—
—
270,355
—
151,250
5,818
—
32,250
7,106
—
—
—
—
—
—
300,000
31,578
3,590
18,087
85,283
270,355
5,691
200,000
21,645
300,000
112,203
42,620
$
114,498
$
156,858
$
466,779
$
335,168
$ 1,073,303
Interest includes the estimated contractual payments under our Senior Secured Credit Facility assuming no change in the
weighted average borrowing rate of 2.2%, which was the rate in place as of December 31, 2014.
As of December 31, 2014, we had approximately $2.9 million of unrecognized tax benefits. We anticipate a decrease in our
unrecognized tax benefits of approximately $1.1 million during the next twelve months due to the expiration of statutes of
limitations. In addition, as of December 31, 2014, the fair value of the Big Fish Games earnout liability is $327.8 million. We
anticipate an increase in our earnout liability of approximately $20.0 million during the next twelve months, as the liability is
expected to be paid during 2016 and 2017.
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ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate and Credit Risk
Our primary exposure to market risk relates to changes in interest rates. At December 31, 2014, we had $470.4 million outstanding
under our Senior Secured Credit Facility, which bears interest at LIBOR based variable rates. We are exposed to market risk
on variable rate debt due to potential adverse changes in these rates. Assuming the outstanding balance of the debt facility
remains constant, a one-percentage point increase in the LIBOR rate would reduce net earnings and cash flows from operating
activities by $2.8 million.
Foreign Currency Exchange Risk
We operate internationally and are exposed to foreign currency exchange risk. While the substantial majority of our revenue
has been and is expected to continue to be denominated in U.S. dollars, our results of operations and cash flows are subject to
fluctuations due to changes in foreign currency exchange rates, particularly changes in the Euro. Due to the relative size of our
international operations to date, our foreign currency exposure is not material and thus we have not instituted a hedging program.
As our global operations continue to grow, we will monitor the foreign currency exposure to determine if and when we should
begin a hedging program.
72
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of Churchill Downs Incorporated
In our opinion, the consolidated financial statements listed in the index appearing under item 15(a)(1) present fairly, in all material
respects, the financial position of Churchill Downs Incorporated and its subsidiaries at December 31, 2014 and 2013, and the
results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity
with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under item 15(a)(2) presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established
in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule,
for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item
9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule and on the
Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management's Report on Internal Control over Financial Reporting appearing under Item 9A, management has
excluded Big Fish Games, Inc. from its assessment of internal control over financial reporting as of December 31, 2014 because
it was acquired by the Company in a purchase business combination during 2014. We have also excluded Big Fish Games, Inc.
from our audit of internal control over financial reporting. Big Fish Games, Inc. is a wholly-owned subsidiary whose total assets
and total revenues represent 4.1% and 1.7% respectively, of the related consolidated financial statement amounts as of and for
the year ended December 31, 2014.
/s/ PricewaterhouseCoopers LLP
Louisville, Kentucky
February 25, 2015
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73
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31,
(in thousands)
Current assets:
ASSETS
Cash and cash equivalents
Restricted cash
Accounts receivable, net of allowance for doubtful accounts of $4,246 in 2014 and
$4,338 in 2013
Deferred income taxes
Income taxes receivable
Other current assets
Total current assets
Property and equipment, net
Investment in and advances to unconsolidated affiliates
Goodwill
Other intangible assets, net
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Bank overdraft
Purses payable
Account wagering deposit liabilities
Accrued expenses
Tax refund due to Big Fish Games former equity holders
Deferred revenue
Deferred revenue - Big Fish Games
Big Fish Games deferred payment, current
Current maturities of long-term debt
Dividends payable
Total current liabilities
Long-term debt, net of current maturities
Notes payable
Big Fish Games deferred payment, net of current amount due
Big Fish Games earnout liability
Other liabilities
Deferred revenue
Deferred income taxes
Total liabilities
Commitments and contingencies
Shareholders’ equity:
$
$
$
2014
2013
$
67,936
26,065
75,890
$
$
17,716
29,455
24,665
241,727
595,315
109,548
839,520
549,972
24,192
2,360,274
45,597
544
11,169
18,137
91,056
18,087
51,833
41,747
27,180
11,250
17,419
334,019
459,105
300,000
51,620
327,800
21,718
16,489
149,522
1,660,273
44,708
36,074
46,572
8,927
12,398
12,036
160,715
585,498
86,151
300,616
198,149
21,132
1,352,261
43,123
973
18,839
18,679
67,328
—
49,078
—
—
—
15,186
213,206
69,191
300,000
—
—
17,753
16,706
30,616
647,472
Preferred stock, no par value; 250 shares authorized; no shares issued
Common stock, no par value; 50,000 shares authorized; 17,472 shares issued at
December 31, 2014 and 17,948 shares issued at December 31, 2013
Accumulated other comprehensive loss
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
—
—
262,280
295,955
(125)
437,846
700,001
2,360,274
$
—
408,834
704,789
1,352,261
$
The accompanying notes are an integral part of the consolidated financial statements.
74
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
for the years ended December 31,
(in thousands, except per common share data)
2014
2013
2012
Net revenues:
Racing
Casinos
TwinSpires
Big Fish Games
Other
Operating expenses:
Racing
Casinos
TwinSpires
Big Fish Games
Other
Selling, general and administrative expenses
Acquisition related charges
Insurance recoveries, net of losses
Operating income
Other income (expense):
Interest income
Interest expense
Equity in gains (losses) of unconsolidated investments
Miscellaneous, net
Earnings from continuing operations before provision for income taxes
Income tax provision
Earnings from continuing operations
Discontinued operations, net of income taxes:
(Loss) gain from operations
Loss on sale of assets
Net earnings
Net earnings (loss) per common share data:
Basic
Earnings from continuing operations
Discontinued operations
Net earnings
Diluted
Earnings from continuing operations
Discontinued operations
Net earnings
Weighted average shares outstanding:
Basic
Diluted
Other comprehensive loss:
Foreign currency translation, net of tax
Other comprehensive loss
Comprehensive income
$
$
$
$
$
$
$
$
$
$
$
$
$
261,453
329,010
190,333
13,855
18,283
812,934
216,269
244,051
133,553
15,971
24,188
85,114
3,826
(431)
90,393
20
(20,842)
6,328
619
(13,875)
76,518
(30,161)
46,357
—
—
46,357
2.67
—
2.67
2.64
—
2.64
17,271
17,589
(125)
(125)
46,232
$
274,269
297,473
184,541
—
23,042
779,325
233,286
222,879
123,449
—
26,540
83,446
—
(375)
90,100
112
(6,231)
(4,142)
5,667
(4,594)
85,506
(30,473)
55,033
(50)
(83)
54,900
3.13
(0.01)
3.12
3.07
(0.01)
3.06
17,294
17,938
—
—
54,900
$
$
$
$
$
$
$
302,088
223,112
183,279
—
22,817
731,296
255,405
163,686
123,476
—
25,356
73,829
—
(7,006)
96,550
90
(4,531)
(1,701)
819
(5,323)
91,227
(33,075)
58,152
124
—
58,276
3.38
0.01
3.39
3.33
0.01
3.34
17,047
17,475
—
—
58,276
The accompanying notes are an integral part of the consolidated financial statements.
75
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CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
for the years ended December 31, 2014, 2013 and 2012
(in thousands, except per common share data)
Common Stock
Shares
17,178
Amount
$ 260,199
$
Other
Comprehensive
Loss
Retained
Earnings
— $ 323,831
58,276
Balance, December 31, 2011
Net earnings and comprehensive income
Issuance of common stock for stock option exercises
Issuance of common stock for employee benefit plans
Issuance of common stock for long-term incentive plan
Tax windfall from share-based compensation
Repurchase of common stock
Restricted stock forfeitures
Grant of restricted stock
Amortization of restricted stock
Cash dividends, $0.72 per share
Restricted dividends, $0.72 per share
Stock option plan expense
155
19
158
(84)
(1)
23
Balance, December 31, 2012
17,448
Net earnings and comprehensive income
Issuance of common stock for stock option exercises
Issuance of common stock for employee benefit plans
Issuance of common stock for long-term incentive plan
Tax windfall from share-based compensation
Repurchase of common stock
Restricted stock forfeitures
Grant of restricted stock
Amortization of restricted stock
Cash dividends, $0.87 per share
Restricted dividends, $0.87 per share
Stock option plan expense
7
17
174
(133)
(1)
436
Balance, December 31, 2013
17,948
Net earnings and comprehensive income
Issuance of common stock for stock option exercises
Issuance of common stock for employee benefit plans
Issuance of common stock for acquisition
Tax windfall from share-based compensation
Repurchase of common stock
Stock buyback
Restricted stock forfeitures
Grant of restricted stock
Amortization of restricted stock
Cash dividends, $1.00 per share
Restricted dividends, $1.00 per share
Stock option plan expense
Foreign currency translation adjustment, net of ($70) tax
effect
186
15
157
(160)
(691)
(9)
26
5,663
714
4,207
1,407
(5,094)
6,377
1,236
274,709
330
805
6,371
2,981
(10,723)
20,525
957
295,955
6,417
1,058
15,793
7,708
(15,021)
(61,561)
11,527
404
(12,351)
(170)
—
369,586
54,900
(15,186)
(466)
—
408,834
46,357
(17,026)
(319)
$
Total
584,030
58,276
5,663
714
4,207
1,407
(5,094)
—
—
6,377
(12,351)
(170)
1,236
644,295
54,900
330
805
6,371
2,981
(10,723)
—
—
20,525
(15,186)
(466)
957
704,789
46,357
6,417
1,058
15,793
7,708
(15,021)
(61,561)
—
—
11,527
(17,026)
(319)
404
Balance, December 31, 2014
17,472
$ 262,280
$
(125)
(125) $ 437,846
(125)
700,001
$
The accompanying notes are an integral part of the consolidated financial statements.
76
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31,
(in thousands)
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization
Acquisition related charges
Asset impairment loss
Gain on sale of business and asset dispositions
Equity in (gains) losses of unconsolidated investments
Share-based compensation
Deferred tax provision
Other
Increase (decrease) in cash resulting from changes in operating assets and
liabilities, net of business acquisitions and dispositions:
Restricted cash
Accounts receivable
Other current assets
Income taxes
Accounts payable
Purses payable
Accrued expenses
Deferred revenue
Other assets and liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Additions to property and equipment
Acquisition of businesses, net of cash acquired
Acquisition of gaming licenses
Investment in joint ventures
Purchases of minority investments
Proceeds from sale of assets
Proceeds from insurance recoveries
Net cash used in investing activities
Cash flows from financing activities:
Borrowings on bank line of credit
Repayments of bank line of credit
Proceeds from bond issuance
Change in bank overdraft
Payment of dividends
Repurchase of common stock
Repurchase of common stock from share-based compensation
Common stock issued
Windfall tax provision from share-based compensation
Loan origination fees
Debt issuance costs
Net cash provided by financing activities
Net increase in cash and cash equivalents
Effect of exchange rate changes on cash
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
2014
2013
2012
$
46,357
$
54,900
$
58,276
68,257
3,826
3,247
(382)
(6,328)
11,931
14,839
619
9,468
(1,619)
(3,255)
206
(8,385)
(7,669)
8,330
639
1,538
141,619
(54,486)
(366,045)
(2,250)
(17,906)
(602)
981
—
(440,308)
804,986
(403,822)
—
(429)
(15,186)
(61,561)
(15,021)
7,475
7,708
(1,069)
(1,032)
322,049
23,360
(132)
44,708
67,936
$
61,750
—
—
(366)
4,142
21,482
5,284
689
6,359
(495)
1,372
(11,023)
(5,879)
(6,594)
4,866
6,029
2,399
144,915
(48,771)
(154,872)
(2,650)
(70,500)
(902)
15
—
(277,680)
740,131
(880,667)
300,000
(5,053)
—
—
(10,723)
1,135
2,981
(2,258)
(5,250)
140,296
7,531
—
37,177
44,708
$
55,600
—
25
(128)
1,701
7,613
9,659
910
9,178
(5,396)
(3,075)
764
3,459
(10,148)
9,923
8,804
(3,067)
144,098
(41,298)
(142,915)
(2,250)
(19,850)
(2,153)
833
10,505
(197,128)
554,248
(472,083)
—
555
(22,461)
—
(5,094)
6,377
1,407
(67)
—
62,882
9,852
—
27,325
37,177
$
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The accompanying notes are an integral part of the consolidated financial statements.
77
CHURCHILL DOWNS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
for the years ended December 31,
(in thousands)
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
State tax credits
Income taxes
Schedule of non-cash investing and financing activities:
Issuance of common stock for acquisition of Big Fish Games
Earnout liability for acquisition of Big Fish Games
Deferred payment for acquisition of Big Fish Games
Issuance of common stock in connection with the Company LTIP, the
New Company LTIP and other restricted stock plans
Dividends payable
Dividends accrued on restricted stock plans
Accrued debt issuance costs
Property and equipment additions included in accounts payable and
accrued expenses
Assets acquired and liabilities assumed from acquisition of
businesses:
Accounts receivable, net
Income taxes receivable
Other current assets
Other non-current assets
Property and equipment, net
Goodwill
Other intangible assets
Accounts payable
Accrued expenses
Deferred revenue
Deferred income taxes
Other liabilities
$
$
2014
2013
2012
$
17,517
—
16,982
$
4,032
1,298
31,324
2,856
—
24,462
15,793
324,747
97,073
2,991
17,419
319
—
1,269
19,274
18,087
10,632
1,780
14,632
538,904
362,863
(9,064)
(16,987)
(37,250)
(96,182)
(3,031)
$
—
—
—
30,678
15,186
466
1,000
3,769
252
—
799
—
45,105
50,202
64,693
(1,063)
(5,111)
(5)
—
—
$
—
—
—
5,459
—
170
—
5,254
486
—
688
282
64,935
36,702
46,004
(780)
(5,234)
(168)
—
—
The accompanying notes are an integral part of the consolidated financial statements.
78
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
NOTE 1—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Churchill Downs Incorporated (the “Company”) is a diversified provider of pari-mutuel horseracing, casino gaming, entertainment,
and is the country’s premier source of online account wagering on horseracing events. In addition, the Company is one of the
world's largest producers and distributors of casual games for PCs and mobile devices. The Company offers casino gaming through
its casinos in Mississippi, its slot and video poker operations in Louisiana, its slot operations in Florida, and its casino in Maine.
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries,
Calder Race Course, Inc. and Tropical Park, Inc. which hold licenses to conduct pari-mutuel wagering and horseracing at Calder
Race Course (“Calder”), Arlington International Race Course, LLC (“Arlington”), Churchill Downs Louisiana Horseracing
Company, LLC (“CDI Louisiana”), Churchill Downs Louisiana Video Poker Company, LLC (“CD Louisiana Video”) and its
wholly-owned subsidiary, Video Services, LLC (“VSI”), SW Gaming, LLC (“Harlow’s”), Oxford Casino (“Oxford”), Magnolia
Hill, LLC ("Riverwalk"), Churchill Downs Technology Initiatives Company (“CDTIC”), the owner and operator of TwinSpires,
Big Fish Games, Inc. ("Big Fish Games"), United Tote Company, Inc. (“United Tote”), Churchill Downs Investment Company
(“CDIC”), Bluff Media ("Bluff"), as well as the Company's equity investment in HRTV, LLC (“HRTV”) and a 50% joint venture
in Miami Valley Gaming LLC ("MVG"). All significant intercompany balances and transactions have been eliminated in
consolidation.
The Consolidated Statements of Comprehensive Income include net revenues and operating expenses associated with the
Company's Racing, Casinos, TwinSpires, Big Fish Games and Other Investments operating segments and are defined as follows:
Racing: net revenues and corresponding operating expenses associated with commissions earned on wagering at the Company’s
racetracks, off-track betting facilities (“OTBs”) and simulcast fees earned from other wagering sites. In addition, amounts include
ancillary revenues and expenses generated by the pari-mutuel facilities including admissions, sponsorships and licensing rights,
food and beverage sales and fees for the alternative uses of its facilities.
Casinos: net revenues and corresponding operating expenses generated from slot machines, table games and video poker. In
addition, it includes ancillary revenues and expenses generated by food and beverage sales, hotel operations revenue and
miscellaneous other revenue.
TwinSpires: net revenues and corresponding operating expenses generated by the Company’s Advance Deposit Wagering (“ADW”)
business from wagering through the Internet, telephone or other mobile devices on pari-mutuel events. In addition, it includes the
Company’s information business that provides data information and processing services to the equine industry.
Big Fish Games: net revenues and corresponding expenses generated by premium paid, casual free-to-play and casino-style games
for PC, Mac, smartphone, tablet and online.
Other: net revenues and corresponding operating expenses generated by United Tote Company, the Company’s provider of pari-
mutuel wagering systems and Bluff.
Reclassifications
During the year ended December 31, 2013, the Company completed the sale of 100% of the assets of Fight! Magazine ("Fight"),
a division of Bluff which was acquired by the Company in February 2012. Net revenues, operating expenses and the loss on the
sale of Fight for the years ended December 31, 2013 and 2012, have been reclassified to discontinued operations. There was no
impact from these reclassifications on net earnings or cash flows.
Summary of Significant Accounting Policies
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. Checks issued but not presented to banks frequently result
in overdraft balances for accounting purposes and are classified as a current liability in the Consolidated Balance Sheets.
Restricted Cash
Restricted cash represents amounts due to horsemen for purses, stakes and awards as well as customer deposits collected for
advance deposit wagering. In addition, as of December 31, 2013, restricted cash included $8.8 million of funds related to the
Horse Racing Equity Trust Fund ("HRE Trust Fund") proceeds in Illinois, as further described in Note 21.
Foreign Currency Transactions
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Notes to Consolidated Financial Statements
The functional currency of the Company's international subsidiaries is the U.S. dollar, with the exception of the Big Fish Games
Luxembourg subsidiary, whose functional currency is the Euro. For subsidiaries with a functional currency of the U.S. dollar,
foreign currency denominated monetary assets and liabilities are remeasured into U.S. dollars at current exchange rates and foreign
currency denominated nonmonetary assets and liabilities are remeasured into U.S. dollars at historical exchange rates. Foreign
currency denominated revenue and expenses are remeasured at historical exchange rates. Gains or losses from foreign currency
remeasurement are included in other income and expense. For the Luxembourg subsidiary, assets and liabilities are translated into
U.S. dollars using exchange rates in effect at the end of a reporting period. Income and expense accounts are translated into U.S.
dollars using average rates of exchange. The net gain or loss resulting from translation is recorded as foreign currency translation
adjustment and included in accumulated other comprehensive income in stockholders' equity.
Allowance for Doubtful Accounts Receivable
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to
make required payments. The allowance is maintained at a level considered appropriate based on historical and other factors that
affect collectability. Uncollectible accounts receivable are written off against the allowance for doubtful accounts receivable when
management determines that the probability of payment is remote and collection efforts have ceased.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is calculated using the straight-line method over the estimated useful
lives of the related assets as follows: 10 to 40 years for grandstands and buildings, 2 to 10 years for equipment, 2 to 10 years for
furniture and fixtures and 10 to 20 years for tracks and other improvements.
Intangible Assets
The Company determines the initial carrying value of its intangible assets in accordance with purchase accounting based on the
anticipated future cash flows relating to the intangible asset. Definite-lived intangible assets are amortized over their estimated
useful lives ranging from one to thirty years using the straight-line method. Definite-lived intangible assets are reviewed for
impairment in accordance with the Company's policy for long-lived assets below.
Goodwill is tested for impairment annually as of March 31 or between annual tests if events occur or circumstances indicate there
may be impairment. Guidance related to goodwill impairment testing allows an entity the option to first assess qualitative factors
to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair
value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity
determines it is more likely than not that the fair value of a reporting unit is less than the carrying amount, then the Company
would perform the two step goodwill impairment test. The first step, used to identify potential impairment, is a comparison of the
reporting unit's estimated fair value to its carrying value, including goodwill. If the fair value of the reporting unit exceeds its
carrying value, applicable goodwill is considered not to be impaired. If the carrying value exceeds fair value, there is an indication
of impairment and the second step is performed to measure the amount of the impairment, if any. The second step of the goodwill
impairment test consists of comparing the implied fair value of reporting unit goodwill with the carrying amount of that goodwill.
If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized
equal to such excess. The implied fair value of goodwill is determined in the same manner, as when determining the amount of
goodwill recognized in a business combination.
The Company considers its slots gaming rights and trademarks as indefinite-lived intangible assets that do not require amortization
based on its future expectations to operate its casino facilities, as well as its historical experience in renewing these intangible
assets at minimal cost with various state gaming commissions. In addition, the Company expects to use the Big Fish Games name
indefinitely. These intangible assets are tested annually as of March 31, or more frequently if indicators of impairment exist. In
2013, in connection with its annual impairment testing, the Company adopted Financial Accounting Standards Board ("FASB")
ASU No. 2012-02, Intangibles-Goodwill and Other: Testing Indefinite-Lived Assets for Impairment which allows an entity the
option to first assess qualitative factors to determine whether it is more likely than not that the fair value of the indefinite-lived
intangible asset is less than its carrying amount. If the carrying amount of the slots gaming rights and trademark intangible assets
exceed their fair value, an impairment loss is recognized. The Company completed the required annual impairment tests of goodwill
and indefinite-lived intangible assets, and no adjustment to the carrying values of goodwill or indefinite-lived intangible assets
was required.
Long-lived Assets-Impairments
In the event that facts and circumstances indicate that the carrying amount of tangible assets and other long-lived assets or groups
of assets may be impaired, an evaluation of recoverability is performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the assets is compared to the assets’ carrying amount to determine if an impairment loss
should be recorded. The impairment loss is based on the excess, if any, of the carrying value over the fair value of the assets.
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Fair Value of Assets and Liabilities
The Company adheres to a hierarchy for ranking the quality and reliability of the information used to determine fair values. Assets
and liabilities that are carried at fair value are classified and disclosed in one of the following three categories: Level 1: Unadjusted
quoted market prices in active markets for identical assets or liabilities; Level 2: Unadjusted quoted prices in active markets for
similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or
inputs other than quoted prices that are observable for the asset or liability; and Level 3: Unobservable inputs for the asset or
liability. The Company endeavors to utilize the best available information in measuring fair value. Financial assets and liabilities
are classified based on the lowest level of input that is significant to the fair value measurement.
Internal Use Software
The Company capitalized internal use software primarily related to TwinSpires of approximately $5.3 million, $7.4 million and
$5.2 million during the years ended December 31, 2014, 2013 and 2012, respectively. The estimated useful life of costs capitalized
is generally three years. During the years ended December 31, 2014, 2013 and 2012, the amortization of capitalized costs totaled
approximately $6.0 million, $5.1 million and $4.2 million, respectively. Capitalized internal use software is included in property
and equipment, net. The Company records internal use software in accordance with current accounting guidance governing
computer software developed or obtained for internal use.
Loan Origination Costs
During the years ended December 31, 2014, 2013 and 2012, the Company incurred $1.1 million, $2.3 million and $0.1 million,
respectively, in loan origination costs associated with the second, third and fourth amended and restated credit agreements, which
were capitalized and are being amortized as interest expense over the remaining term of the credit facility.
Debt Issuance Costs
Debt issuance costs are deferred and amortized to interest expense using the effective interest method over the contractual term
of the underlying indebtedness. During the years ended December 31, 2014 and 2013, the Company incurred total debt issuance
costs of $6.3 million associated with the issuance of the Senior Unsecured Notes.
Investment in and Advances to Unconsolidated Affiliates
The Company has investments in unconsolidated affiliates accounted for under the equity method. Under the equity method,
carrying value is adjusted for the Company's share of the investees' earnings and losses, as well as capital contributions to and
distributions from these companies. Distributions in excess of equity method earnings are recognized as a return of investment
and recorded as investing cash inflows in the consolidated statements of cash flows. The Company classifies income and losses
as well as gains and impairments related to its investments in unconsolidated affiliates as a component of its other income (expense).
The Company evaluates its investment in unconsolidated affiliates for impairment whenever events or changes in circumstances
indicate that the carrying value of its investment may have experienced an "other-than-temporary" decline in value. If such
conditions exist, the Company compares the estimated fair value of the investment to its carrying value to determine if an impairment
is indicated and determines whether the impairment is "other-than-temporary" based on its assessment of all relevant factors,
including consideration of the Company's intent and ability to retain its investment. The Company estimates fair value using a
discounted cash flow analysis based on estimated future results of the investee.
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Revenue Recognition
Pari-mutuel revenues are recognized upon occurrence of the live race that is presented for wagering and after that live race is made
official by the respective state’s racing regulatory body. Casino revenues represent net casino wins, which is the difference between
casino wins and losses. Other operating revenues such as admissions, programs and concession revenues are recognized once
delivery of the product or services has occurred.
Racing and TwinSpires revenues are generated by pari-mutuel wagering on live and simulcast racing content. Live racing handle
includes patron wagers made on live races at the Company’s racetracks and also wagers made on imported simulcast signals by
patrons at the Company’s racetracks during live meets. Import simulcasting handle includes wagers on imported signals at the
Company’s racetracks when the respective tracks are not conducting live racing meets, at the Company’s OTBs and through the
Company’s ADW providers throughout the year. Export handle includes all patron wagers made on live racing signals sent to
other tracks, OTBs and ADW providers. Advance deposit wagering consists of patron wagers through an advance deposit account.
The Company retains as revenue a predetermined percentage or commission on the total amount wagered, and the balance is
distributed to the winning patrons. The gross percentages earned approximated 11% of handle for the Racing segment and 19%
of handle for the TwinSpires segment. The Company is subject to pari-mutuel and casino taxes based on pari-mutuel and casino
revenues in the jurisdictions in which it operates. These taxes are recorded as an operating expense in the Consolidated Statements
of Comprehensive Income.
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Notes to Consolidated Financial Statements
Big Fish Games Deferred Revenue and Revenue Recognition
Big Fish Games revenue is primarily derived from the sale of premium paid, casino and casual free-to-play games and virtual
goods within games. Premium game revenue is derived from a subscription business, the Big Fish Game Club, and from the sale
of specific games. Subscribers receive a game credit each month with their subscription. The Company determined that the price
of a monthly subscription is equivalent to the vendor specific objective evidence (“VSOE”) of the game credit and that the additional
benefits of the monthly subscription are marketing and promotional activities. The value of the game credit is recognized when
a customer redeems the game credit. The Company also sells game credits on its website that are redeemable for the download
of a game. Revenue is recognized when the customer redeems the game credit for a game.
The Company records breakage revenue, which is recognized based on historical game credit redemption patterns and represents
the balance of credits where it has determined the likelihood of redemption is remote or the credits have legally expired.
The Company offers casino and casual games that customers can play at no cost and can purchase virtual goods within games to
enhance the game playing experience. These games are distributed primarily through third party mobile platform providers,
including by not limited to, Apple and Google. Once downloaded, players can purchase in-game virtual currency which is
redeemable in the game for virtual goods. Substantially all of the virtual goods can be consumed by a player action. The Company
recognizes revenue when persuasive evidence of an arrangement exists, the service has been provided to the user, the price paid
by the user is fixed or determinable, and collectability is reasonably assured. Determining whether and when some of these criteria
have been satisfied requires judgments that may have a significant impact on the timing and amount of revenue reported in each
period. For the purpose of determining when the service has been provided to the player, the Company has determined that an
implied obligation exists to the paying user to continue to make available the purchased virtual goods within the game over the
estimated average playing period of paying player for the game, which represents the Company's best estimate of the estimated
average life of the virtual goods. For casino games, the estimated average life of the virtual goods is estimated to be the time
period over which virtual goods are consumed or approximately four days. For all other casual games, the average playing period
of paying players of approximately four months represents the Company's best estimate of the estimated average life of virtual
goods.
The Company receives reports from third party mobile platform providers which breakdown the virtual goods purchased in casual
and casino games for a given time period. The proceeds from the sale of virtual goods are recorded as deferred revenue, and
recognized as revenue over the estimated average life of the virtual goods. The Company computes its estimated life of virtual
goods at least once each year, and more frequently if qualitative evidence exists that would indicate a possible change including
consideration of changes in the characteristics of games.
Principal Agent Considerations
In accordance with Accounting Standards Codification (“ASC”) 605-45, Revenue Recognition: Principal Agent Considerations,
the Company evaluates its digital storefront agreements in order to determine whether or not it is acting as the principal or as an
agent when selling the Company's games, which it considers in determining if revenue should be reported gross or net. The
Company primarily uses digital storefronts for distributing its casino and casual free-to-play games. Key indicators that it evaluates
in order to reach this determination include:
the terms and conditions of the Company contracts with the digital storefronts;
the party responsible for billing and collecting fees from the end-users, including the resolution of billing disputes;
•
•
• whether the Company is paid a fixed percentage of the arrangement’s consideration or a fixed fee for each game;
•
•
the party which sets the pricing with the end-user, has the credit risk and provides customer support; and
the party responsible for the fulfillment of the game and that determines the specifications of the game.
Based on the evaluation of the above indicators, the Company has determined that it is generally acting as a principal and is the
primary obligor to end-users for games distributed through digital storefronts, and the Company therefore recognizes revenue
related to these arrangements on a gross basis.
Customer Loyalty Programs
The Company's customer loyalty programs offer incentives to customers who wager at the Company’s racetracks, through its
advance deposit wagering platform, TwinSpires.com, or at its casino facilities. The TSC Elite program, which was introduced
during the year ended December 31, 2012, to replace the previous program, TwinSpires Club, is for pari-mutuel wagering at the
Company’s racetracks or through TwinSpires.com. The Player’s Club is offered at the Company’s casino facilities in Louisiana,
Florida, Maine and Mississippi. Under the programs, customers are able to accumulate points over time that they may redeem for
cash, free play, merchandise or food and beverage items at their discretion under the terms of the programs. As a result of the
ability of the customer to accumulate points, the Company accrues the cost of points, after consideration of estimated forfeitures,
as they are earned. For the TSC Elite program, the estimated value of the cost to redeem points is recorded as the points are earned.
To arrive at the estimated cost associated with points, estimates and assumptions are made regarding incremental costs of the
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Notes to Consolidated Financial Statements
benefits, rates and the mix of goods and services for which points will be redeemed. For the Player’s Cub program, the retail value
of the points-based cash awards or complimentary goods and services is netted against revenue as a promotional allowance. As
of December 31, 2014 and 2013, the outstanding reward point liability was $1.7 million and $2.1 million, for each respective
period.
Account Wagering Deposit Liabilities
Account wagering deposit liabilities consist of deposits received from TwinSpires.com and Velocity customers, to be used to fund
wagering through the TwinSpires players' accounts. Account wagering deposit liability balances are also classified as restricted
cash within the Company's Consolidated Balance Sheets.
Promotional Allowances
Promotional allowances, which include the Company’s customer loyalty programs, primarily consist of the retail value of
complimentary goods and services provided to guests at no charge. The retail value of these promotional allowances is included
in gross revenue and then deducted to arrive at net revenue.
During the years ended December 31, 2014, 2013 and 2012, promotional allowances of $32.5 million, $33.0 million and $21.5
million, respectively, were included as a reduction to net revenues. During those periods, TwinSpires promotional allowances
were $12.5 million, $12.3 million and $9.3 million, Casino promotional allowances were $19.2 million, $19.8 million and $11.2
million, and Racing promotional allowances were $0.7 million, $0.9 million and $1.0 million, respectively. The estimated cost
of providing promotional allowances is included in operating expenses for the years ended December 31, 2014, 2013 and 2012
and totaled $9.1 million, $9.5 million and $5.7 million, respectively.
Deferred Revenue
Deferred revenue includes advance sales related to the Kentucky Derby and Kentucky Oaks races in Kentucky and other advance
billings on racing events. Revenues from these advance billings are recognized when the related event occurs. Deferred revenue
also includes advance sales of Personal Seat Licenses (“PSLs”) and luxury suites. PSLs represent the ownership of a specific seat
for the Kentucky Derby, Kentucky Oaks and Breeders’ Cup races at Churchill Downs and have a contractual life of either one,
two, three, five or thirty years.
Revenue from PSLs is recognized when the Kentucky Derby, Kentucky Oaks and Breeders’ Cup races occur on a ratable basis
over the term of the contract. Luxury suites are sold for specific racing events as well as for a predetermined contractual term.
Revenue related to the sale of luxury suites is recognized as they are utilized when the related event occurs.
Pari-mutuel and Casino Taxes
The Company recognizes pari-mutuel and casino tax expense based on the statutorily required percentage of revenue that is required
to be paid to state and local jurisdictions in the states in which wagering occurs. Individual states and local jurisdictions set pari-
mutuel tax rates which range from 0.5% to 10.0% of the total handle wagered by patrons. Casino tax rates range from 1.5% to
46% of net casino revenue.
Purse Expense
The Company recognizes purse expense based on the statutorily required percentage of revenue that is required to be paid out in
the form of purses to the qualifying finishers of horseraces run at the Company’s racetracks in the period in which wagering occurs.
The Company incurs a liability for all unpaid purses to be paid out. The Company may pay out purses in excess of statutorily
required amounts resulting in purse overpayments, which are expensed as incurred. Recoveries of purse overpayments are
recognized in the period they are realized.
Income Taxes
In accordance with the liability method of accounting for income taxes, the Company recognizes the amount of taxes payable or
refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been
recognized in the consolidated financial statements or tax returns.
Adjustments to deferred taxes are determined based upon the changes in differences between the book basis and tax basis of assets
and liabilities, measured by enacted tax rates the Company estimates will be applicable when these differences are expected to
reverse. Changes in current tax laws, enacted tax rates or the estimated level of taxable income or non-deductible expenses could
change the valuation of deferred tax assets and liabilities and affect the overall effective tax rate and tax provision.
When tax returns are filed, it is highly certain that some positions taken will be sustained upon examination by the taxing authorities,
while others are subject to uncertainty about the merits of the position taken or the amount of the position that will be ultimately
sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will be sustained upon examination, including the
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resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax
positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more
than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated
with the tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax
benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing
authorities upon examination.
Uncashed Winning Tickets
The Company’s policy for uncashed winning pari-mutuel tickets follows the requirements as set forth by each state’s pari-mutuel
wagering laws. The Company will either remit uncashed pari-mutuel ticket winnings to the state according to the state’s escheat
or pari-mutuel laws or will maintain the liability during the required holding period according to state law at which time the
Company will recognize it as income.
Insurance Recoveries
In connection with losses incurred from natural disasters, insurance proceeds are collected on existing business interruption and
property and casualty insurance policies. When losses are sustained in one accounting period and the amounts to be recovered
are collected in a subsequent accounting period, management uses estimates and judgment to determine the amounts that are
probable of recovery. Estimated losses, net of anticipated insurance recoveries, are recognized in the period the natural disaster
occurs and the amount of the loss is determinable. To the extent that insurance proceeds received are less than the carrying value
of the assets impaired, the proceeds are reported in the statement of cash flows as an investing activity. Insurance recoveries in
excess of estimated losses are recognized when realizable and are reported in net earnings in the statement of cash flows as an
operating activity.
Workers’ Compensation and General Liability Self-Insurance
The Company is substantially self-insured for losses related to workers’ compensation and general liability claims with stop-loss
insurance for both coverages. Losses are accrued based upon the Company’s undiscounted estimates of the aggregate liability for
claims incurred based on historical experience and certain actuarial assumptions. Expected recoveries from third party insurance
companies are also estimated and accrued.
Advertising
The Company expenses the costs of general advertising and associated promotional expenditures at the time the costs are incurred.
During the years ended December 31, 2014, 2013 and 2012, the Company incurred advertising expenses of approximately $9.9
million, $9.5 million and $6.9 million, respectively.
Share-Based Compensation
All share-based payments to employees, including grants of employee stock options and restricted stock, are recognized as
compensation expense over the service period based on the fair value on the date of grant.
Computation of Net Earnings per Common Share
Net earnings per common share is presented for both basic earnings per common share (“Basic EPS”) and diluted earnings per
common share (“Diluted EPS”). Earnings attributable to securities that are deemed to be participating securities are excluded
from the calculation of Basic EPS using the two-class method. The Company has determined that employee restricted stock grants,
including awards granted under its long-term incentive plans, are participating securities. Basic EPS is based upon the weighted
average number of common shares outstanding during the period, excluding unvested restricted stock and stock options held by
employees. Diluted EPS is based upon the weighted average number of common and potential common shares outstanding during
the period. Potential common shares result from the assumed exercise of outstanding stock options as well as unvested restricted
stock, the proceeds of which are then assumed to have been used to repurchase outstanding common stock using the treasury stock
method. For periods that the Company reports a net loss, all potential common shares are considered anti-dilutive and are excluded
from calculations of Diluted EPS. For periods when the Company reports net earnings, potential common shares with exercise
prices in excess of the Company’s average common stock fair value for the related period are considered anti-dilutive and are
excluded from calculations of Diluted EPS. See Note 18 for further details.
Use of Estimates and Critical Accounting Policies
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 date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The Company’s most significant estimates relate to the valuation of property and
equipment, income tax liabilities, goodwill and other intangible assets, which may be significantly affected by changes in the
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regulatory environment in which the Company operates, and to the aggregate costs for self-insured liability claims.
Comprehensive Income
The Company's accumulated other comprehensive income, as of December 31, 2014, consisted of foreign currency translation
losses.
Reclassifications
Certain financial statement accounts have been reclassified in prior years to conform to current year presentation. There was no
impact from these reclassifications on total assets, total liabilities, total net revenues, operating income or cash flows.
Recent Accounting Pronouncements
In August 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-15, Disclosure of Uncertainties about an
Entity's Ability to Continue as a Going Concern, which explicitly requires management to assess an entity's ability to continue as
a going concern, and to provide related footnote disclosures in certain circumstances. Management will be required to assess, in
each interim and annual period, if there is substantial doubt of an entity's ability to continue as a going concern as evidenced by
relevant known or knowable conditions including an entity's ability to meet its future obligations. Management will be required
to provide disclosures regardless of whether substantial doubt is alleviated by management's plans. The guidance will become
effective for annual fiscal periods ending after December 15, 2016.
In May, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASU 2014-09"). ASU 2014-09 is
a new comprehensive standard for revenue recognition that is based on the core principle that revenue be recognized in a manner
that depicts the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects
to be entitled in exchange for those goods or services. Under the new standard, a good or service is transferred to the customer
when, or as, the customer obtains control of the good or service, which differs from the risk and rewards approach under current
guidance. The new standard provides guidance for transactions that were not previously addressed comprehensively, including
service revenue and contract modifications, eliminates industry-specific revenue recognition guidance, including that for software,
and requires enhanced disclosures about revenue. ASU 2014-09 affects any entity that enters into contracts with customers to
transfer goods or services, except for certain contracts within the scope of other standards, such as leases, and is also applicable
to transfers of nonfinancial assets outside of the entity's ordinary activities. ASU 2014-09 will be effective for the Company on
January 1, 2017 and may be adopted through either retrospective application to all periods presented in the financial statements
or through a cumulative effect adjustment to retained earnings by applying the new guidance to contracts that still require
performance at the effective date. Early adoption is not permitted. The Company is in the process of evaluating the new standard
and cannot currently estimate the financial statement impact of adoption.
In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements and Property Plant and Equipment:
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. Under ASU 2014-08, only a disposal
of a component or a group of components that represents a strategic shift that has or will have a major effect on an entity's operational
and financial results will qualify as a discontinued operation. In addition, under the revised definition, reporting discontinued
operations will no longer be precluded when the operations and cash flows of the disposed component have not been eliminated
from ongoing operations or when there is a significant continuing involvement with the component after disposal. The amendments
in ASU 2014-08 will be effective prospectively for the Company in the first quarter of 2015. The Company does not anticipate a
material impact to its financial statements from ASU 2014-08, absent any disposals of components or groups of components that
represent a strategic shift having a major effect on the Company's operation and financial results in future periods.
NOTE 2—ACQUISITIONS AND NEW VENTURES
Big Fish Games
On December 16, 2014, the Company completed the acquisition of Big Fish Games. Big Fish Games, which has locations in
Seattle, Washington, Oakland, California and in Luxembourg employs approximately 580 employees and develops casual games
for PCs and mobile devices worldwide. Big Fish Games operates in three business lines: premium paid, casino and casual free-
to-play. The Company acquired Big Fish Games to leverage its casino and casual game experience, assembled workforce and to
position itself in the mobile and online game industry. The Company financed the acquisition with borrowings under its Amended
and Restated Credit Agreement (the “Senior Secured Credit Facility”) and the addition of a $200 million Term Loan Facility
(“Term Loan”) to the existing Senior Secured Credit Facility.
The purchase price consideration was $838.3 million, composed of $401.7 million in cash, a deferred payment to the founder of
Big Fish Games of $85.3 million, payable over three years and recorded at fair value of $78.0 million as of the acquisition date,
an estimated payable to the Big Fish Games equity holders related to an income tax refund of $18.1 million and $15.8 million
payable in 157,115 shares of the common stock of the Company. In addition, the Company may be required to pay additional
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variable cash consideration that is contingent upon the achievement of certain performance milestones of Big Fish Games through
December 31, 2015 and is limited to a maximum of $350 million based on achievement of certain non-GAAP earnings targets
before interest and tax. The estimated fair value of the earnout liability at the acquisition date was $324.7 million. The Company
estimated the fair value of the deferred payment and the earnout liability using a discounted cash flows analysis over the period
in which the obligation is expected to be settled, and applied a discount rate based on the Company’s cost of debt. The cost of
debt as of the closing date was based on the observed market yields of the Company’s Senior Unsecured Notes issued in December
of 2013 and was adjusted for the difference in seniority and term of the deferred payment and the earnout liability. See Note 16
for further discussion of the fair value measurement of the deferred payment and the earnout liability.
The fair values recorded were based upon a preliminary valuation. Estimates and assumptions used in such valuation are subject
to change, which could be significant, within the measurement period up to one year from the acquisition date. The primary areas
of the preliminary valuation that are not yet finalized relate to the fair value of amounts for income taxes, adjustments to working
capital, and the final amount of residual goodwill. The Company expects to continue to obtain information to assist it in determining
the fair values of the net assets acquired at the acquisition date during the measurement period. The following table summarizes
(in thousands) the preliminary fair value of the assets acquired and liabilities assumed, net of cash acquired of $34.7 million, at
the date of acquisition.
Accounts receivable
Income taxes receivable
Prepaid expenses
Deferred income taxes
Other assets
Property and equipment
Goodwill
Other intangible assets
Total assets acquired
Accounts payable
Accrued expenses
Income taxes payable
Deferred revenue
Deferred income taxes
Other liabilities
Total liabilities acquired
Purchase price, net of cash acquired
The preliminary fair value of other intangible assets consists of the following (in thousands):
Total
19,274
18,087
9,727
905
1,780
14,632
538,904
362,863
966,172
9,064
16,987
210
37,250
96,182
2,821
162,514
803,658
$
$
Tradename
Customer relationships
Developed Technology
In-Process Research & Development
Strategic Developer Relationships
Total intangible assets
Fair Value
Recognized
$
200,000
32,663
87,000
12,700
30,500
$
362,863
Weighted-
Average
Useful Life
N/A
3.0 years
4.0 years
5.0 years
6.0 years
The Company engaged a third-party valuation firm to assist management in its analysis of the fair value of tangible and intangible
assets acquired. All estimates, key assumptions and forecasts were either provided by or reviewed by the Company. While the
Company chose to utilize a third-party valuation firm, the fair value analysis and related valuation represents the conclusions of
management and not the conclusions of any third party.
86
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the related
assets as follows: 1 to 5 years for computer hardware and software and 2 to 10 years for office furniture, fixtures and equipment.
The estimated useful lives for leasehold improvements is 3 to 10 years based on the shorter of the estimated useful life of the
improvement or the lease term.
The tradename was valued using the relief-from-royalty method of the income approach, which estimates the fair value of the
intangible asset by discounting the fair value of the hypothetical royalty payments a market participant would be willing to pay
to enjoy the benefits of the asset. A royalty rate of 5.0% was used based on a review of third-party licensing agreements given
Big Fish Games’ brand recognition and competitive position in the market. The tradename was assigned an indefinite life based
on the Company’s intention to keep the Big Fish Games name for an indefinite period of time.
In valuing the customer relationships, the replacement cost method of the cost approach was used. The value was determined
based on the number of paying customers and average cost per customer. Developed technology was valued using the relief-from-
royalty method of the income approach based upon revenues derived from games within the premium paid, casino and casual
free-to-play categories. Big Fish Games pays royalties of 10.0% and 25.0% to its developers and these rates were used in the
valuation.
As of the valuation date, Big Fish Games had a portfolio of free-to-play games expected to launch in 2015 and one game expected
to launch in 2016. The Company estimated that the majority of the revenues associated with games launched in 2015 would be
5 years and the game launched in 2016 would be 6 years. The fair value was calculated using the relief-from-royalty method of
the income approach and a royalty rate of 10.0% was used in the valuation.
Strategic developers are third-party alliance partners that develop content exclusively for Big Fish Games. In the valuation of
strategic developer relationships, the comparative method of the income approach was used to calculate the fair value. In estimating
the fair value, the analysis considered the differences in the present value of the cash flows associated with the strategic developers
and without the strategic developers.
As of the valuation date, the fair value of Big Fish Games’ deferred revenue was $37.3 million, which reflects the costs including
network and delivery, royalties, third party platform fees, game operations and corporate expenses, plus a market participant
margin.
Goodwill of $538.9 million arising from the acquisition consisted largely of projected future revenue and profit growth, including
benefits from Big Fish Games’ expertise in the mobile and online games industry, particularly social casinos. All of the goodwill
was assigned to Big Fish Games, which remains a stand-alone business within the Company for purposes of segment reporting.
None of the goodwill recognized will be deducted for tax purposes.
The acquisition of Big Fish Games is included in Acquisition of businesses, net of cash acquired in the investing section of the
Consolidated Statements of Cash Flows in the amount $366.0 million, net of cash acquired of $34.7 million. Included in non-
cash investing activities is common stock issued in connection with the acquisition of $15.8 million, earnout liability of $324.7
million, and deferred payments of $97.1 million.
Acquisition-related costs in the amount of $6.4 million were charged directly to operations and were included in Selling, general
and administrative expenses on the Consolidated Statements of Comprehensive Income. Acquisition-related costs include legal,
advisory, valuation, accounting and other fees incurred to effect the business combination.
F
o
r
m
1
0
-
K
During the period from December 16, 2014 through December 31, 2014, Big Fish Games contributed revenues of $13.9 million
and loss from continuing operations before provision for income taxes of $2.9 million.
Saratoga Harness Racing, Inc. ("SHRI") Joint Venture
On May 13, 2014, the Company entered into a 50% joint venture with SHRI to bid on the development, construction and operation
of the Capital View Casino & Resort located in the Capital Region near Albany, New York. On June 30, 2014, the Company filed
an application with the New York State Facility Location Board to obtain a license to build and operate a facility with approximately
1,500 slot machines, 56 table games, a 100-room hotel and multiple entertainment and dining options. On December 17, 2014,
the New York State Facility Location Board recommended that the Capital Region license be granted to another bidder.
During the year ended December 31, 2014, the Company incurred $1.0 million in equity losses in our other investments segment
associated with the license application process and funded $3.3 million to the joint venture. As a result of the bid decision, the
Company recorded an impairment loss of $1.6 million to reduce the Company's investment in the joint venture to its fair market
value.
Oxford Casino Acquisition
On July 17, 2013, the Company completed its acquisition of Oxford Casino (“Oxford”) in Oxford, Maine for cash consideration
of approximately $168.6 million. The transaction included the acquisition of a 25,000-square-foot casino and various dining
87
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
facilities. The acquisition continued the Company's diversification and growth strategies to invest in assets with rates of returns
attractive to the Company's shareholders. The Company financed the acquisition with borrowings under its Senior Secured Credit
Facility.
During the years ended December 31, 2014 and 2013, Oxford recognized revenues of $76.5 million and $34.4 million, respectively,
and earnings from continuing operations of $14.0 million and $6.1 million, respectively, subsequent to its acquisition by the
Company. The following table summarizes (in thousands) the fair values of the assets acquired and liabilities assumed, net of
cash acquired of $13.7 million, at the date of the acquisition.
Accounts receivable
Prepaid expenses
Inventory
Property and equipment
Goodwill
Other intangible assets
Total assets acquired
Accounts payable
Accrued expenses
Other liabilities
Total liabilities acquired
Purchase price, net of cash acquired
The fair value of other intangible assets consists of the following (in thousands):
Slot gaming rights
Customer relationships
Tradename
Other intangibles
Total intangible assets
$
Total
252
675
124
45,105
50,202
64,693
161,051
1,063
5,111
5
6,179
$
154,872
Total
58,500
1,700
2,400
2,093
64,693
$
$
Depreciation of property and equipment acquired is calculated using the straight-line method over the estimated remaining useful
lives of the related assets as follows: 2 to 5 years for computer hardware and software, 2 to 9 years for equipment, 6 years for
furniture and fixtures, 40 years for buildings and 14 years for building improvements. Amortization of definite-lived intangible
assets acquired is calculated using the straight-line method over the estimated useful life of the related intangible asset. Intangible
assets include customer relationships valued at $1.7 million with a life of 6 years. Other intangibles include table game fees paid
to the State of Maine which is amortized over the 20-year contract period. Slot gaming rights and tradename are determined to
have indefinite lives and are not being amortized.
Goodwill of $50.2 million was recognized given the expected contribution of the Oxford acquisition to the Company's overall
business strategy. The entire balance of goodwill has been allocated to the Casinos business segment. The Company expects to
deduct goodwill for tax purposes.
Pro Forma (unaudited)
The following table illustrates the effect on net revenues, earnings from continuing operations and earnings from continuing
operations per common share as if the Company had acquired Big Fish Games and Oxford as of the beginning of 2013. The pro
forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations
that would have occurred had the acquisitions of Big Fish Games and Oxford been consummated at the beginning of 2013.
88
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Net revenues
Earnings from continuing operations
Year Ended December 31,
2014
1,126,592
64,145
$
$
2013
1,085,518
11,182
$
$
For the year ended December 31, 2013 earnings from continuing operations includes Company and Big Fish related non-
recurring acquisition costs of $23.1 million.
NOTE 3—DISCONTINUED OPERATIONS
Sale of Fight! Magazine
On December 16, 2013, the Company completed the sale of 100% of the assets of Fight! Magazine ("Fight") for an immaterial
cash consideration. Fight is a division of Bluff which was acquired by the Company in February 2012. Net revenues, operating
expenses and the loss on sale of Fight for the years ended December 31, 2013 and 2012, have been reclassified to discontinued
operations.
Hollywood Park Racetrack
The Company recognized operating expenses of $0.1 million during the year ended December 31, 2013, from adjustments related
to workers' compensation reserves retained by the Company subsequent to its sale of Hollywood Park Racetrack during 2005
which have been recorded in discontinued operations.
Financial Information
Fight and Hollywood Park have been accounted for as discontinued operations. Accordingly, the results of operations of the sold
businesses for all periods presented and the loss on the sold businesses have been classified as discontinued operations, net of
income taxes, in the Consolidated Statements of Comprehensive Income. Set forth below is a summary of the results of operations
of discontinued businesses for the years ended December 31, 2014, 2013 and 2012 (in thousands):
Year ended December 31,
2013
2012
2014
$
1,087
Net revenues
Operating expenses
Selling, general and administrative expenses
Operating (loss) gain
Other income (expense)
(Loss) earnings from operations before income taxes
Income tax benefit (provision)
(Loss) gain from operations
Loss on sale of assets, net of income taxes
Net (loss) gain
NOTE 4—NATURAL DISASTERS
Kentucky Hailstorm
$
— $
—
—
—
—
—
—
—
—
$
— $
632
857
—
(225)
145
(80)
30
(50)
(83)
(133) $
F
o
r
m
1
0
-
K
885
—
202
(2)
200
(76)
124
—
124
On April 28, 2012, a hailstorm caused damage to portions of Louisville, Kentucky including Churchill Downs Racetrack ("Churchill
Downs") and its separate training facility known as Trackside Louisville. Both locations sustained damage to their stable areas
as well as damages to administrative offices and several other structures. The Company carries property and casualty insurance,
subject to a $0.5 million deductible. During the year ended December 31, 2012, the Company recorded a reduction of property
and equipment of $0.6 million and received $1.1 million from its insurance carriers in partial settlement of its claim. The Company
recognized insurance recoveries, net of losses of $0.5 million during the year ended December 31, 2012. During the year ended
December 31, 2013, the Company received an additional $0.4 million and recognized insurances recoveries, net of losses of $0.4
million as a component of operating income during 2013. During the year ended December 31, 2014, the Company received an
additional $0.4 million from its insurance carriers and recognized insurance recoveries, net of losses of $0.4 million as a component
of operating income. The insurance claims for this event have been finalized, and the Company does not expect to receive additional
funds from this claim.
89
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Mississippi River Flooding
As a result of the Mississippi River flooding during 2011, the Company temporarily ceased operations at Harlow’s Casino Resort
& Spa (“Harlow’s”) on May 6, 2011, and the Board of Mississippi Levee Commissioners ordered the closure of the Mainline
Mississippi River Levee on May 7, 2011. On May 12, 2011, the property sustained damage to its 2,600-seat entertainment center
and a portion of its dining facilities. On June 1, 2011, Harlow’s resumed casino operations with temporary dining facilities. During
December 2012 and January 2013, the Company completed the renovation and improvement projects, which included a new buffet
area, steakhouse, business center, spa facility, fitness center, pool and a multi-purpose event center.
The Company carries flood, property and casualty insurance as well as business interruption insurance subject to a $1.3 million
deductible for damages. As of December 31, 2012, the Company recorded a reduction of property and equipment of $8.5 million
and incurred $2.0 million in repair expenditures. During the year ended December 31, 2011, the Company received $3.5 million
from its insurance carriers in partial settlement of its claim. This amount has been included as insurance recoveries, summarized
below, for the year ended December 31, 2012. In addition, the Company finalized its claim with its insurance carriers and received
$12.0 million during the year ended December 31, 2012. The Company recognized insurance recoveries, net of losses, of $5.0
million during the year ended December 31, 2012. The insurance claims for this event have been finalized with the Company's
insurance carriers, and it does not expect to receive additional funds or recognize additional income from the claim.
Mississippi Wind Damage
On February 24, 2011, severe storms caused damage to portions of Mississippi, including Greenville, Mississippi, the location of
Harlow’s. The Harlow’s property sustained damage to a portion of the hotel, including its roof, furniture and fixtures in
approximately 61 hotel rooms and fixtures in other areas of the hotel. The hotel was closed to customers for renovations following
the storm damage and reopened during June 2011. The Company carries property and casualty insurance as well as business
interruption insurance subject to a $0.1 million deductible for damages. As of December 31, 2012, the Company recorded a
reduction of property and equipment of $1.4 million and incurred $0.4 million in repair expenditures. The Company filed a
preliminary claim with its insurance carriers for $1.0 million in damages, which it received during the second quarter of 2011.
The Company received an additional $3.4 million from its insurance carriers during the year ended December 31, 2012. The
Company recognized insurance recoveries, net of losses, of $1.5 million during the year ended December 31, 2012. The insurance
claims for this event have been finalized with the Company's insurance carriers, and it does not expect to receive additional funds
or recognize additional income from the claim.
Financial Information
The casualty losses and related insurance proceeds have been included as components of operating income in the Company’s
Consolidated Statements of Comprehensive Income. Set forth below is a summary of the impact of the natural disasters on the
results of operations of the Company for the years ended December 31, 2014, 2013 and 2012, respectively, (in thousands):
Racing
Total
Racing
Total
Year Ended December 31, 2014
Casualty Losses
Insurance
Recoveries
Insurance
Recoveries, Net
of Losses
$
$
— $
— $
(431) $
(431) $
(431)
(431)
Year Ended December 31, 2013
Casualty Losses
Insurance
Recoveries
Insurance
Recoveries, Net
of Losses
$
$
— $
— $
(375) $
(375) $
(375)
(375)
90
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Year Ended December 31, 2012
Casualty Losses
Insurance
Recoveries
Insurance
Recoveries, Net
of Losses
$
$
$
12,331
644
12,975
$
$
$
(18,856) $
(1,125) $
(19,981) $
(6,525)
(481)
(7,006)
Casinos
Racing
Total
NOTE 5—ACCOUNTS RECEIVABLE
The Company's accounts receivable at December 31, 2014 and 2013 is comprised of the following (in thousands):
Simulcast and ADW receivables
Trade receivables
PSL and hospitality receivables
Other receivables
Allowance for doubtful accounts
Total
2014
2013
$
$
17,282
46,985
10,877
4,992
80,136
(4,246)
75,890
$
$
19,768
16,129
9,410
5,603
50,910
(4,338)
46,572
At December 31, 2014, Big Fish Games' accounts receivable was $28.9 million included within trade receivables and primarily
represents amounts due from mobile, retail and publishing partners.
During the years ended December 31, 2014, 2013 and 2012, the Company recognized $0.7 million, $0.5 million and $0.9 million,
respectively, of bad debt expense in its TwinSpires segment associated with customer wagering on TwinSpires.com. In addition,
during the year ended December 31, 2013, the Company recognized $2.5 million of bad debt expense associated with the
collectibility of a third-party deposit related to an Internet gaming license.
NOTE 6—PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following (in thousands):
Land
Grandstands and buildings
Equipment
Furniture and fixtures
Tracks and other improvements
Construction in progress
Accumulated depreciation
Total
F
o
r
m
1
0
-
K
2014
2013
$
118,658
$
439,625
237,867
51,815
142,975
15,427
1,006,367
(411,052)
595,315
$
$
118,165
435,125
208,966
47,718
121,085
15,214
946,273
(360,775)
585,498
Depreciation expense was approximately $55.0 million, $49.6 million and $44.4 million for the years ended December 31, 2014,
2013 and 2012, respectively, and is classified in operating expenses in the Consolidated Statements of Comprehensive Income.
On July 1, 2014, the Company ceased its pari-mutuel operations at Calder and finalized an agreement with The Stronach Group
("TSG") under which TSG will operate, at TSG's expense, live racing and maintain certain facilities used for racing and training
at Calder through an agreement which expires on December 31, 2020. As a result, the Company assessed alternative potential
uses of the Calder facility and certain assets not required to be maintained under lease agreement. During the year ended December
31, 2014 the Company recognized accelerated depreciation expense of $2.4 million, primarily related to Calder's barns, which are
not expected to be utilized subsequent to December 31, 2014. During 2015, the Company will continue to assess potential
alternative uses of the Calder facility not associated with the lease agreement.
91
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
On November 4, 2014, the Company ceased operations of Luckity and recorded an impairment charge of $3.2 million in its
TwinSpires segment for property and equipment specifically associated with Luckity. Prior to this date, the Company was still
investing in this business and actively marketing to Luckity customers.
During 2012, the Company began an assessment of potential alternative uses to its Trackside training facility at Churchill Downs.
As such, the Company reviewed the useful lives of assets at this facility and commenced accelerated depreciation on certain of
its long-term assets, resulting in additional depreciation expense of $1.5 million and $0.9 million during the years ended December
31, 2013 and 2012, respectively, related to this facility. The Trackside assets were fully depreciated as of December 31, 2013.
NOTE 7—INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
Miami Valley Gaming Joint Venture
During March 2012, the Company entered into a 50% joint venture with Delaware North Companies Gaming & Entertainment
Inc. (“DNC”) to develop a new harness racetrack and video lottery terminal (“VLT”) gaming facility in Lebanon, Ohio. Through
the joint venture agreement, the Company and DNC formed a new company, Miami Valley Gaming, LLC (“MVG”), to manage
both the Company’s and DNC’s interests in the development and operation of the racetrack and VLT gaming facility. On December
21, 2012, MVG completed the purchase of the harness racing licenses and certain assets held by Lebanon Trotting Club Inc. and
Miami Valley Trotting Inc. ("MVG Sellers") for total consideration of $60.0 million, of which $10.0 million was funded at closing
with the remainder funded through a $50.0 million note payable with a six year term effective upon the commencement of gaming
operations. In addition, there is a potential contingent consideration payment of $10.0 million based on the financial performance
of the facility during the seven-year period after gaming operations commence.
On December 12, 2013, the new facility opened in Lebanon, Ohio on a 120-acre site. The facility includes a 5/8-mile harness
racing track and an 186,000-square-foot gaming facility with approximately 1,580 VLTs. MVG invested $204.6 million in the
new facility, including a $50.0 million license fee to the Ohio Lottery Commission. During the twelve months ended December
30, 2014, the Company funded $14.6 million in capital contributions to the joint venture bringing the Company's total investment
to $105.0 million.
Since both DNC and the Company have participating rights over MVG, and both must consent to MVG's operating, investing and
financing decisions, the Company accounts for MVG using the equity method. Summarized financial information for MVG is
comprised of the following (in thousands):
2014
2013
Assets
Current assets
Property and equipment, net
Other assets, net
Total assets
Liabilities and Members' Equity
Current liabilities
Current portion of long-term debt
Long-term debt, excluding current portion
Other liabilities
Members' equity
$
$
$
24,943
$
130,868
105,059
260,870
$
16,775
$
8,332
26,584
83
209,096
Total liabilities and members' equity
$
260,870
$
18,001
140,793
80,408
239,202
36,324
8,471
32,287
75
162,045
239,202
The joint venture's long-term debt consists of a $50 million secured note payable from MVG to the MVG Sellers payable quarterly
over 6 years through August 2019 at a 5.0% interest rate.
92
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Casino revenue
Non-casino revenue
Net revenues
Operating and SG&A expenses
Depreciation & amortization expenses
Pre-opening expenses
Operating income (loss)
Interest and other expenses, net
Net income (loss)
Years Ended December 31,
2014
2013
2012
$
126,111
$
6,472
$
6,257
132,368
97,385
12,299
54
22,630
(4,829)
17,801
$
$
5,479
11,951
10,815
935
7,240
(7,039)
(397)
(7,436) $
—
109
109
242
7
1,079
(1,219)
—
(1,219)
The Company's 50% share of MVG's results has been included in the Consolidated Statements of Comprehensive Income for
the years ended December 31, 2014, 2013 and 2012 as follows (in thousands):
Equity in gains (losses) of unconsolidated investments
$
8,900
$
(3,718) $
(610)
Years Ended December 31,
2013
2012
2014
NOTE 8—GOODWILL
Goodwill of the Company at December 31, 2014 and 2013 is comprised of the following (in thousands):
Balance as of December 31, 2012 $
51,659
$
67,457
$
127,364
$
Racing
Casinos
TwinSpires
Big Fish
Games
Other
Investments
3,934
— $
Additions
Balance as of December 31, 2013
Additions
—
51,659
—
50,202
117,659
—
—
127,364
—
—
—
538,904
—
3,934
—
Total
$
250,414
50,202
300,616
538,904
Balance as of December 31, 2014 $
51,659
$
117,659
$
127,364
$
538,904
$
3,934
$
839,520
During the year ended December 31, 2014, the Company established goodwill of $538.9 million related to the acquisition of Big
Fish Games on December, 16, 2014.
During the year ended December 31, 2013, the Company established goodwill of $50.2 million related to the acquisition of Oxford
on July 17, 2013.
The Company performed its annual goodwill impairment analysis for the year ended December 31, 2014 in accordance with ASU
No. 2011-08, Intangibles-Goodwill and Other: Testing Goodwill for Impairment. This analysis included an assessment of qualitative
factors to determine whether it is more likely than not that the fair value of the reporting units is less than their carrying amounts.
The impairment analysis included an assessment of certain qualitative factors including but not limited to macroeconomic, industry
and market conditions; cost factors that have a negative effect on earnings; overall financial performance; the movement of the
Company's share price; and other relevant entity and reporting unit specific events. This assessment included the determination
of the likely effect of each factor on the fair value of each reporting unit. Although the Company believes the factors considered
in the impairment analysis are reasonable, significant changes in any of the assumptions could produce a significantly different
result. Based on the annual goodwill impairment analysis for the years ended December 31, 2014 and 2013, the Company concluded
that goodwill had not been impaired.
NOTE 9—OTHER INTANGIBLE ASSETS
The Company’s other intangible assets are comprised of the following (in thousands):
93
F
o
r
m
1
0
-
K
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
December 31, 2014
December 31, 2013
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Definite-lived intangible assets:
Favorable contracts
Customer relationships
Slots gaming license
Table games license
Developed Technology
In-Process Research &
Development
Strategic Development
Other
Indefinite-lived intangible assets:
Slots gaming rights
Trademarks
Illinois Horseracing Equity Trust
Other
Total
$
$
11,000
89,203
2,250
2,493
87,000
12,700
(4,907) $
(39,399)
(1,125)
(180)
(931)
6,093
49,804
1,125
2,313
86,069
(105)
12,595
30,500
3,719
238,865
$
$
(263)
(326)
(47,236)
30,237
3,393
191,629
128,890
225,729
3,307
417
$
549,972
$
$
11,000
56,540
2,250
2,493
—
—
—
3,719
76,002
$
$
(4,260) $
(30,464)
(1,125)
(50)
—
—
—
(297)
(36,196)
6,740
26,076
1,125
2,443
—
—
—
3,422
39,806
128,890
25,729
3,307
417
$
198,149
Amortization expense for definite-lived intangible assets was approximately $13.3 million, $12.2 million and $11.2 million for
the years ended December 31, 2014, 2013 and 2012, respectively, and is classified in operating expenses. The Company submitted
payments of $2.3 million for each of the years ended December 31, 2014 and 2013, respectively, for annual license fees for Calder
Casino. Payments are being amortized to expense over the annual license period.
Indefinite-lived intangible assets consist primarily of state gaming licenses in Maine, Mississippi and Florida, rights to participate
in the Horse Racing Equity Fund and trademarks.
During the year ended December 31, 2014, the Company established definite-lived intangible assets of $162.9 million and
indefinite-lived intangible assets of $200.0 million related to the Big Fish Games acquisition.
During the year ended December 31, 2013, the Company established definite-lived intangible assets of $3.8 million and indefinite-
lived intangible assets of $60.9 million related to the Oxford acquisition. During November 2013, the Company paid $0.4 million
to the State of Maine for table game fees that are being amortized over a 20-year contract period. During the year ended December
31, 2013, the Company reduced customer relationships and accumulated amortization by $2.8 million and other definite-lived
intangibles and accumulated amortization by $0.4 million, related to the Harlow's acquisition, as these amounts were fully
amortized. Finally, the Company expensed $0.2 million of definite-lived and indefinite lived assets related to the disposal of
Fight! Magazine.
Indefinite-lived intangible assets are tested for impairment on an annual basis as of March 31. In March 2013, the Company
adopted ASU No. 2012-02, Intangibles-Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment. ASU
2012-02 simplifies indefinite-lived intangible asset impairment testing by adding a qualitative review step to assess whether a
quantitative impairment analysis is necessary. Under the amended guidance, a testing methodology similar to that which is
performed for goodwill impairment testing is acceptable for assessing a company's indefinite-lived intangible assets. The Company
completed the required annual impairment tests of indefinite-lived intangible assets as of March 31, 2014, and no adjustment to
the carrying value of indefinite-lived intangible assets was required. The Company assessed its indefinite-lived intangible assets
by qualitatively evaluating events and circumstances that have both positive and negative factors, including macroeconomic
conditions, industry events, financial performance and other changes and concluded that it was more likely than not that fair value
of its indefinite-lived intangible assets exceeds their carrying value.
Future estimated amortization expense does not include additional payments of $2.3 million in 2013 and in each year thereafter
for the ongoing amortization of future expected annual Florida slots gaming license fees not yet incurred or paid. Future estimated
aggregate amortization expense on existing definite-lived intangible assets for each of the next five fiscal years is as follows (in
thousands):
94
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Year Ended
December 31,
2015
2016
2017
2018
2019
Estimated
Amortization
Expense
$
$
$
$
$
53,818
51,596
35,927
18,716
16,638
NOTE 10—INCOME TAXES
Components of the provision for income taxes are as follows (in thousands):
Current provision:
Federal
State and local
Foreign
Deferred:
Federal
State and local
Foreign
2014
2013
2012
$
13,236
$
22,727
$
2,008
78
15,322
19,672
81
(4,914)
14,839
2,462
—
25,189
5,788
(504)
—
5,284
$
30,161
$
30,473
$
21,103
2,351
(38)
23,416
8,292
1,367
—
9,659
33,075
The Company’s income tax expense is different from the amount computed by applying the federal statutory income tax rate to
income before taxes as follows (in thousands):
Federal statutory tax on earnings before income taxes
State income taxes, net of federal income tax benefit
Non-deductible lobbying and contributions
Tax credits and incentives
Tax adjustments
Accruals and settlements related to tax audits
Valuation allowance
Change in effective state tax rates
Non-deductible transaction costs
Non-deductible acquisition related charges
Other permanent differences
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2014
2013
2012
$
26,782
$
29,928
$
1,388
999
(1,209)
(485)
529
—
(401)
947
1,339
272
1,514
723
(663)
(174)
(395)
(220)
(383)
—
—
143
31,929
2,185
946
(494)
(1,093)
(686)
—
197
—
—
91
$
30,161
$
30,473
$
33,075
During 2003, the Company entered into a Tax Increment Financing (“TIF”) Agreement with the Commonwealth of Kentucky.
Pursuant to this agreement, the Company is entitled to receive reimbursement for 80% of the increase in Kentucky income and
sales tax resulting from its 2005 renovation of the Churchill facility. During the years ended 2014, 2013, and 2012, the Company
recognized reductions in operating expenses of $0.6 million, $0.8 million and $0.7 million, respectively. In addition, the Company
recognized reductions to its income tax expense, net of federal taxes, of $0.1 million, $0.4 million, and $0.5 million, respectively.
As of December 31, 2014, the Company has received $6.4 million of combined benefits and established a sales tax receivable of
$0.6 million and an income tax receivable of $0.1 million related to the reimbursement.
Components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
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Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Deferred tax assets:
Deferred compensation plans
Deferred income
Allowance for uncollectible receivables
Deferred liabilities
Net operating losses and credit carryforward
Deferred tax assets
Valuation allowance
Net deferred tax asset
Deferred tax liabilities:
Intangible assets in excess of tax basis
Property and equipment in excess of tax basis
Other
Deferred tax liabilities
Net deferred tax liability
Income taxes are classified in the balance sheet as follows:
Net current deferred tax asset
Net non-current deferred tax liability
2014
2013
$
31,520
$
14,271
752
1,323
3,822
32,573
69,990
(1,274)
68,716
151,210
37,827
11,485
200,522
(131,806) $
$
17,716
(149,522)
(131,806) $
$
$
$
6,328
1,295
3,574
19,186
44,654
(1,213)
43,441
22,749
40,135
2,246
65,130
(21,689)
8,927
(30,616)
(21,689)
As of December 31, 2014, the Company had federal net operating losses of $24.4 million, which were acquired in conjunction
with the acquisitions of Youbet.com and Big Fish Games. The utilization of these losses, which expire between 2019 and 2034,
is limited on an annual basis pursuant to IRC § 382. The Company believes that it will be able to fully utilize all of these losses.
In addition, the Company has $4.3 million of state net operating losses; $2.4 million of this loss carryforward was acquired in
conjunction with the acquisitions of Youbet.com and Big Fish Games. These losses, which expire between 2015 and 2034, may
be subject to annual limitations similar to IRC § 382. The Company has recorded a valuation allowance of $0.9 million against
the state net operating losses due to the fact that it is unlikely that it will generate income in certain states, which is necessary to
utilize the assets.
The changes in the valuation allowance for deferred tax assets for the years ended December 31, 2014 and 2013 are as follows
(in thousands):
Balance at beginning of the year
Charged to costs and expenses
Charged to other accounts
Deductions
Balance at end of the year
2014
2013
$
$
1,213
$
158
(83)
(14)
1,274
$
1,334
168
—
(289)
1,213
The IRS has audited the Company through 2012. Subsequent years are open to examination. State and local tax years open for
examination vary by jurisdiction. As of December 31, 2014, the Company had approximately $2.9 million of total gross
unrecognized tax benefits, excluding interest of $0.1 million. Of this amount, $1.7 million was related to tax positions acquired
in the Big Fish Games acquisition. If the total gross unrecognized tax benefits were recognized, there would be a $1.8 million
effect to the annual effective tax rate and an additional $1.1 million would be reimbursed by the pre-acquisition shareholders of
Big Fish Games, in conjunction with a tax indemnity agreement. The Company anticipates a decrease in its unrecognized tax
positions of approximately $1.1 million during the next twelve months. This anticipated decrease is primarily due to the expiration
of statutes of limitations.
During October 2012, the Company funded a $2.9 million income tax payment to the State of Illinois related to a dispute over
state income tax apportionment methodology which was recorded in other assets at December 31, 2014. The Company filed its
state income tax returns related to the years 2002 through 2005 following the methodology prescribed by Illinois statute, however
the State of Illinois has taken a contrary tax position. The Company filed a formal protest with the State of Illinois during the
96
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
fourth quarter of 2012. The Company does not expect this issue to have a material adverse effect on its business, financial condition
or results of operations. See Note 17 for further discussion of this matter.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
Balance as of January 1
Additions for tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Balance as of December 31
2014
2013
2012
582
573
2,097
(326)
2,926
$
$
8,565
190
207
(8,380)
582
$
$
2,109
—
7,390
(934)
8,565
$
$
The increase in the uncertain tax position in 2014 was primarily related to the acquisition of Big Fish Games. The decrease in the
uncertain tax position in 2013 was due to an IRS settlement related to the timing of the taxation of receipts from the HRE Trust
Fund and the expiration of statute of limitations related to various tax positions. The Company recognizes interest accrued related
to unrecognized tax benefits in income tax expense and penalties in selling, general and administrative expenses in the Consolidated
Statements of Comprehensive Income. The Company accrued less than $0.2 million of interest for each of the years ended
December 31, 2014 and 2013.
NOTE 11—SHAREHOLDERS’ EQUITY
Stock Repurchase Program
On April 23, 2013, the Company’s Board of Directors authorized the repurchase of up to $100 million of the Company's stock in
a stock repurchase program. During the year ended December 31, 2014, the Company repurchased 691,000 shares for $61.6
million in a privately negotiated transaction. The shares were retired, and the cost of the shares acquired was treated as a deduction
from shareholders' equity. The Company funded this repurchase using available cash and borrowings under its Senior Secured
Credit Facility. Under the terms of the stock repurchase program, the Company may repurchase an additional $38.4 million of
common stock prior to the termination of the repurchase program on December 31, 2015.
Shareholder Rights Plan
On March 13, 2008, the Company’s Board of Directors approved a shareholder rights plan, which granted each shareholder the
right, in certain circumstances, to purchase a fraction of a share of Series A Junior Participating Preferred Stock at the rate of one
right for each share of the Company’s common stock. If a person or group, together with its affiliates and associates, become an
acquiring person, defined as the beneficial owner of 15% or more of the Company’s common stock, each holder of a right (other
than the person or group who has become an acquiring person) will have the right to receive, upon exercise, shares of the Company’s
common stock having a value equal to two times the exercise price of the right. Certain persons and transactions are exempted
from the definition of acquiring person. In the event that, at any time following the date such person or group becomes an acquiring
person, (i) the Company engages in a merger or other business combination transaction in which the Company is not the surviving
corporation (other than with an entity that acquired the shares pursuant to an offer for all outstanding shares of common stock that
a majority of the independent directors determines to be fair and not inadequate and to otherwise be in the best interests of the
Company and its shareholders, after receiving advice from one or more investment banking firms (a “Qualifying Offer”) ), (ii) the
Company engages in a merger or other business combination transaction (other than with an entity that acquired the shares pursuant
to a Qualifying Offer) in which the Company is the surviving corporation and the common stock of the Company is changed or
exchanged, or (iii) 50% or more of the Company’s assets, cash flow or earnings power is sold or transferred, each holder of a right
(other than the person or group who has become an acquiring person) shall thereafter have the right to receive, upon exercise,
common stock of the surviving entity having a value equal to two times the exercise price of the right. At any time after a person
or group becomes an acquiring person, and prior to the acquisition by such person or group of fifty percent (50)% or more of the
outstanding common stock, the Board of Directors may exchange the rights (other than rights owned by such acquiring person),
in whole or in part, for common stock at an exchange ratio of one share of common stock, or one one-thousandth of a share of
Preferred Stock (or of a share of a class or series of the Company’s preferred stock having equivalent rights, preferences and
privileges), per right (subject to adjustment).
NOTE 12—EMPLOYEE BENEFIT PLANS
The Company has a profit-sharing plan that covers all employees, other than Big Fish Games employees and others not participating
in an associated profit-sharing plan, with three months or more of service. The Company will match contributions made by the
employee up to 3% of the employee’s annual compensation and will also match, at 50%, contributions made by the employee up
97
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Notes to Consolidated Financial Statements
to an additional 2% of compensation with certain limits. The Company may also contribute a discretionary amount determined
annually by the Board of Directors as well as a year-end discretionary match not to exceed 4% of compensation. The Company’s
cash contribution to the plan for the years ended December 31, 2014, 2013 and 2012 was approximately $2.5 million, $2.3 million
and $1.8 million, respectively.
Big Fish Games has a defined contribution plan that covers all employees and matches employee contributions to the plan at 3%
of the employee's annual compensation.
The Company is a member of a noncontributory defined benefit multi-employer retirement plan for all members of the Pari-mutuel
Clerk’s Union of Kentucky and several other collectively bargained retirement plans, which are administered by unions. Cash
contributions are made in accordance with negotiated labor contracts. Retirement plan expense for each of the years ended
December 31, 2014, 2013 and 2012 was approximately $0.7 million, $0.7 million and $0.6 million, respectively. The Company’s
policy is to fund this expense as accrued. The Company currently estimates that future contributions to these plans will not increase
significantly from prior years.
The Company provides eligible executives and directors of the Company an opportunity to defer to a future date the receipt of
base and bonus compensation for services as well as director’s fees through a deferred compensation plan. The Company’s
matching contribution on base compensation deferrals equals the matching contribution of the Company’s profit-sharing plan with
certain limits. The Company’s cash contribution to the plan amounts to $0.1 million for each of the years ended December 31,
2014, 2013 and 2012, respectively.
NOTE 13—TOTAL DEBT
The following table presents our total debt outstanding at December 31, 2014 and 2013 (in thousands):
Senior Secured Credit Facility:
Senior Secured Credit Facility due 2018
Term Loan A due 2019
Swing line of credit
5.375% Senior Unsecured Notes due 2021
Total debt
Current maturities of long-term debt
Total debt, net of current maturities
5.375% Senior Unsecured Notes
As of December 31,
2013
2014
$
258,000
$
58,000
200,000
12,355
300,000
770,355
11,250
—
11,191
300,000
369,191
—
$
759,105
$
369,191
On December 16, 2013, the Company completed an offering of $300 million in aggregate principal amount of 5.375% Senior
Unsecured Notes that mature on December 15, 2021 (the “Senior Unsecured Notes”). The Senior Unsecured Notes were issued
at par, with interest payable on June 15th and December 15th of each year. The Company received net proceeds of $295 million,
after deducting underwriting fees, and used the net proceeds from the offering to repay a portion of its outstanding borrowings,
and accrued and unpaid interest outstanding under its Third Amended and Restated Credit Agreement ("Senior Secured Credit
Facility"). In connection with the issuance, the Company capitalized $6.3 million of debt issuance costs which are being amortized
as interest expense over the remaining term of the Senior Unsecured Notes.
The Senior Unsecured Notes were issued in a private offering that was exempt from registration under the Securities Act of 1933,
as amended, and are senior unsecured obligations of the Company. The Senior Unsecured Notes are guaranteed by each of the
Company’s domestic subsidiaries that guarantee its Senior Secured Credit Facility and will rank equally with the Company’s
existing and future senior obligations. At any time prior to December 15, 2016, the Company may redeem all or part of the Senior
Unsecured Notes at par plus the present value (discounted at the treasury rate plus 50 basis points) of scheduled interest payments
through December 15, 2016, along with accrued and unpaid interest, if any, at the date of redemption. On or after December 15,
2016, the Company may redeem all or part of the Senior Unsecured Notes at a redemption price of 104.0% which gradually reduces
to par by 2019.
Senior Secured Credit Facility
On December 1, 2014, the Company executed the Fourth Amended and Restated Credit Agreement (the “Senior Secured Credit
Facility”) whereby it added a $200 million Term Loan Facility (“Term Loan”) to the existing Senior Secured Credit Facility and
amended certain definitions and provisions of the credit agreement including Consolidated Funded Indebtedness, EBITDA and
98
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
calculation of the Total Leverage Ratio. The Company incurred loan origination costs of $0.9 million in connection with this
amendment, which were capitalized and are being amortized as interest expense over the remaining term of the Senior Secured
Credit Facility.
On May 17, 2013, the Company entered into the Third Amended and Restated Credit Agreement (also referred to as the “Senior
Secured Credit Facility”) which amended certain provisions of the credit agreement including increasing the maximum aggregate
commitment from $375 million to $500 million. The Senior Secured Credit Facility also provides for an accordion feature which,
if exercised, could increase the maximum aggregate commitment by up to an additional $225 million and reduce the pricing
schedule for outstanding borrowings and commitment fees across all leverage pricing levels. The guarantors under the Senior
Secured Credit Facility continue to be a majority of the Company's wholly-owned subsidiaries. The Company incurred loan
origination costs of $2.3 million in connection with this amendment, which were capitalized and are being amortized as interest
expense over the remaining term of the Senior Secured Credit Facility.
The Senior Secured Credit Facility matures on May 17, 2018. The Term Loan matures on December 1, 2019 provided however,
in the event the Senior Secured Credit Facility has not, prior to May 17, 2018, been extended to a maturity date of December 1,
2019, the Term Loan matures on May 17, 2018.
Regarding the Term Loan, the Company is required to make quarterly principal payments that commence on March 31, 2015 and
are set to occur on the last day of each quarter through September 30, 2019. Payments start at $2.5 million and increase in increments
of $1.25 million on December 31 of each year to reach final year quarterly payment amount of $7.5 million. To the extent not
previously repaid, any outstanding balance on the Term Loan shall be repaid in full on the facility termination date. If no additional
payments are made, and the termination date is September 30, 2019, the balance due at termination will be $102.5 million.
Generally, borrowings made pursuant to the Senior Secured Credit Facility bear interest at a LIBOR-based rate per annum plus
an applicable percentage ranging from 1.125% to 3.0% depending on the Company's total leverage ratio. In addition, under the
Senior Secured Credit Facility, the Company agreed to pay a commitment fee at rates that range from 0.175% to 0.45% of the
available aggregate commitment, depending on the Company's leverage ratio. The Term Loan is not subject to, nor included in
the calculation of, the commitment fee. The weighted average interest rate on outstanding borrowings at December 31, 2014 and
2013 was 2.19% and 1.71%, respectively.
The Senior Secured Credit Facility contains customary affirmative and negative covenants for credit facilities of this type, including
limitations on the Company and its subsidiaries with respect to indebtedness, restricted payments, liens, investments, mergers and
acquisitions, disposition of assets, sale-leaseback transactions and transactions with affiliates. The covenants permit the Company
to use proceeds of the credit extended under the agreement for general corporate purposes, restricted payments and acquisition
needs. The Senior Secured Credit Facility also contains financial covenants that require the Company (i) to maintain an interest
coverage ratio (i.e., consolidated adjusted EBITDA to consolidated interest expense) that is greater than 3.0 to 1.0; (ii) not to permit
the total leverage ratio (i.e., total consolidated funded indebtedness to consolidated adjusted EBITDA) to be greater than 4.5 to
1.0, provided that if a certain minimum consolidated adjusted EBITDA is reached then the total leverage ratio will be increased
to 5.0 to 1.0 for such periods that the minimum is maintained; and (iii) not to permit the senior secured leverage ratio (i.e. senior
secured consolidated funded indebtedness to consolidated adjusted EBITDA) to be greater than 3.5 to 1.0. As of December 31,
2014, the Company was in compliance with all covenants under the Senior Secured Credit Facility, and substantially all of the
Company's assets continue to be pledged as collateral under the Senior Secured Credit Facility.
As of December 31, 2014, we had $223.7 million of borrowing capacity under the Senior Secured Credit Facility.
Future aggregate maturities of total debt are as follows (in thousands):
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Year Ended
December 31,
2015
2016
2017
2018
Thereafter
Total
$
$
11,250
16,250
21,250
421,605
300,000
770,355
NOTE 14—OPERATING LEASES
The Company leases facilities for nine of its ten OTB operations at Arlington. Eight of Arlington's OTB operations are conducted
at non-owned Illinois restaurants under licensing agreements with varying payment terms, including payment contingent on handle.
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Churchill Downs Incorporated
Notes to Consolidated Financial Statements
These OTB operations are generally multi-year agreements, renewable with 90 days notice by either party. Arlington's ninth leased
facility, Waukegan, operates as a traditional OTB under a lease which will expire in 2015. The Company has ten operating lease
agreements for Fair Grounds OTBs, which expire in various years from 2014 through 2021. Furthermore, the Company has
operating leases for its corporate headquarters, TwinSpires, and Big Fish Games locations.
Future minimum operating lease payments are as follows, not including the variable portion of contingent leases and Arlington’s
contingent licensing agreements (in thousands):
Year Ended December 31,
2015
2016
2017
2018
2019
Thereafter
Total
$
$
11,604
10,719
9,601
4,591
2,515
3,590
42,620
The Company also leases totalisator equipment, gaming equipment, audio/visual equipment and operates certain facilities that are
partially contingent on handle, bandwidth usage or race days. Total annual rent expense for contingent lease payments, including
totalisator equipment, audio/visual equipment, gaming equipment, land and facilities, was approximately $4.3 million, $3.7 million
and $3.6 million for the years ended December 31, 2014, 2013 and 2012, respectively. The Company’s total rent expense for all
operating leases, including the contingent lease payments, was approximately $20.2 million, $20.2 million and $18.4 million for
the years ended December 31, 2014, 2013 and 2012, respectively. During 2013, the increase in total rent expense primarily reflects
an increase in slot machine expense, which is attributable to the acquisitions of Riverwalk and Oxford.
NOTE 15—SHARE-BASED COMPENSATION PLANS
As of December 31, 2014, the Company has share-based employee compensation plans as described below. The total compensation
expense, which includes compensation expense related to restricted share awards, restricted stock unit awards, stock option awards,
granted LTIP awards and stock options associated with an employee stock purchase plan, was $11.9 million, $21.5 million, and
$7.6 million for the years ended December 31, 2014, 2013 and 2012, respectively.
Employee Stock Options
The Company sponsors the Churchill Downs Incorporated 1997 Stock Option Plan (the “97 Plan”) and the Churchill Downs
Incorporated 2007 Omnibus Stock Incentive Plan (the “07 Incentive Plan”). In addition, the Company may, from time to time,
grant stock option awards to individuals outside of its share-based compensation plans. These share-based incentive compensation
plans are described below.
On March 13, 2003, the Board of Directors suspended the 97 Plan. Awards issued under the 97 Plan prior to its suspension were
unaffected by such suspension.
The 97 Plan and the 07 Incentive Plan provide that the exercise price of any incentive stock option may not be less than the fair
market value of the common stock on the date of grant. Outstanding stock options under the 97 Plan have contractual terms of
ten years and generally vest three years from the date of grant. Outstanding stock options under the 07 Incentive Plan have
contractual terms of ten years and generally vest ratably on each anniversary of the grant date over a three year period.
Activity for stock options granted by the Company during the years ended December 31, 2014, 2013 and 2012 is presented below
(in thousands, except per common share data):
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Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Number of Shares
Under Option
Weighted Average
Exercise Price
354
$
— $
(153) $
— $
201
$
— $
(7) $
(1) $
193
$
— $
(182) $
(1) $
$
10
36.52
—
36.80
—
36.30
—
42.94
36.12
36.04
—
35.26
49.95
48.63
Balance as of December 31, 2011
Granted
Exercises
Canceled/forfeited
Balance as of December 31, 2012
Granted
Exercises
Canceled/forfeited
Balance as of December 31, 2013
Granted
Exercises
Canceled/forfeited
Balance as of December 31, 2014
During the year ended December 31, 2010, the Company entered into an amended and restated employment agreement with Robert
L. Evans, the Company’s Chairman of the Board and former Chief Executive Officer. Mr. Evans received a stock option, vesting
quarterly over approximately three years to purchase an aggregate of 180,000 shares of the Company’s common stock, with an
exercise price equal to the fair market value of a share of the Company’s common stock on September, 27, 2010, the date on which
the award was granted. This stock option has a contractual term of six years expiring on November 14, 2016. Under Mr. Evans’
previous employment agreement, Mr. Evans received a stock option, vesting quarterly over three years, to purchase an aggregate
of 130,000 shares of the Company’s common stock, with an exercise price equal to the fair market value of a share of the Company’s
common stock on July 18, 2006.
During 2014, Mr. Evans exercised options for 180,000 shares of the Company's common stock which were granted at $35.19 per
share, for common stock prices ranging from $85.00 to $91.33 per share. During 2012, Mr. Evans exercised options for 130,000
shares of the Company's common stock which were granted at $36.16 per share, for common stock at stock prices ranging from
$57.36 to $60.05 per share.
During the years ended December 31, 2014, 2013 and 2012, no stock options were granted. Whenever the Company issues stock
options, it estimates the fair value of the stock options as of the date of grant, using the Black-Scholes option pricing model. The
Black-Scholes option pricing model was developed for use in estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions,
including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value
estimate, in the Company’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of
the Company’s employee stock options. The Company calculates the expected term for its stock options based on historical
exercise behavior and bases the risk-free interest rate on a traded zero-coupon U.S. Treasury bond with a term substantially equal
to the stock option’s expected term. The volatility used to value stock options is based on historical volatility. The Company
calculates historical volatility using a simple average calculation methodology based on daily price intervals as measured over the
expected term of the stock option.
At December 31, 2014, all outstanding options were vested and exercisable. The following table summarizes information about
stock options outstanding as of December 31, 2014 (in thousands, except contractual life and per share data):
Shares Under
Option
Remaining
Contractual
Life
Average
Exercise Price
Per Share
Intrinsic
Value per
Share(1)
Aggregate
Intrinsic
Value
Options exercisable and vested at
December 31, 2014
10
3.2 $
48.63
$
46.67
$
483
(1) Computed based upon the amount by which the fair market value of the Company’s common stock at December 31, 2014
of $95.30 per share exceeded the weighted average exercise price.
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Churchill Downs Incorporated
Notes to Consolidated Financial Statements
The total intrinsic value of stock options exercised during the years ended December 31, 2014, 2013 and 2012 was $9.6 million,
$0.3 million, and $5.7 million, respectively. Cash received from stock option exercises totaled $6.4 million, $0.3 million, and
$3.4 million for the years ended December 31, 2014, 2013 and 2012, respectively.
At December 31, 2013, there were 193 thousand options exercisable with a weighted average exercise price of $36.04.
Restricted Shares and Restricted Stock Units
2013 New Company LTIP
During 2013, the Board of Directors approved the terms and conditions of performance share awards issued pursuant to the
Churchill Downs Incorporated 2007 Omnibus stock incentive plan (the "New Company LTIP"). As a way to continue to encourage
innovation, an entrepreneurial approach, and careful risk assessment, and in order to retain key executives, the New Company
LTIP offers long-term incentive compensation to the Company's named executive officers and other key executives ("Grantees")
as reported in the Company's Schedule 14A Proxy Statement filing.
During 2013, the Grantees received 92,000 restricted shares of the Company's common stock vesting over approximately four
years and 324,000 restricted shares of the Company's common stock with vesting contingent upon the Company's common stock
reaching certain closing prices on NASDAQ for 20 consecutive trading days. During the year ended December 31, 2014, the
Company's closing stock price achieved the twenty consecutive trading days closing price stock requirement for 84,500 restricted
shares. During the year ended December 31, 2013, the Company's closing stock price achieved the stock price requirement for
155,000 restricted shares.
During the years ended December 31, 2014 and 2013, the Company recognized $8.3 million and $12.8 million, respectively, of
compensation expense related to the New Company LTIP. As of December 31, 2014, unrecognized compensation expense
attributable to unvested service period awards was $2.8 million. The weighted average period over which the Company expects
to recognize the remaining compensation expense under the service period awards approximates 17 months. There is no remaining
unrecognized expense under the market condition awards.
Other Restricted Share Awards
The Company sponsored the Churchill Downs Incorporated 2004 Restricted Stock Plan (the “04 Plan”). In addition, the Company,
may, from time to time, grant restricted shares or restricted stock units to individuals outside of its share-based compensation
plans.
On March 15, 2007, the Board of Directors replaced the 04 Plan with the 07 Incentive Plan. Awards issued under the 04 Plan prior
to its termination were unaffected by such termination. The 07 Incentive Plan permits the award of restricted shares or restricted
stock units to directors and key employees, including officers of the Company and its subsidiaries who are from time to time
responsible for the management, growth and protection of the business of the Company and its subsidiaries.
Restricted shares granted under the 04 Plan generally vest in full five years from the date of grant or upon retirement at or after
age 60. Restricted shares granted under the 07 Incentive Plan generally vest in full three years from the date of grant or upon
retirement at or after age 60. The fair value of restricted shares under both the 04 Plan and the 07 Incentive Plan is determined
by the product of the number of shares granted and the grant date market price of the Company’s common stock, discounted to
consider the fact that dividends are not paid on these shares.
During the year ended December 31, 2010, the Company entered into an amended and restated employment agreement with Robert
L. Evans. Mr. Evans received (i) 45,000 restricted shares of the Company’s common stock, with vesting contingent upon the
Company’s common stock reaching certain closing prices on NASDAQ for twenty consecutive trading days, and (ii) 81,250
restricted stock shares, vesting quarterly over 6.0 years. During the years ended December 31, 2013 and 2012, 15,000 shares and
30,000 shares, respectively, with vesting contingent upon the Company's stock price, reached the required closing stock prices
and vested.
Under a previous employment agreement with Robert L. Evans, Mr. Evans received (i) 90,000 restricted shares of the Company’s
common stock, with vesting contingent upon the Company’s common stock reaching certain closing prices on NASDAQ for
twenty consecutive trading days, (ii) 65,000 restricted shares of the Company’s common stock, vesting quarterly over five years,
and contingent upon the Company’s common stock reaching certain closing prices on NASDAQ for ten consecutive trading days
and (iii) 65,000 restricted stock units representing shares of the Company’s common stock, vesting quarterly over five years, with
Mr. Evans entitled to receive the shares underlying the units (along with a cash payment equal to accumulated dividend equivalents
beginning with the lapse of forfeiture, plus interest at a 3% annual rate) six months after termination of employment. The restricted
share awards were approved by the Company’s shareholders at its Annual Meeting of Shareholders held on June 28, 2007, the
grant date of these awards. During the years ended December 31, 2014 and 2013, zero shares and 60,000 shares, respectively,
with vesting contingent upon the Company's stock price, reached the required closing stock prices and vested.
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Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Activity for the 2013 New Company LTIP, 04 Plan, the 07 Incentive Plan and awards made outside of share-based
compensation plans for the years ended December 31, 2014, 2013 and 2012, is presented below (in thousands, except per
common share data):
Market Condition
(Performance-Based)
Awards
Service Period Awards
Total
Number of
Shares
Weighted
Average
Grant Date
Fair Value
Number of
Shares
Weighted
Average
Grant Date
Fair Value
Number of
Shares
Weighted
Average
Grant Date
Fair Value
112
$
— $
(52) $
— $
60
$
324
$
(60) $
— $
324
$
— $
43.76
—
41.31
—
45.90
53.71
45.90
—
53.71
—
(239) $
53.49
— $
85
$
—
54.32
$
307
182
$
(169) $
(1) $
$
319
287
$
(256) $
(1) $
$
349
26
$
(107) $
(12) $
$
256
38.63
51.99
45.85
39.12
42.42
67.55
59.54
38.75
53.58
88.58
54.15
60.41
56.24
$
419
182
$
(221) $
(1) $
$
379
611
$
(316) $
(1) $
$
673
26
$
(346) $
(12) $
$
341
40.01
51.99
44.77
39.12
42.97
60.21
53.90
38.75
53.64
88.58
53.70
60.41
55.77
Balance as of December 31, 2011
Granted
Vested
Canceled/forfeited
Balance as of December 31, 2012
Granted
Vested
Canceled/forfeited
Balance as of December 31, 2013
Granted
Vested
Canceled/forfeited
Balance as of December 31, 2014
As of December 31, 2014, there was $5.9 million of unrecognized share-based compensation expense related to nonvested restricted
share and restricted stock unit awards that the Company expects to recognize over a weighted average period of 1.9 years.
As of December 31, 2014, employees of the Company held 84,500 restricted shares subject to performance-based vesting criteria
(all of which are considered market-based restricted shares), which were issued during the year ended December 31, 2013. The
number of these shares that vest is based upon established market-based performance targets that will be assessed on an ongoing
basis.
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan, the Company is authorized to sell, pursuant to short-term stock options, shares of its
common stock to its full-time (or part-time for at least 20 hours per week and at least five months per year) employees at a discount
from the common stock’s fair market value. The Employee Stock Purchase Plan operates on the basis of recurring, consecutive
one-year periods. Each period commences on August 1 and ends on the following July 31.
Each August 1, the Company offers eligible employees the opportunity to purchase common stock. Employees who elect to
participate for each period have a designated percentage of their compensation withheld (after-tax) and applied to the purchase of
shares of common stock on the last day of the period, July 31. The Employee Stock Purchase Plan allows withdrawals, terminations
and reductions on the amounts being deducted. The purchase price for the common stock is 85% of the lesser of the fair market
value of the common stock on (i) the first day of the period, or (ii) the last day of the period. No employee may purchase common
stock under the Employee Stock Purchase Plan valued at more than $25 thousand for each calendar year.
Under the Employee Stock Purchase Plan, the Company sold approximately fifteen thousand shares of common stock to employees
pursuant to options granted on August 1, 2013, and exercised on July 31, 2014. Because the plan year overlaps the Company’s
fiscal year, the number of shares to be sold pursuant to options granted on August 1, 2014, can only be estimated because the 2014
plan year is not yet complete. The Company’s estimate of options granted in 2014 under the Plan is based on the number of shares
sold to employees under the Employee Stock Purchase Plan for the 2013 plan year, adjusted to reflect the change in the number
of employees participating in the Employee Stock Purchase Plan in 2014. The Company recognized compensation expense related
to the Employee Stock Purchase Plan of $0.4 million, for each of the years ended December 31, 2014, 2013 and 2012.
NOTE 16—FAIR VALUE OF ASSETS AND LIABILITIES
The Company endeavors to utilize the best available information in measuring fair value. Financial assets and liabilities are
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Notes to Consolidated Financial Statements
classified based on the lowest level of input that is significant to the fair value measurement. The following tables present the
Company's assets and liabilities measured at fair value at December 31, 2014 and 2013 (in thousands):
Cash equivalents and restricted cash
Big Fish Games deferred payments
Big Fish Games earnout liability
Senior unsecured notes
Bluff contingent consideration liability
Total
Cash equivalents and restricted cash
Senior unsecured notes
Bluff contingent consideration liability
Total
Balance as of December 31, 2013
Additions
Change in fair value
Balance as of December 31, 2014
Year Ended December 31, 2014
Level 1
Level 2
Level 3
27,464
$
—
—
—
—
27,464
$
— $
—
—
299,250
—
299,250
$
—
78,800
327,800
—
2,331
408,931
Year Ended December 31, 2013
Level 1
Level 2
Level 3
$
36,940
—
—
— $
305,250
—
36,940
$
305,250
—
—
2,331
2,331
$
$
$
$
Fair Value Measurements
Using Significant
Unobservable Inputs
(Level 3)
$
$
2,331
402,774
3,826
408,931
The Company's cash equivalents and restricted cash, which are held in interest-bearing accounts, qualify for Level 1 in the fair
value hierarchy which includes unadjusted quoted market prices in active markets for identical assets.
The Company's accrued liability for a contingent consideration recorded in conjunction with the Bluff acquisition was based on
significant inputs not observed in the market and represents a Level 3 fair value measurement. The estimate of the contingent
consideration liability uses an income approach and is based on the probability of achieving enabling legislation which permits
Internet poker gaming and the probability-weighted discounted cash flows. Any change in the fair value of the contingent
consideration subsequent to the acquisition date will be recognized in the Company's Consolidated Statements of Comprehensive
Income.
The Company estimated the fair value of the Big Fish Games deferred payment and earnout liability as of December 31, 2014
using a discounted cash flows analysis over the period in which the obligation is expected to be settled, and applied a discount
rate based on the Company’s cost of debt. The cost of debt as of the closing date was based on the observed market yields of the
Company's Senior Unsecured Notes issued in December of 2013 and represents a Level 3 fair value measurement and was adjusted
for the difference in seniority and term of the deferred payment and earnout liability. The change in fair values of the Big Fish
Games deferred payment and earnout liability of $3.8 million between the closing date and December 31, 2014 was recorded as
acquisition related charges in the Consolidated Statements of Comprehensive Income. Changes to the Company's cost of debt
could lead to a different fair value estimate for the deferred payment and earnout liability.
The Company's $300 million par value Senior Unsecured Notes, which were issued on December 16, 2013, via a private offering,
represent a Level 2 fair value measurement. The fair value of the Senior Unsecured Notes is estimated based on unadjusted quoted
prices for similar liabilities in markets that are not active.
The Company currently has no other assets or liabilities subject to fair value measurement on a recurring basis. The following
methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
104
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Cash Equivalents—The carrying amount reported in the balance sheet for cash equivalents approximates its fair value
due to the short-term maturity of these instruments.
Long-Term Debt: Senior Secured Credit Facility—The carrying amounts of the Company’s borrowings under its Senior
Secured Credit Facility approximates fair value, based upon current interest rates and represents a Level 2 fair value
measurement.
During the years ended December 31, 2014 and 2013, the Company did not measure any assets at fair value on a non-recurring
basis.
NOTE 17—COMMITMENTS AND CONTINGENCIES
Legal Proceedings
The Company records an accrual for legal contingencies to the extent that it concludes that it is probable that a liability has been
incurred and the amount of the loss can be reasonably estimated. Except as disclosed below, no estimate of the possible loss or
range of loss in excess of amounts accrued, if any, can be made at this time regarding the matters specifically described below.
We do not believe that the final outcome of these matters will have a material adverse impact on our business, financial condition
and results of operations.
Louisiana Horsemens' Purses
On April 21, 2014, John L. Soileau and other individuals filed a Petition for Declaratory Judgment, Permanent Injunction, and
Damages - Class Action styled John L. Soileau, et. al. versus Churchill Downs Louisiana Horseracing, LLC, Churchill Downs
Louisiana Video Poker Company, LLC (Suit No. 14-3873) in the Parish of Orleans, State of Louisiana. The petition defines the
“alleged plaintiff class” as quarter-horse owners, trainers and jockeys that have won purses at the “Fair Grounds Race Course &
Slots” facility in New Orleans, Louisiana since the first effective date of La. R.S. 27:438 and specifically since 2008. The petition
alleges that Churchill Downs Louisiana Horseracing, L.L.C. and Churchill Downs Louisiana Video Poker Company, L.L.C. (“Fair
Grounds”) have collected certain monies through video draw poker devices that constitute monies earned for purse supplements
and all of those supplemental purse monies have been paid to thoroughbred horsemen during Fair Grounds’ live thoroughbred
horse meets while La. R.S. 27:438 requires a portion of those supplemental purse monies to be paid to quarter-horse horsemen
during Fair Grounds’ live quarter-horse meets. The petition requests that the Court declare that Fair Grounds violated La. R.S.
27:438, issue a permanent and mandatory injunction ordering Fair Grounds to pay all future supplements due to the plaintiff class
pursuant to La. R.S. 27:438, and to pay the plaintiff class such sums as it finds to reasonably represent the value of the sums due
to the plaintiff class. On August 14, 2014, the plaintiffs filed an amendment to their petition naming the Horsemen’s Benevolent
and Protective Association 1993, Inc. (“HBPA”) as an additional defendant and alleging that HBPA is also liable to plaintiffs for
the disputed purse funds. On October 9, 2014, HBPA and Fair Grounds filed exceptions to the suit, including an exception of
primary jurisdiction seeking a referral to the Louisiana Racing Commission. By Judgment dated November 21, 2014, the District
Court granted the exception of primary jurisdiction and referred the matter to the Louisiana Racing Commission. On January 26,
2015, the Louisiana Fourth Circuit Court of Appeals denied the plaintiffs’ request for supervisory review of the Judgment. This
matter is currently awaiting review by the Louisiana Racing Commission.
Illinois Department of Revenue
In October 2012, the Company filed a verified complaint for preliminary and permanent injunctive relief and for declaratory
judgment (the “Complaint”) against the Illinois Department of Revenue (the “Department”). The Company's complaint was filed
in response to Notices of Deficiency issued by the Department on March 18, 2010, and September 6, 2012. In response to said
Notices of Deficiency, the Company, on October 4, 2012, issued a payment in protest in the amount of $2.9 million (the “Protest
Payment”) under the State Officers and Employees Money Disposition Act and recorded this amount in other assets. The Company
subsequently filed its complaint in November 2012 alleging that the Department erroneously included handle, instead of the
Company's commissions from handle, in the computation of the Company's sales factor (a computation of the Company's gross
receipts from wagering within the State of Illinois) for determining the applicable tax owed. On October 30, 2012, the Company's
Motion for Preliminary Injunctive Relief was granted, which prevents the Department from depositing any monies from the Protest
Payment into the State of Illinois General Fund and from taking any further action against the Company until the Circuit Court
takes final action on the Company's Complaint. If successful with its Complaint, the Company will be entitled to a full or partial
refund of the Protest Payment from the Department. On December 3, 2014, the Company filed its Motion for Summary Judgment
on all material aspects of its case. Also on December 3, 2014, the Department, by and through its counsel, the Illinois Attorney
General, filed its Cross-Motion for Summary Judgment. This matter remains pending before the Tax and Miscellaneous Remedies
Section of the Circuit Court of Cook County. Oral arguments on the parties’ Motions for Summary Judgment are scheduled for
March 5, 2015.
Kentucky Downs
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Churchill Downs Incorporated
Notes to Consolidated Financial Statements
On September 5, 2012, Kentucky Downs Management, Inc. (“KDMI”) filed a petition for declaration of rights in Kentucky Circuit
Court located in Simpson County, Kentucky styled Kentucky Downs Management Inc. v. Churchill Downs Incorporated (Civil
Action No. 12-CI-330) (the “Simpson County Case”) requesting a declaration that the Company does not have the right to exercise
its put right and require Kentucky Downs, LLC (“Kentucky Downs”) and/or Kentucky Downs Partners, LLC (“KDP”) to purchase
the Company’s ownership interest in Kentucky Downs. On September 18, 2012, the Company filed a complaint in Kentucky
Circuit Court located in Jefferson County, Kentucky, styled Churchill Downs Incorporated v. Kentucky Downs, LLC; Kentucky
Downs Partners, LLC; and Kentucky Downs Management Inc. (Civil Action No. 12-CI-04989) (the “Jefferson County Case”)
claiming that Kentucky Downs and KDP had breached the operating agreement for Kentucky Downs and requesting a declaration
that the Company had validly exercised its put right and a judgment compelling Kentucky Downs and/or KDP to purchase the
Company’s ownership interest in Kentucky Downs pursuant to the terms of the applicable operating agreement. On October 9,
2012, the Company filed a motion to dismiss the Simpson County Case and Kentucky Downs, KDP and KDMI filed a motion to
dismiss the Jefferson County Case. A hearing for the motion to dismiss in the Simpson County Case occurred November 30, 2012.
At that hearing the Company’s motion to dismiss the Simpson County Case was denied. Subsequently, Kentucky Downs, KDMI
and KDP’s motion to dismiss the Jefferson County Case was granted on January 23, 2013, due to the Simpson County Circuit
Court’s assertion of jurisdiction over the dispute. On May 16, 2013, Kentucky Downs, KDP and KDMI filed a Motion for Summary
Judgment against the Company and Turfway Park, LLC. On September 19, 2013, the Company filed its response to the Motion
for Summary Judgment. A hearing occurred before the Simpson County Circuit Court on September 23, 2013, on the Kentucky
Downs, KDP and KDMI Motion for Summary Judgment. All parties appeared before the Simpson County Court and oral arguments
were heard. On October 31, 2013, the Simpson County Court entered an Order Denying Petitioners’ (Kentucky Downs Management
Inc. et al.) Motion for Summary Judgment. The case will now move forward through discovery and to trial. No trial date has
been set.
Texas Pari-Mutuel Wagering
On September 21, 2012, the Company filed a lawsuit in the United States District Court for the Western District of Texas styled
Churchill Downs Incorporated; Churchill Downs Technology Initiatives Company d/b/a TwinSpires.com v. Chuck Trout, in his
official capacity as Executive Director of the Texas Racing Commission; Gary P. Aber, Susan Combs, Ronald F. Ederer, Gloria
Hicks, Michael F. Martin, Allan Polunsky, Robert Schmidt, John T. Steen III, Vicki Smith Weinberg, in their official capacity as
members of the Texas Racing Commission (Case No. 1:12-cv-00880-LY) challenging the constitutionality of a Texas law requiring
residents of Texas that desire to wager on horseraces to wager in person at a Texas race track. In addition to its complaint, on
September 21, 2012, the Company filed a motion for preliminary injunction seeking to enjoin the state from taking any action to
enforce the law in question. In response, on October 9, 2012, counsel for the state assured both the Company and the court that
the state would not enforce the law in question against the Company without prior notice, at which time the court could then
consider the motion for preliminary injunction. On April 15, 2013, both parties filed their opening briefs, and a trial was held on
May 2, 2013. On September 23, 2013, the United States District Court for the Western District of Texas ruled against the Company
and upheld the Texas law at issue. Subsequently, on September 25, 2013, the Company ceased taking wagers from Texas residents
via TwinSpires.com and returned deposited funds to Texas residents. The Company filed a motion for an expedited hearing in the
United States Court of Appeals, which was granted on October 17, 2013. The Texas Racing Commission, et. al., filed an appellate
brief on December 13, 2013. The Company filed its brief in reply on December 30, 2013. Oral arguments were heard before the
United States Court of Appeals for the Fifth Circuit on February 4, 2014. On September 25, 2014, the United States Court of
Appeals for the Fifth Circuit issued an unpublished opinion affirming the United States District Court for the Western District of
Texas and its ruling in favor of the Texas Racing Commission.
There are no other material pending legal proceedings.
106
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
NOTE 18—EARNINGS PER COMMON SHARE COMPUTATIONS
The following is a reconciliation of the numerator and denominator of the earnings per common share computations (in thousands,
except per share data):
Numerator for basic earnings from continuing operations per
common share:
Earnings from continuing operations
Earnings from continuing operations allocated to participating securities
Numerator for basic earnings from continuing operations per
common share
Numerator for basic earnings per common share:
Net earnings
Net earnings allocated to participating securities
Numerator for basic net earnings per common share
Numerator for diluted earnings from continuing operations per common
share:
Numerator for diluted earnings per common share
Denominator for net earnings per common share:
Basic
Plus dilutive effect of stock options and restricted stock
Plus dilutive effect of participating securities
Diluted
Earnings (loss) per common share:
Basic
Earnings from continuing operations
Discontinued operations
Net earnings
Diluted
Earnings from continuing operations
Discontinued operations
Net earnings
NOTE 19—SEGMENT INFORMATION
$
$
$
$
$
$
$
$
$
$
Year Ended December 31,
2013
2012
2014
46,357
(267)
46,090
46,357
(267)
46,090
46,357
46,357
$
$
$
$
$
$
55,033
(873)
54,160
54,900
(870)
54,030
55,033
54,900
$
$
$
$
$
$
58,152
(518)
57,634
58,276
(519)
57,757
58,152
58,276
17,271
17,294
17,047
153
165
248
396
233
195
17,589
17,938
17,475
2.67
—
2.67
2.64
—
2.64
$
$
$
$
3.13
(0.01)
3.12
3.07
(0.01)
3.06
$
$
$
$
3.38
0.01
3.39
3.33
0.01
3.34
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The Company operates in the following five segments: (1) Racing, which includes Churchill Downs, Arlington and its ten OTBs,
Fair Grounds and its twelve OTBs and Calder, which ceased pari-mutuel operations on July 1, 2014; (2) Casinos, which includes
video poker and gaming operations at Calder Casino, Fair Grounds Slots, Harlow’s, Riverwalk, Oxford, MVG and VSI; (3)
TwinSpires, which includes TwinSpires, our ADW business, Fair Grounds Account Wagering, Bloodstock Research Information
Services, Velocity and Luckity, until the cessation of its operations on November 4, 2014, as well as the Company's equity investment
in HRTV, LLC; (4) Big Fish Games; and (5) Other Investments, which includes United Tote, Bluff and the Company's other minor
investments. Eliminations include the elimination of intersegment transactions.
On January 1, 2014, the Company reclassified its equity investment in MVG from Other Investments to Casinos, to coincide with
the first full period of operations for the venture, which opened on December 12, 2013. MVG's results of operations for the year
ended December 31, 2013 have been reclassified to the Casinos segment.
In order to evaluate the performance of these operating segments internally, the Company uses Adjusted EBITDA (defined as
earnings before interest, taxes, depreciation, amortization, and adjusted for insurance recoveries net of losses, HRE Trust Fund
proceeds, share-based compensation expenses, pre-opening expenses, the impairment of assets, Big Fish Games transaction
expenses, Big Fish Games acquisition-related charges, changes in Big Fish Games deferred revenue and other charges or recoveries).
107
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Big Fish Games transaction expenses include legal, accounting and other deal-related expenses. Big Fish Games acquisition-
related charges reflect the change in fair value of the Big Fish Games earnout and deferred consideration liability recorded each
reporting period. Changes in Big Fish Games deferred revenue reflect reductions in revenue from business combination accounting
rules when deferred revenue balances assumed as part of an acquisition are adjusted to their fair values. Fair value approximates
the cost of fulfilling the service obligation, plus a reasonable profit margin. Adjusted EBITDA also includes 50% of the operating
income or loss of our joint venture, MVG.
During the year ended December 31, 2013, the Company implemented the Adjusted EBITDA metric because it believes the
inclusion or exclusion of certain recurring and non-recurring items is necessary to provide a more accurate measure of its core
operating results and enables management and investors to evaluate and compare from period to period our operating performance
in a meaningful and consistent manner. The 2012 financial information has been retrospectively revised to reflect the change in
the segment profitability reporting measure. Adjusted EBITDA should not be considered as an alternative to operating income as
an indicator of performance, as an alternative to cash flows from operating activities as a measure of liquidity, or as an alternative
to any other measure provided in accordance with GAAP. The Company's calculation of Adjusted EBITDA may be different from
the calculation used by other companies and, therefore, comparability may be limited.
The accounting policies of the segments are the same as those described in the “Summary of Significant Accounting Policies” in
Note 1. The table below presents information about reported segments for the years ended December 31, 2014, 2013 and 2012
(in thousands):
Net revenues from external customers:
Churchill Downs
Arlington
Calder
Fair Grounds
Total Racing
Calder Casino
Fair Grounds Slots
VSI
Harlow’s Casino
Oxford Casino
Riverwalk Casino
Total Casinos
TwinSpires
Big Fish Games
Other Investments
Corporate
Arlington
Calder
Fair Grounds
Total Racing
TwinSpires
Other Investments
Eliminations
Net revenues
Net revenues from external customers
Intercompany net revenues:
Churchill Downs
$
$
Year Ended December 31,
2013
2012
2014
$
143,191
$
132,845
$
124,255
60,312
19,325
38,625
261,453
77,003
40,774
34,369
50,199
76,526
50,139
329,010
190,333
13,855
17,125
1,158
812,934
7,038
5,767
707
1,089
14,601
958
4,130
(19,689)
$
$
64,483
36,264
40,677
274,269
78,951
42,156
35,931
52,440
34,350
53,645
297,473
184,541
—
21,899
1,143
779,325
6,686
3,395
1,263
1,151
12,495
853
4,409
(17,757)
$
$
69,077
64,566
44,190
302,088
77,864
42,881
35,433
56,604
—
10,330
223,112
183,279
—
21,785
1,032
731,296
5,592
4,712
1,583
1,270
13,157
836
3,466
(17,459)
—
$
— $
— $
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Churchill Downs Incorporated
Notes to Consolidated Financial Statements
Reconciliation of segment Adjusted EBITDA to net earnings:
Racing
Casinos
TwinSpires
Big Fish Games
Other Investments
Total segment Adjusted EBITDA
Corporate Adjusted EBITDA
Insurance recoveries, net of losses
Big Fish Games acquisition charges
Big Fish Games transaction expenses
Big Fish Games changes in deferred revenue
HRE Trust Fund proceeds
Share-based compensation expense
Pre-opening expenses
MVG interest expense, net
Asset impairment charges
Other charges
Depreciation and amortization
Interest income (expense), net
Income tax provision
Earnings from continuing operations
Discontinued operations, net of income taxes
Net earnings
Foreign currency translation, net of tax
Comprehensive income
Year Ended December 31,
2013
2012
2014
$
$
61,160
101,106
45,282
3,837
(3,857)
207,528
(5,037)
431
(3,826)
(6,367)
(4,497)
—
(11,932)
(27)
(2,546)
(4,843)
(3,287)
(68,257)
(20,822)
(30,161)
46,357
—
46,357
(125)
46,232
$
$
50,275
80,631
49,122
—
809
180,837
(4,606)
375
—
—
—
4,541
(21,482)
(3,620)
(170)
—
(2,500)
(61,750)
(6,119)
(30,473)
55,033
(133)
54,900
—
54,357
64,231
44,618
—
(117)
163,089
(4,834)
7,006
—
—
—
—
(13,993)
—
—
—
—
(55,600)
(4,441)
(33,075)
58,152
124
58,276
—
$
54,900
$
58,276
The table below presents information about equity in (losses) earnings of unconsolidated investments included in the Company's
reported segments for the years ended December 31, 2014, 2013 and 2012 (in thousands):
Casinos
TwinSpires
Other Investments
Year Ended December 31,
2013
2012
2014
$
$
8,900
(68)
(2,504)
6,328
$
$
(3,718) $
(848)
424
(4,142) $
(610)
(1,413)
322
(1,701)
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The tables below present total asset information about reported segments as of December 31, 2014 and 2013 and capital expenditures
for the years ended December 31, 2014, 2013 and 2012 (in thousands):
Total assets:
Racing
Casinos
TwinSpires
Big Fish Games
Other Investments
Capital expenditures, net:
Racing
Casinos
TwinSpires
Big Fish Games
Other Investments
As of December 31,
2013
2014
$
518,517
$
621,240
182,322
1,007,438
30,757
513,345
622,038
186,621
—
30,257
$
2,360,274
$
1,352,261
Year Ended December 31,
2013
2012
2014
$
35,637
$
20,184
$
7,715
5,778
116
5,240
13,643
5,908
—
9,036
$
54,486
$
48,771
$
14,027
14,524
4,427
—
8,320
41,298
NOTE 20—RELATED PARTY TRANSACTIONS
Directors and employees of the Company may from time to time own or have interests in horses racing at the Company’s racetracks.
All such races are conducted, as applicable, under the regulations of each state’s respective regulatory agency, and no director
receives any extra or special benefit with regard to having his or her horses selected to run in races or in connection with the actual
running of races. There is no material financial statement impact attributable to directors who may have interests in horses racing
at our racetracks.
In its ordinary course of business, the Company may enter into transactions with certain of its officers and directors for the sale
of personal seat licenses and suite accommodations at its racetracks, and tickets for its live racing events. The Company believes
that each such transaction has been on terms no less favorable for the Company than could have been obtained in a transaction
with a third party and no such person received any extra or special benefit in connection with such transactions.
NOTE 21— HRE TRUST FUND PROCEEDS
Under legislation enacted in 1999, the HRE Trust Fund was scheduled to receive amounts equal to 15% of the adjusted gross
receipts generated by a tenth riverboat casino license to be granted in Illinois. The funds were to be distributed to racetracks in
Illinois for purses as well as racetrack discretionary spending. During December 2008, the Illinois Gaming Board awarded the
tenth riverboat license to a casino in Des Plaines, Illinois. This casino opened during July 2011, entitling the Illinois racing industry
to receive an amount equal to 15% of the adjusted gross receipts of this casino from the gaming taxes generated by that casino,
once the accumulated funds were appropriated by the state.
On July 10, 2013, the Governor of Illinois signed Illinois House Bill 214 into law, providing for the release of $23.0 million of
funds collected from the tenth riverboat licensee since its opening during 2011. During the year ended December 31, 2013,
Arlington received $7.9 million as its share of the proceeds, of which $3.6 million was designated for Arlington purses. The
remaining $4.2 million was recognized as miscellaneous other income in the Company's Consolidated Statements of Comprehensive
Income during the year ended December 31, 2013. No additional proceeds related to future funds of the tenth riverboat are expected
to be distributed to Illinois racetracks under the provisions of House Bill 214.
NOTE 22— SUBSEQUENT EVENT - HRTV EQUITY INVESTMENT DIVESTITURE
As part of the TSG agreement related to the cessation of Calder pari-mutuel operations, the Company modified its HRTV operating
and ownership agreement with TSG resulting in the divestiture of the Company’s interest in HRTV effective January 2, 2015.
110
Churchill Downs Incorporated
Notes to Consolidated Financial Statements
During January 2015, we received $6.0 million in proceeds from the sale of the ownership interest. The Company recorded a gain
of $5.8 million during January 2015 from the sale of its remaining investment in HRTV.
Supplementary Financial Information — Results of Operations (Unaudited)
Summarized unaudited consolidated quarterly information for the years ended December 31, 2014 and 2013 is provided below
(in thousands, except per common share data):
For the Year Ended December 31, 2014
Net revenues
Earnings (loss) from operations
Net earnings per common share:
Basic:
Net earnings (loss)
Diluted:
Net earnings (loss)
Net revenues
Earnings from continuing operations
Discontinued operations, net of income taxes:
(Loss) earnings from operations
Loss on sale of assets
Net earnings
Net earnings per common share:
Basic:
Earnings from continuing operations
Discontinued operations
Net earnings (loss)
Diluted:
Earnings from continuing operations
Discontinued operations
Net earnings (loss)
$
$
$
$
$
$
$
$
$
$
$
$
$
First Quarter
167,310
Second Quarter
303,651
$
(700) $
57,333
(0.04) $
(0.04) $
3.23
3.21
$
$
$
Third Quarter
173,665
$
3,531
Fourth Quarter
168,308
$
(13,807)
$
0.21
0.20
$
$
(0.81)
(0.81)
For the Year Ended December 31, 2013
First Quarter
147,876
Second Quarter
283,593
$
Third Quarter
185,496
$
1,089
$
50,308
$
9,208
Fourth Quarter
162,360
$
(5,573)
$
(31) $
— $
(10) $
— $
41
$
— $
1,058
$
50,298
$
9,249
$
0.06
—
0.06
0.06
—
0.06
$
$
$
$
2.85
—
2.85
2.81
—
2.81
$
$
$
$
0.52
—
0.52
0.51
0.01
0.52
$
$
$
$
(49)
(83)
(5,705)
(0.32)
(0.01)
(0.33)
(0.32)
(0.01)
(0.33)
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ITEM 9.
None.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A.
CONTROLS AND PROCEDURES
Included in this Annual Report on Form 10-K are certifications of our Chief Executive Officer and Chief Financial Officer,
which are required in accordance with Rule 13a-14 of the Securities and Exchange Act of 1934, as amended (the “Exchange
Act”). This section includes information concerning the controls and controls evaluation referred to in the certifications.
(a) Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed
in the reports that the Company files or submits to the Securities and Exchange Commission is recorded, processed, summarized,
and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and
communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required financial disclosure.
111
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the
participation of the Company’s Disclosure Committee and management, including the Chief Executive Officer and the Chief
Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange
Act Rule 13a-15(b). Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that
our disclosure controls and procedures were effective as of December 31, 2014.
(b) Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting
includes those policies and procedures that:
(i)
(ii)
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and directors of the Company;
and
(iii) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014.
In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control-Integrated Framework (2013).
We have excluded Big Fish Games, Inc. ("Big Fish Games") from our assessment of internal control over financial reporting as
of December 31, 2014, because it was acquired by us in a business acquisition during 2014. Big Fish Games is a wholly-owned
subsidiary whose total assets were 4.1% and total revenues were 1.7% of the related consolidated financial statement amounts
as of and for the year ended December 31, 2014.
Based on our assessment using those criteria, management has concluded that the Company maintained effective internal control
over financial reporting as of December 31, 2014.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2014, has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which appears under
Item 8.
(c) Changes in Internal Control Over Financial Reporting
Management of the Company has evaluated, with the participation of the Company’s Chief Executive Officer and Chief Financial
Officer, changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act)
during the fourth quarter of 2014. There have not been any changes in the Company’s internal control over financial reporting
(as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended December 31, 2014 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required herein is incorporated by reference from sections of the Company’s Proxy Statement titled “Section
16(a) Beneficial Ownership Reporting Compliance,” “Election of Directors,” “Executive Officers of the Company,” “Corporate
Governance” and “Audit Committee,” to be filed with the Securities and Exchange Commission in connections with the
112
Company's 2015 Annual Meeting of Shareholders ("the Proxy Statement") pursuant to instruction G(3) of the General Instructions
to Form 10-K.
The Company has adopted a Code of Ethics that applies to its Chief Executive Officer, Chief Financial Officer and employees
performing
the Company’s corporate website,
www.churchilldownsincorporated.com, under the “Investors” heading. A copy of this Code of Ethics is also available and will
be sent to shareholders free of charge upon request to the Company’s Secretary.
functions. This Code of Ethics
is available on
similar
ITEM 11.
EXECUTIVE COMPENSATION
The information required herein is incorporated by reference from sections of the Company’s Proxy Statement titled “Election
of Directors — Director Compensation for the year ended December 31, 2014,” “Compensation Committee Interlocks and
Insider Participation,” “Corporate Governance,” “Certain Relationships and Related Transactions,” “Executive Compensation,”
“Compensation Committee Report” and “Compensation Discussion and Analysis,” pursuant to instruction G(3) of the General
Instructions to Form 10-K.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required herein is incorporated by reference from the sections of the Company’s Proxy Statement titled “Security
Ownership of Certain Beneficial Owners and Management,” “Election of Directors,” “Executive Officers of the Company” and
“Equity Compensation Plan Information,” pursuant to instruction G(3) of the General Instructions to Form 10-K.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required herein is incorporated by reference from the section of the Company’s Proxy Statement titled “Certain
Relationships and Related Transactions” and “Corporate Governance,” pursuant to instruction G(3) of the General Instructions
to Form 10-K.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required herein is incorporated by reference from the section of the Company’s Proxy Statement titled
“Independent Public Accountants,” pursuant to instruction G(3) of the General Instructions to Form 10-K.
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PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) (1) Consolidated Financial Statements
The following financial statements of Churchill Downs Incorporated for the years ended December 31,
2014, 2013 and 2012 are included in Part II, Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Comprehensive Income
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Schedule II—Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, not significant or not required, or because
the required information is included in the consolidated financial statements or notes thereto.
(3) For the list of required exhibits, see exhibit index.
Exhibits
See exhibit index.
All financial statements and schedules except those items listed under Items 15(a)(1) and (2) above are
omitted because they are not applicable or not required, or because the required information is included in
the consolidated financial statements or notes thereto.
(b)
(c)
Pages
73
74
75
76
77
79
116
117
117
114
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHURCHILL DOWNS INCORPORATED
/s/ William C. Carstanjen
William C. Carstanjen
Chief Executive Officer
(Principal Executive Officer)
February 25, 2015
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Robert L. Evans
Robert L. Evans
Chairman of the Board
February 25, 2015
(Chairman of the Board)
/s/ Ulysses L. Bridgeman
Ulysses L. Bridgeman
February 25, 2015
(Director)
/s/ Robert L. Fealy
Robert L. Fealy
February 25, 2015
(Director)
/s/ James F. McDonald
James F. McDonald
February 25, 2015
(Director)
/s/ William C. Carstanjen
William C. Carstanjen
Chief Executive Officer
February 25, 2015
(Principal Executive Officer)
/s/ Craig J. Duchossois
Craig J. Duchossois
February 25, 2015
(Director)
/s/ Daniel P. Harrington
Daniel P. Harrington
February 25, 2015
(Director)
/s/ R. Alex Rankin
R. Alex Rankin
February 25, 2015
(Director)
/s/ William E. Mudd
William E. Mudd
President and
Chief Financial Officer
February 25, 2015
(Principal Financial and
Accounting Officer
/s/ Richard L. Duchossois
Richard L. Duchossois
February 25, 2015
(Director)
/s/ G. Watts Humphrey, Jr.
G. Watts Humphrey, Jr.
February 25, 2015
(Director)
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CHURCHILL DOWNS INCORPORATED
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
Balance
Beginning
of Year
Acquired
Balances
Charged
to
Expenses
Deductions
Balance
End of
Year
Description
Allowance for doubtful accounts:
2014
2013
2012
$
$
$
4,338
1,885
2,408
Description
Deferred income tax asset valuation allowance:
2014
2013
2012
$
$
$
$
$
$
— $
— $
— $
1,710
3,785
1,937
$
$
$
(1,802) $
(1,332) $
(2,460) $
4,246
4,338
1,885
Balance
Beginning
of Year
Additions
Deductions
Balance
End of
Year
1,213
1,334
1,487
$
$
$
75
168
33
$
$
$
(14) $
(289) $
(186) $
1,274
1,213
1,334
116
EXHIBIT INDEX
Numbers
Description
2
(a)
Purchase Agreement dated as of September 10, 2010 among
Churchill Downs Incorporated, SWG Holdings, LLC and
HCRH, LLC
Agreement and Plan of Merger, dated as of November 12, 2014,
by and among Churchill Downs Incorporated, Ocean Acquisition
Corp., Big Fish Games, Inc., and the security holders’ agent
party thereto
By Reference To
Exhibit 10.1 to Current Report on Form
8-K filed September 13, 2010
Exhibit 2.1 to Current Report on Form 8-
K filed November 13, 2014
Shareholder Agreement, dated as of November 12, 2014, by and
between Churchill Downs Incorporated and Paul J. Thelen
Exhibit 2.2 to Current Report on Form 8-
K filed November 13, 2014
3
(a)
Amended and Restated Articles of Incorporation of Churchill
Downs Incorporated, as amended July 3, 2012
Exhibit 3.1 to Current Report on Form 8-
K filed July 10, 2012
(b)
Amended and Restated Bylaws of Churchill Downs
Incorporated, as amended July 3, 2012
Exhibit 3.1 to Current Report on Form 8-
K filed July 10, 2012
4
(a)
Rights Agreement, dated as of March 19, 2008 by and between
Churchill Downs Incorporated and National City Bank
Exhibit 4.1 to Current Report on Form 8-
K filed March 17, 2008
(b)
(c)
(d)
Second Amended and Restated Credit Agreement dated
December 22, 2009, among Churchill Downs Incorporated, the
guarantors party thereto, the Lenders party thereto and JPMorgan
Chase Bank, N.A., as agent and collateral agent, with PNC Bank,
National Association, as Syndication Agent, and Fifth Third
Bank, U.S. Bank, National Association and Wells Fargo Bank,
National Association, as Documentation Agents
Amendment No. 1 to the Second Amended and Restated Credit
Agreement, dated November 1, 2010 among Churchill Downs
Incorporated, the guarantors party thereto, the Lenders party
thereto and JPMorgan Chase Bank, N.A., as agent and collateral
agent, with PNC Bank, National Association, as Syndication
Agent, and Fifth Third Bank, U.S. Bank, National Association
and Wells Fargo Bank, National Association, Documentation
Agents
Third Amendment and Restated Credit Agreement, dated May
17, 2013 among Churchill Downs Incorporated, the guarantors
party thereto, the Lenders party thereto and JP Morgan Chase
Bank, N.A., as agent and collateral agent, with PNC Bank,
National Association, as Syndication Agent, and Fifth Third
Bank, U.S. Bank, National Association and Wells Fargo Bank,
National Association, Documentation Agents
(e)
Amendment and Restatement Agreement dated December 1,
2014 with Fourth Amended and Restated Credit Agreement
10
(a)
Churchill Downs Incorporated Amended and Restated
Supplemental Benefit Plan dated December 1, 1998*
(b)
Churchill Downs Incorporated 2003 Stock Option Plan*
Fourth Amended and Restated Churchill Downs Incorporated
1997 Stock Option Plan*
Exhibit 10.1 to Current Report on Form
8-K filed December 29, 2009
Exhibit 10.1 to Current Report on Form
8-K filed November 1, 2010
Exhibit 10(a) to Quarterly Report on
Form 10-Q for the fiscal quarter ended
June 30, 2013.
Exhibit 4(e) to Annual Report on Form
10-K for the fiscal year ended December
31, 2014
Exhibit 10(a) to Annual Report on Form
10-K for the fiscal year ended December
31, 1998
Exhibit 4(e) to the Registration Statement
on Form S-8 dated June 20, 2003 (No.
333-106310)
Exhibit 10(a) to Quarterly Report on
Form 10-Q for the fiscal quarter ended
June 30, 2002
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Amended and Restated Lease Agreement dated January 31, 1996 Exhibit 10(i) to Annual Report on Form
10-K for the fiscal year ended December
31, 1995
117
(b)
(c)
(c)
(d)
Numbers
(e)
(f)
(g)
Description
Churchill Downs Incorporated Amended and Restated Deferred
Compensation Plan for Employees and Directors*
Form of Stockholder’s Agreement, dated September 8, 2000
among Churchill Downs Incorporated and Duchossois Industries,
Inc.
By Reference To
Exhibit 10(a) to Quarterly Report on
Form 10-Q for the fiscal quarter ended
March 31, 2001
Annex C of the Proxy Statement for a
Special Meeting of Shareholders of
Churchill Downs Incorporated held
September 8, 2000
Lease Agreement between the City of Louisville, Kentucky and
Churchill Downs Incorporated dated January 1, 2003
Exhibit 2.1 to Current Report on Form 8-
K filed January 6, 2003
(h)
Form of Restricted Stock Agreement*
Exhibit 10.1 to Current Report on Form
8-K filed November 30, 2004
(i)
(j)
(k)
(l)
Stock Redemption Agreement dated as of October 19, 2004,
between Churchill Downs Incorporated and Brad M. Kelley
Exhibit 10.2 to Current Report on Form
8-K filed October 25, 2004
Churchill Downs Incorporated Amended and Restated
Convertible Promissory Note dated March 7, 2005
Exhibit 10.1 to Current Report on Form
8-K filed March 11, 2005
2005 Churchill Downs Incorporated Deferred Compensation
Plan, as amended*
Exhibit 10.1 to Current Report on Form
8-K filed June 21, 2005
Reinvestment Agreement dated as of September 23, 2005,
among Bay Meadows Land Company, LLC, Stockbridge HP
Holdings Company, LLC, Stockbridge Real Estate Fund II-A,
LP, Stockbridge Real Estate Fund II-B, LP, Stockbridge Real
Estate Fund II-T, LP, Stockbridge Hollywood Park Co-Investors,
LP and Churchill Downs Investment Company
Exhibit 10.3 to Current Report on Form
8-K filed September 29, 2005
(m)
2006 Amendment to 2005 Churchill Downs Incorporated
Deferred Compensation Plan*
Exhibit 10.1 to Current Report on Form
8-K filed June 8, 2006
(n)
(o)
(p)
(q)
(r)
(s)
(t)
(u)
(v)
Churchill Downs Incorporated 2007 Omnibus Stock Incentive
Plan*
Exhibit A to Schedule 14A filed April 30,
2007
Amendment to Churchill Downs Incorporated 2005 Deferred
Compensation Plan Adopted June 28, 2007*
Amended and Restated Terms and Conditions of Performance
Share Awards Issued Pursuant to the Churchill Downs
Incorporated 2007 Omnibus Stock Incentive Plan
Exhibit 10(b) to Quarterly Report on
Form 10-Q for the fiscal quarter ended
June 30, 2007
Exhibit 10.1 to Current Report on Form
8-K filed December 19, 2008
First Amendment to the Churchill Downs Incorporated Amended
and Restated Incentive Compensation Plan (1997), effective
November 14, 2008*
Exhibit 10 (vv) to Annual Report on
Form 10-K for the fiscal year ended
December 31, 2008
2005 Churchill Downs Incorporated Deferred Compensation
Plan (As Amended as of December 1, 2008)*
Churchill Downs Incorporated Executive Severance Policy
(Amended Effective as of November 12, 2008)*
Agreement and Sale of Purchase, dated as of November 30,
2009, between The Duchossois Group, Inc. and Arlington Park
Racecourse, LLC
Exhibit 10 (ww) to Annual Report on
Form 10-K for the fiscal year ended
December 31, 2008
Exhibit 10 (xx) to Annual Report on
Form 10-K for the fiscal year ended
December 31, 2008
Exhibit 10.1 to Current Report on Form
8-K filed December 4, 2009
Promissory Note, dated as of December 3, 2009, made by
Arlington Park Racecourse, LLC to The Duchossois Group, Inc.
Exhibit 10.2 to Current Report on Form
8-K filed December 4, 2009
Dissolution Agreement for TrackNet Media Group, LLC by and
between Churchill Downs Incorporated and MI Developments,
Inc, entered May 14, 2010
Exhibit 99.1 to Current Report on Form
8-K dated May 19, 2010
118
Numbers
(w)
Description
Amended and Restated Employment Agreement dated as of
September 27, 2010, by and between Churchill Downs
Incorporated and Robert L. Evans
By Reference To
Exhibit 10(a) to Quarterly Report on
Form 10-Q for the fiscal quarter ended
September 30, 2010
(x)
(y)
(z)
(aa)
(bb)
Form of Churchill Downs Incorporated Restricted Stock
Agreement*
Limited Liability Company Agreement of Miami Valley Gaming
& Racing, LLC, dated as of March 1, 2012, among Miami Valley
Gaming & Racing, LLC, Churchill Downs Incorporated, MVGR,
LLC (a wholly-owned subsidiary of Churchill Downs
Incorporated), Delaware North Companies Gaming &
Entertainment, Inc. and DNC Ohio Gaming, Inc. (a wholly-
owned subsidiary of Delaware North Companies Gaming &
Entertainment, Inc.)
Exhibit 10(ll) to Annual Report on Form
10-K for the fiscal year ended December
31, 2011
Exhibit 10.1 to Current Report on Form
8-K filed March 5, 2012
Asset Purchase Agreement, dated as of March 1, 2012, between
Miami Valley Gaming & Racing LLC; Lebanon Trotting Club,
Inc.; Miami Valley Trotting, Inc.; Keith Nixon Jr. and John Carlo
Exhibit 10.2 to Current Report on Form
8-K filed March 5, 2012
Indenture dated as of December 16, 2013 by and among
Churchill Downs Incorporated, the Guarantors, and US Bank
National Association
Exhibit (4.1) to Current Report on Form
8-K dated December 16, 2013.
Registration Rights Agreement dated December 16, 2013 by and
among Churchill Downs Incorporated, the Guarantors and the
representatives of the initial purchasers
Exhibit (4.2) to Current Report on Form
8-K dated December 16, 2013.
(cc)
Churchill Downs Incorporated Executive Annual Incentive Plan
(dd)
Amendment to the Churchill Downs Incorporated 2007 Omnibus
Stock Incentive Plan
(ee)
(ff)
Form of Executive Change in Control, Severance and Indemnity
Agreement dated as of August 27, 2014 executed between
Churchill Downs Incorporated and Robert L. Evans, William C.
Carstanjen, William E. Mudd, and Alan K. Tse*
Form of Executive Change in Control, Severance and Indemnity
Agreement dated as of February 9, 2015 executed between
Churchill Downs Incorporated and Robert L. Evans, William C.
Carstanjen, William E. Mudd, and Alan K. Tse*
Churchill Downs Incorporated Code of Ethics as of December
31, 2003
Subsidiaries of the Registrant
Consent of PricewaterhouseCoopers LLP, Independent
Registered Public Accounting Firm
14
21
23
31
(a)
Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
(b)
Certification of Principal Financial Officer Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Exhibit A of the Proxy Statement for a
Meeting of Shareholders of Churchill
Downs Incorporated held June 14, 2012.
Exhibit B of the Proxy Statement for a
Meeting of Shareholders of Churchill
Downs Incorporated held June 14, 2012.
Exhibit 10.1 to Current Report on Form
8-K filed August 28, 2014
Exhibit 10.1 to Current Report on Form
8-K filed February 12, 2015
Exhibit 14 to Annual Report on Form 10-
K for the fiscal year ended December 31,
2003
Exhibit 21 to Annual Report on Form 10-
K for the fiscal year ended December 31,
2014
Exhibit 23 to Annual Report on Form 10-
K for the fiscal year ended December 31,
2014
Exhibit 31(a) to Annual Report on Form
10-K for the fiscal year ended December
31, 2014
Exhibit 31(b) to Annual Report on Form
10-K for the fiscal year ended December
31, 2014
119
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Numbers
32
Description
Certification of Chief Executive Officer and Principal Financial
Officer Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(furnished pursuant to Rule 13a-14(b))
By Reference To
Exhibit 32 to Annual Report on Form 10-
K for the fiscal year ended December 31,
2014
101
INS
XBRL Instance Document
101 SCH
XBRL Taxonomy Extension Schema Document
101 CAL
XBRL Taxonomy Extension Calculation Linkbase Document
101 DEF
XBRL Taxonomy Extension Definition Linkbase Document
101 LAB
XBRL Taxonomy Extension Label Linkbase Document
101 PRE
XBRL Taxonomy Extension Presentation Linkbase Document
* Management contract or compensatory plan or arrangement.
120
SUBSIDIARIES OF THE REGISTRANT
State/Jurisdiction of
Incorporation/Organization
Exhibit 21
Subsidiary
Arlington Park Racecourse, LLC
Arlington OTB Corp.
Quad City Downs, Inc.
Calder Race Course, Inc., d/b/a Calder Casino and Race Course
Tropical Park, LLC
Churchill Downs Louisiana Horseracing Company, LLC d/b/a Fair
Grounds Race Course & Slots
Churchill Downs Louisiana Video Poker Company, LLC
Video Services, LLC
Churchill Downs Technology Initiatives Company d/b/a Bloodstock
Research Information Services and TwinSpires.com
Churchill Downs Management Company, LLC
HCRH, LLC
Magnolia Hill, LLC d/b/a Riverwalk Casino Hotel, LLC
SW Gaming, LLC d/b/a Harlow's Casino Resort & Spa
United Tote Company
United Tote Canada, Inc.
Churchill Downs Racetrack, LLC
Velocity Wagering HC, LLC
Velocity Wagering Services Limited
MVGR, LLC
Miami Valley Gaming & Racing, LLC
Bluff Holdings Georgia, Inc.
Bluff Holding Company, LLC
Churchill Downs Interactive Gaming, LLC
BB Development, LLC d/b/a Oxford Casino
Big Fish Games, Inc.
BFG Holding LLC
3 Minute Games LLC
Big Fish Games Ireland Limited
Big Fish Games Canada, Inc.
Big Fish Games do Brasil Participações Ltda.
Big Fish Games Luxembourg S.à.r.l
Self Aware Games, LLC
Slots, Slot Machines and Slots Tournaments LLC
Illinois
Illinois
Iowa
Florida
Florida
Louisiana
Louisiana
Louisiana
Delaware
Kentucky
Delaware
Delaware
Mississippi
Montana
Ontario
Kentucky
Delaware
Isle of Man
Delaware
Delaware
Georgia
Delaware
Delaware
Maine
Washington
Washington
Washington
Ireland
Canada
Brazil
Luxembourg
California
Washington
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-197102, 333-182929,
333-182928, 333-62013, 333-41376, 333-43486, 333-100574, 333-106310, 333-116734, 333-127057, 333-135360, 033-61111,
333-116733, 333-144182, 333-144191 and 333-144192) of Churchill Downs Incorporated of our report dated February 25, 2015
relating to the financial statements, financial statement schedule and the effectiveness of internal control over financial reporting,
which appears in this Form 10-K.
Exhibit 23
/s/ PricewaterhouseCoopers LLP
Louisville, Kentucky
February 25, 2015
EXHIBIT 31(a)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, William C. Carstanjen, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Churchill Downs Incorporated;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: February 25, 2015
/s/ William C. Carstanjen
William C. Carstanjen
Chief Executive Officer
(Principal Executive Officer)
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EXHIBIT 31(b)
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, William E. Mudd, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Churchill Downs Incorporated;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the
period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: February 25, 2015
/s/ William E. Mudd
William E. Mudd
President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to
18 U.S.C. Section 1350,
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32
In connection with the Annual Report on Form 10-K of Churchill Downs Incorporated (the “Company”) for the year ended
December 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), William C. Carstanjen,
as Chief Executive Officer (Principal Executive Officer) of the Company, and William E. Mudd, as President and Chief Financial
Officer (Principal Financial and Accounting Officer) of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, as
adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
/s/ William C. Carstanjen
William C. Carstanjen
Chief Executive Officer
(Principal Executive Officer)
February 25, 2015
/s/ William E. Mudd
William E. Mudd
President and Chief Financial Officer
(Principal Financial and Accounting Officer)
February 25, 2015
This certification is being furnished to the Securities and Exchange Commission as an exhibit to the Report and shall not be deemed
filed by the Company for purposes of § 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise
adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906,
has been provided to Churchill Downs Incorporated and will be retained by Churchill Downs Incorporated and furnished to the
Securities and Exchange Commission or its staff upon request.
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Thank you for your investment in Churchill Downs and
for your trust in our leadership
Board of Directors
Directors & Officers
Ulysses L. Bridgeman, Jr.
Owner & President,
Manna, Inc. & EJR Inc.
(2016)
Craig J. Duchossois
CEO & Director,
The Duchossois Group, Inc.
(2015)
Richard L. Duchossois
Founder & Chairman,
The Duchossois Group, Inc.
(2016)
Robert L. Fealy
Chairman,
Brivo Systems, LLC
(2017)
Aditi J. Gockhale
Senior Vice President Digital,
Nutrisystem, Inc.
(2017)
Daniel P. Harrington
President & CEO,
HTV Industries, Inc.
(2017)
G. Watts Humphrey, Jr.
Lead Independent Director, CDI;
President, GWH Holdings, Inc.;
Chairman, IPEG;
Owner, Shawnee Farm
(2015)
James F. McDonald
Former Chairman & CEO, Scientific
Atlanta Inc.;
Former Senior Vice President,
Cisco Systems, Inc.
(2016)
R. Alex Rankin
President & CEO,
Sterling G. Thompson Co.;
President,
Upson Downs Farms, Inc.
(2016)
Executive Officers
Robert L. Evans
Chairman
(2015)
William C. Carstanjen
Chief Executive Officer
William E. Mudd
President &
Chief Financial Officer
Directors Emeriti
Alan K. Tse
Executive Vice President,
General Counsel &
Secretary
Charles W. Bidwell, Jr.
Catesby W. Clay
J. David Grissom
Thomas H. Meeker
Carl F. Pollard
Darrell R. Wells
NOTE: Parenthetical numbers denote year of term expiration
600 N. Hurstbourne Parkway, Ste. 400
Louisville, Kentucky 40222
Telephone: 502.636.4400
www.churchilldownsincorporated.com