10-Q

 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
OR
o
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
61-0156015
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
600 North Hurstbourne Parkway, Suite 400 Louisville, Kentucky 40222
(502) 636-4400
(Address of principal executive offices) (zip code)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes x    No  ¨
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 x No ¨
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.
Large accelerated filer
x
 
Accelerated filer
o
Non-accelerated filer
o
 
Smaller reporting company
o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨    No  x
The number of shares outstanding of Registrant’s common stock at October 23, 2015 was 17,572,576 shares.
 
 
 



CHURCHILL DOWNS INCORPORATED
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended September 30, 2015
 
 
 
 
 
 
 
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
 
 
 
 

2



PART I.
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
CHURCHILL DOWNS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (in thousands)
 
September 30, 2015
 
December 31, 2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
51,112

 
$
67,936

Restricted cash
27,928

 
26,065

Accounts receivable, net of allowance for doubtful accounts of $3,957 at September 30, 2015 and $4,246 at December 31, 2014
61,659

 
75,890

Deferred income taxes
18,989

 
18,519

Income taxes receivable

 
29,455

Game technology and rights, net
10,556

 
530

Other current assets
38,807

 
24,135

Total current assets
209,051

 
242,530

Property and equipment, net
571,457

 
595,315

Investment in and advances to unconsolidated affiliate
106,302

 
109,548

Goodwill
841,360

 
840,947

Other intangible assets, net
509,971

 
549,972

Other assets
22,174

 
24,192

Total assets
$
2,260,315

 
$
2,362,504

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
52,159

 
$
45,597

Bank overdraft
4,382

 
544

Purses payable
18,249

 
11,169

Account wagering deposit liabilities
20,291

 
18,137

Accrued expenses
99,894

 
93,286

Income taxes payable
8,938

 

Tax refund due to Big Fish Games former equity holders
6,342

 
18,087

Deferred revenue
9,719

 
51,833

Deferred revenue - Big Fish Games
73,750

 
41,747

Big Fish Games deferred payment, current
28,280

 
27,180

Big Fish Games earnout liability, current
276,570

 

Current maturities of long-term debt
15,000

 
11,250

Dividends payable

 
17,419

Total current liabilities
613,574

 
336,249

Long-term debt, net of current maturities
272,136

 
459,105

Notes payable
300,000

 
300,000

Big Fish Games deferred payment, net of current amount due
54,520

 
51,620

Big Fish Games earnout liability, net of current amount due
64,640

 
327,800

Other liabilities
23,779

 
21,718

Deferred revenue
15,684

 
16,489

Deferred income taxes
149,813

 
149,522

Total liabilities
1,494,146

 
1,662,503

Commitments and contingencies (Note 11)

 

Shareholders' equity:
 
 
 
Preferred stock, no par value; 250 shares authorized; no shares issued

 

Common stock, no par value; 50,000 shares authorized; 17,569 shares issued at September 30, 2015 and 17,472 shares issued at December 31, 2014
271,116

 
262,280

Accumulated other comprehensive loss
(482
)
 
(125
)
Retained earnings
495,535

 
437,846

Total shareholders' equity
766,169

 
700,001

Total liabilities and shareholders' equity
$
2,260,315

 
$
2,362,504

The accompanying notes are an integral part of the condensed consolidated financial statements.

3



 CHURCHILL DOWNS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(Unaudited)
(in thousands, except per common share data)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net revenues:
 
 
 
 
 
 
 
Big Fish Games
$
103,540

 
$

 
$
299,969

 
$

Casinos
82,679

 
81,623

 
251,864

 
249,788

TwinSpires
50,346

 
46,266

 
156,409

 
149,426

Racing
38,867

 
41,055

 
218,741

 
231,069

Other
4,333

 
4,539

 
12,931

 
13,813

 
279,765


173,483

 
939,914

 
644,096

Operating expenses:
 
 
 
 
 
 
 
Big Fish Games
80,005

 

 
245,610

 

Casinos
60,821

 
60,436

 
182,664

 
184,487

TwinSpires
33,475

 
31,872

 
102,863

 
102,260

Racing
40,918

 
46,492

 
152,525

 
175,195

Other
4,924

 
5,837

 
15,830

 
17,885

Selling, general and administrative expenses
24,643

 
18,175

 
68,250

 
58,306

Calder exit costs
12,737

 
2,298

 
13,490

 
2,298

Research and development
9,950

 

 
30,029

 

Acquisition-related charges
2,810

 

 
17,410

 

Insurance recoveries, net of losses

 

 

 
(431
)
Operating income
9,482

 
8,373

 
111,243

 
104,096

Other income (expense):
 
 
 
 
 
 
 
Interest income
8

 
6

 
232

 
15

Interest expense
(6,740
)
 
(5,173
)
 
(21,336
)
 
(15,107
)
Equity in gains of unconsolidated investments
2,389

 
1,057

 
8,244

 
5,853

Gain on sale of equity investment

 

 
5,817

 

Miscellaneous, net
(186
)
 
114

 
(346
)
 
482

 
(4,529
)
 
(3,996
)
 
(7,389
)
 
(8,757
)
Earnings from continuing operations before provision for income taxes
4,953

 
4,377

 
103,854

 
95,339

Income tax provision
(750
)
 
(846
)
 
(46,165
)
 
(35,175
)
Net earnings
$
4,203

 
$
3,531

 
$
57,689

 
$
60,164

 
 
 
 
 
 
 
 
Net earnings per common share data:
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
Net earnings
$
0.24

 
$
0.21

 
$
3.28

 
$
3.44

Diluted
 
 
 
 
 
 
 
Net earnings
$
0.24

 
$
0.20

 
$
3.26

 
$
3.40

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
17,347

 
17,020

 
17,316

 
17,322

Diluted
17,769

 
17,303

 
17,715

 
17,670

 
 
 
 
 
 
 
 
Other comprehensive earnings:
 
 
 
 
 
 
 
Foreign currency translation, net of tax effect
58

 

 
(357
)
 

Other comprehensive earnings (loss)
58

 

 
(357
)
 

Comprehensive earnings
$
4,261

 
$
3,531

 
$
57,332

 
$
60,164

The accompanying notes are an integral part of the condensed consolidated financial statements.

4


CHURCHILL DOWNS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
 
Nine Months Ended September 30,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net earnings
$
57,689

 
$
60,164

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
Depreciation and amortization
82,129

 
48,324

Game technology and rights amortization
5,846

 

Acquisition-related charges
17,410

 

Asset impairment loss
12,948

 

Loss (gain) on asset disposals
368

 
(405
)
Gain on sale of equity investment
(5,817
)
 

Equity in gains of unconsolidated investments
(8,244
)
 
(5,853
)
Dividend from investment in unconsolidated affiliate
11,000

 

Share-based compensation
10,580

 
10,567

Other
1,207

 
458

Increase (decrease) in cash resulting from changes in operating assets and liabilities, net of business acquisition:
 
 
 
Restricted cash
(1,863
)
 
8,525

Accounts receivable
(9,555
)
 
(1,455
)
Other current assets
(11,696
)
 
(3,346
)
Game technology and rights
(16,247
)
 

Accounts payable
8,611

 
2,872

Purses payable
7,080

 
(6,336
)
Accrued expenses
4,733

 
2,707

Deferred revenue
13,329

 
(24,797
)
Income taxes receivable and payable
38,067

 
20,482

Other assets and liabilities
5,621

 
2,338

Net cash provided by operating activities
223,196

 
114,245

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(30,838
)
 
(48,854
)
Deferred payments to Big Fish Games former equity holders
(959
)
 

Acquisition of gaming license
(2,250
)
 
(2,250
)
Investment in joint ventures
(350
)
 
(9,375
)
Proceeds from sale of equity investment
6,000

 

Purchases of minority investments
(81
)
 
(273
)
Proceeds on sale of property and equipment
124

 
925

Net cash used in investing activities
(28,354
)
 
(59,827
)
Cash flows from financing activities:
 
 
 
Borrowings on bank line of credit
382,412

 
317,379

Repayments on bank line of credit
(565,631
)
 
(303,179
)
Tax refund payments to Big Fish Games equity holders
(11,773
)
 

Change in bank overdraft
3,838

 
1,580

Payment of dividends
(17,419
)
 
(15,186
)
Repurchase of common stock

 
(61,561
)
Repurchase of common stock from share-based compensation
(7,183
)
 
(9,298
)
Common stock issued
1,213

 
7,475

Windfall tax benefit from share-based compensation
4,218

 
6,904

Loan origination fees
(31
)
 
(170
)
Debt issuance costs

 
(1,029
)
Net cash used in financing activities
(210,356
)
 
(57,085
)
Net decrease in cash and cash equivalents
(15,514
)
 
(2,667
)
Effect of exchange rate changes on cash
(1,310
)
 

Cash and cash equivalents, beginning of period
67,936

 
44,708

Cash and cash equivalents, end of period
$
51,112

 
$
42,041

The accompanying notes are an integral part of the condensed consolidated financial statements.

5


CHURCHILL DOWNS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)

 
Nine Months Ended September 30,
 
2015
 
2014
Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
15,371

 
$
9,078

Income taxes
$
29,530

 
$
16,956

Schedule of non-cash investing and financing activities:
 
 
 
Issuance of common stock in connection with the Company's restricted stock plans
$
22,685

 
$
2,991

The accompanying notes are an integral part of the condensed consolidated financial statements.

6


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


NOTE 1 — BASIS OF PRESENTATION
The accompanying Condensed Consolidated Financial Statements are presented in accordance with the requirements of this Quarterly Report on Form 10-Q and consequently do not include all of the disclosures normally required by Generally Accepted Accounting Principles ("GAAP") in the United States of America or those normally made in Churchill Downs Incorporated’s (the “Company”) Annual Report on Form 10-K. The year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements but does not include all disclosures required by GAAP. Accordingly, the reader of this Quarterly Report on Form 10-Q should refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 for further information. The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with the Company’s customary accounting practices and have not been audited.
In the opinion of management, all adjustments necessary for a fair statement of this information have been made, and all such adjustments are of a normal, recurring nature. Certain amounts for the nine months ended September 30, 2014 associated with Calder exit costs were reclassified to be consistent with current year presentation. There was no impact from these reclassifications on comprehensive earnings or cash flows.
The Company’s revenues and earnings are seasonal in nature, primarily due to its Racing segment. Therefore, revenues and operating results for any interim quarter are generally not 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. For instance, the Company historically has had fewer live racing days during the first quarter of each year, and the majority of its live racing revenue occurs during the second quarter, with the running of the Kentucky Derby and the Kentucky Oaks. The Company conducted 60 live thoroughbred racing days during the third quarter of 2015, which compares to 65 live thoroughbred racing days during the third quarter of 2014. For the nine months ended September 30, 2015, the Company conducted 183 live thoroughbred racing days, which compares to 276 live racing days during the nine months ended September 30, 2014. This decrease is primarily related to the cessation of pari-mutuel operations at Calder Race Course in July 2014. Furthermore, casino revenues and earnings have historically been higher during the first quarter due to seasonal revenues from the Company's predominately southern casino properties. The Company's revenues from its Big Fish Games, Inc. ("Big Fish Games") segment also have a seasonal component and are typically lower during the summer months.
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 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. At each of September 30, 2015 and December 31, 2014, the outstanding reward point liabilities were $1.8 million and $1.7 million, respectively, and were included in accrued expenses.
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 three months ended September 30, 2015 and 2014, promotional allowances of $8.6 million and $8.8 million, respectively, were included as a reduction to net revenues. During those periods, TwinSpires promotional allowances were $3.7 million and $3.6 million, respectively. Casino promotional allowances were $4.8 million and $5.0 million, respectively. Racing promotional allowances were $0.1 million and $0.2 million, respectively. The estimated cost of providing casino promotional allowances included in operating expenses for the three months ended September 30, 2015 and 2014 totaled $1.8 million and $2.4 million, respectively.
During the nine months ended September 30, 2015 and 2014, promotional allowances of $25.3 million and $25.4 million, respectively, were included as a reduction to net revenues. During those periods, TwinSpires promotional allowances were $10.3 million and $9.8 million, respectively. Casino promotional allowances were $14.6 million and $15.0 million, respectively. Racing promotional allowances were $0.4 million and $0.6 million, respectively. The estimated cost of providing casino promotional allowances included in operating expenses for the nine months ended September 30, 2015 and 2014 totaled $5.9 million and $7.3 million, respectively.
Game Technology and Rights
Game technology and rights are purchased from third-party developers both before and after the production or launch of games. The Company pays amounts to these developers as they reach agreed-upon milestones. Once the game is launched, the Company amortizes its game technology and rights on an accelerated basis over the useful life of the game, which is generally one year.

7


Research and Development
Costs incurred for research and development activities are expensed as incurred. Development costs associated with software to be sold are capitalized when technological feasibility has been established through the date the product is available for general release. At September 30, 2015 and December 31, 2014, there were no material amounts capitalized. For the three and nine months ended September 30, 2015, the Company incurred research and development expenses of $10.0 million and $30.0 million, respectively, within its Big Fish Games segment, which consisted primarily of compensation related expenses.
NOTE 2 — NEW VENTURES & ACQUISITIONS
California Internet Gaming
During May 2015, the Company's Internet real-money gaming operations, Churchill Downs Interactive Gaming ("I-Gaming"), entered into an agreement with a licensed California card room operator ("Licensed Operator") to provide Internet-based interactive gaming services within California, should enabling legislation be enacted which would permit such activities. The term of the agreement commences after enabling legislation and upon the acceptance of the first customer wager, continuing thereafter for a ten-year period. The venture provides for I-Gaming and the Licensed Operator to jointly provide a platform for operations, to obtain and maintain required licenses and regulatory approvals and to otherwise market and operate the venture, which may include poker and other real-money gaming activities, to California residents. At this time, it is difficult to assess whether this legislation will be enacted into law, and the effect it would have on the Company's business, financial condition and results of operation.
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 Luxembourg, employs approximately 599 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 and 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 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 7 for further discussion of the fair value measurement of the deferred payment and the earnout liability.
During the three months ended September 30, 2015, the Company finalized its 2014 federal provision to return income tax adjustments. The Company recorded a measurement period adjustment and increased goodwill by $0.4 million. As detailed in Note 6, the Company adopted ASU 2015-16, Simplifying the Accounting for Measurement Period Adjustments. The Company also increased deferred tax liabilities by $0.5 million and increased accounts receivable and income tax receivable by $0.1 million. The primary area of the preliminary valuation that was not finalized at September 30, 2015 related to the 2014 state provision to return income tax adjustments which the Company expects to complete during the fourth quarter of 2015.
Furthermore, during the three months ended March 31, 2015, the Company obtained additional information to assist it in determining the values of the liabilities assumed at the acquisition date and changes which occurred during the measurement period. A measurement period adjustment was recorded related to estimated payroll taxes associated with the earnout liability. The Company retroactively adjusted the December 31, 2014 Condensed Consolidated Balance Sheet and increased deferred tax assets by $0.8 million, increased goodwill by $1.4 million and increased accrued expenses by $2.2 million. In addition, the Company made deferred payments of $12.7 million to Big Fish Games former equity holders for the receipt of a federal income tax refund and working capital adjustments related to the acquisition.
The following table summarizes (in thousands) the current fair value of the assets acquired and liabilities assumed, net of cash acquired of $34.7 million, at the date of acquisition.

8


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
Total
Accounts receivable
$
19,361

Income taxes receivable
18,107

Prepaid expenses
9,727

Deferred income taxes
1,682

Other assets
1,780

Property and equipment
14,632

Goodwill
540,744

Other intangible assets
362,863

Total assets acquired
968,896

Accounts payable
9,064

Accrued expenses
19,217

Income taxes payable
210

Deferred revenue
37,250

Deferred income taxes
96,676

Other liabilities
2,821

Total liabilities acquired
165,238

Purchase price, net of cash acquired
$
803,658

During the three and nine months ended September 30, 2015, Big Fish Games contributed revenues of $103.5 million and $300.0 million, respectively, and earnings from continuing operations before provision for income taxes and acquisition-related charges of $9.0 million and $10.0 million, respectively.
Pro Forma
The following table illustrates the effect on net revenues and earnings from continuing operations for the three and nine months ended September 30, 2014, respectively, as if the Company had acquired Big Fish Games as of the beginning of 2014. The unaudited 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 acquisition of Big Fish Games been consummated at the beginning of 2014 (in thousands):
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2014
2014
Net revenues
$
259,063

$
882,518

Earnings from continuing operations
$
1,542

$
55,437

Saratoga Harness Racing, Inc. Equity Investment and Management Agreement
On October 2, 2015, the Company completed the acquisition of a 25% ownership interest in Saratoga Casino Holdings LLC ("SCH") for approximately $24.8 million. SCH is a newly formed entity that includes Saratoga Casino and Raceway in Saratoga Springs, New York and a 50% interest in a joint venture with Delaware North Companies to manage the Gideon Putnam Hotel and Resort in Saratoga Springs. Saratoga Casino and Raceway includes a $40 million hotel expansion under construction which is scheduled to open during the spring of 2016. The purchase price remains subject to final adjustments for SCH's working capital related to the transferred New York operations.
Under the terms of the original agreement, Saratoga Harness Racing, Inc. ("SHRI") would also transfer its controlling interest in Saratoga Casino Black Hawk in Black Hawk, Colorado to SCH. During the three months ended September 30, 2015, the Company commenced a five-year management agreement pursuant to which it will manage Saratoga Casino and Raceway. Approvals from the Colorado Division of Gaming are expected to require several more months for this transaction, at which time, the Company will pay the remainder of the purchase price of approximately $6.4 million to SHRI for the Company's pro-rata ownership of the Colorado operations, subject to adjustments for working capital, and commence a five-year management agreement for Saratoga Casino Black Hawk. 
NOTE 3 — NATURAL DISASTERS

9


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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 2012 and 2013, the Company received partial payments for the claim from its insurance carriers. During the three months ended March 31, 2014, the Company received final proceeds of $0.4 million, which it recognized as insurance recoveries, net of losses 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.
NOTE 4 — INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED AFFILIATE
Miami Valley Gaming Joint Venture
The Company's 50% joint venture with Delaware North Companies Gaming & Entertainment Inc. (“DNC”) was established during 2012 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, 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 casino 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 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 in Lebanon, Ohio on a 120-acre site. The facility includes a 5/8-mile harness racing track and an 186,000-square-foot casino facility with approximately 1,600 VLTs. MVG invested $204.6 million in the new facility, including a $50.0 million license fee to the Ohio Lottery Commission.
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):
 
September 30, 2015
 
December 31, 2014
Assets
 
 
 
Current assets
$
23,303

 
$
24,943

Property and equipment, net
122,371

 
130,868

Other assets, net
105,058

 
105,059

Total assets
$
250,732

 
$
260,870

 
 
 
 
Liabilities and Members' Equity
 
 
 
Current liabilities
$
17,636

 
$
16,775

Current portion of long-term debt
8,332

 
8,332

Long-term debt, excluding current portion
22,085

 
26,584

Other liabilities
75

 
83

Members' equity
202,604

 
209,096

Total liabilities and members' equity
$
250,732

 
$
260,870

The joint venture's long-term debt consists of a $50.0 million secured note payable from MVG to the MVG Sellers payable quarterly over 6 years through November 2019 at a 5.0% interest rate for which it has funded $14.6 million in principal repayments. During the three and nine months ended September 30, 2015, the Company received distributions from MVG totaling $3.5 million and $11.0 million, respectively.

10


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Casino revenue
$
32,199

 
$
32,479

 
$
97,362

 
$
96,766

Non-casino revenue
1,468

 
1,289

 
5,304

 
4,833

Net revenues
33,667

 
33,768

 
102,666

 
101,599

Operating and SG&A expenses
24,645

 
25,237

 
74,331

 
74,225

Depreciation & amortization expenses
3,279

 
3,474

 
9,577

 
10,315

Pre-opening expenses

 

 

 
54

Operating income
5,743

 
5,057

 
18,758

 
17,005

Interest (expense) income, net
(1,069
)
 
(1,380
)
 
(3,250
)
 
(3,654
)
Net income
$
4,674

 
$
3,677

 
$
15,508

 
$
13,351

The Company's 50% share of MVG's results has been included in our accompanying condensed consolidated financial statements for the three and nine months ended September 30, 2015 and 2014, as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Equity in gains of unconsolidated investments
$
2,337

 
$
1,839

 
$
7,754

 
$
6,676

NOTE 5 — INCOME TAXES
The Company’s effective tax rate from continuing operations for the nine months ended September 30, 2015 and 2014 was 44% and 37%, respectively. The effective tax rate for the nine months ended September 30, 2015 was greater than the Federal statutory rate due to non-deductible expenses related to the revaluation of liabilities associated with the purchase of Big Fish Games, state and local income tax expense and certain expenses that were not deductible for tax purposes. These additional tax expenses were partially mitigated by the manufacturing deduction that will be available associated with the development of social games by Big Fish Games.
Certain tax authorities may periodically audit the Company, and the Company may occasionally be assessed interest and penalties by tax jurisdictions. The Company recognizes accrued interest from uncertain income tax benefits in its income tax provision, while penalties are accrued in selling, general and administrative expenses. During the nine months ended September 30, 2015, the Company didn’t record any interest expense related to uncertain income tax benefits. As of September 30, 2015, the Company had gross uncertain tax benefits of $2.2 million. If these benefits had been recognized, there would have been a $1.9 million decrease to annual income tax expense.
During October 2012, the Company funded a $2.9 million income tax payment to the State of Illinois related to a dispute over its state income tax apportionment methodology, which was recorded as an other asset. 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 took a contrary tax position. The Company filed a formal protest with the State of Illinois during the fourth quarter of 2012. The Company won its protest and the state has elected not to appeal the court decision. During July 2015, the Company received the $2.9 million refund. The refund did not have an impact on the Company’s tax rate.
NOTE 6 — GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS IMPAIRMENT TEST
In accordance with Accounting Standards Update ("ASU") No. 2011-08, Intangibles-Goodwill and Other: Testing Goodwill for Impairment and ASU No. 2012-02, Intangibles-Goodwill and Other: Testing Indefinite-Lived Intangible Assets for Impairment, the Company completed the required annual impairment tests of goodwill and indefinite-lived intangible assets as of March 31, 2015, and no adjustment to the carrying value of goodwill or indefinite-lived intangible assets was required. The Company assessed its goodwill and indefinite-lived intangible assets by performing its step one fair value calculations on a quantitative basis for each of its reporting units and indefinite-lived intangible assets. The Company concluded that the fair values of its reporting units and indefinite-lived intangible assets exceeded their carrying value and therefore step two of the assessment was not required. Goodwill and definite-lived and indefinite-lived intangible assets are summarized as follows (in thousands):

11


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
Big Fish Games
 
Casinos
 
TwinSpires
 
Racing
 
Other
Investments
 
Total
Goodwill as of December 31, 2014
$
540,331

 
$
117,659

 
$
127,364

 
$
51,659

 
$
3,934

 
$
840,947

Adjustments
413

 

 

 

 

 
413

Goodwill as of September 30, 2015
$
540,744

 
$
117,659

 
$
127,364

 
$
51,659

 
$
3,934

 
$
841,360

During the three months ended September 30, 2015, the Company adopted ASU No. 2015-16, Simplifying the Accounting for Measurement Period Adjustments, and as described in Note 2, prospectively recorded a $0.4 million increase to goodwill.
 
September 30, 2015
 
December 31, 2014
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Book Value
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Book Value
Definite-lived intangible assets
$
224,775

 
$
(73,147
)
 
$
151,628

 
$
238,865

 
$
(47,236
)
 
$
191,629

Indefinite-lived intangible assets
358,343

 

 
358,343

 
358,343

 

 
358,343

Total
$
583,118

 
$
(73,147
)
 
$
509,971

 
$
597,208

 
$
(47,236
)
 
$
549,972

During the nine months ended September 30, 2015, the Company reduced its customer relationships intangible asset and accumulated amortization by $14.0 million, related to TwinSpires, as this amount was fully amortized. In addition, the Company reduced its customer relationships intangible asset and accumulated amortization by $0.1 million, related to Bluff Media ("Bluff"), as this amount was fully amortized.
Finally, the Company submitted payment of $2.3 million for its annual license fee for Calder Casino and reduced its slot license intangible asset and accumulated amortization by $2.3 million as the previous payment was fully amortized.
NOTE 7 — FAIR VALUE OF ASSETS AND LIABILITIES
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. The following tables present the Company’s assets and liabilities measured at fair value as of September 30, 2015 and December 31, 2014 (in thousands):
 
September 30, 2015
 
Level 1
 
Level 3
Cash equivalents and restricted cash
$
30,259

 
$

Big Fish Games deferred payments

 
82,800

Big Fish Games earnout liability

 
341,210

Bluff contingent consideration liability

 
2,331

Total
$
30,259


$
426,341

 
December 31, 2014
 
Level 1
 
Level 3
Cash equivalents and restricted cash
$
27,464

 
$

Big Fish Games deferred payments

 
78,800

Big Fish Games earnout liability

 
327,800

Bluff contingent consideration liability

 
2,331

Total
$
27,464

 
$
408,931

The following table presents the change in fair value of the Company's level 3 liabilities during the nine months ended September 30, 2015 (in thousands):

12


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
 
Big Fish Games Deferred Payments
 
Big Fish Games Earnout Liability
 
Bluff Contingent Consideration
 
Total
Balance as of December 31, 2014
$
78,800

 
$
327,800

 
$
2,331

 
$
408,931

Change in fair value
4,000

 
13,410

 

 
17,410

Balance as of September 30, 2015
$
82,800

 
$
341,210

 
$
2,331

 
$
426,341

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 estimated the fair value of the Big Fish Games deferred payment and earnout liability as of September 30, 2015 using a discounted cash flows analysis over the period in which the obligation is expected to be settled, and applied a discount rate of 3.0% based on the Company’s cost of debt.  The cost of debt 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 increase in fair values of the Big Fish Games deferred payment and earnout liability of $17.4 million during the nine months ended September 30, 2015 was recorded as acquisition-related charges in the Consolidated Statements of Comprehensive Earnings. Changes to the Company's cost of debt could lead to a different fair value estimate for the deferred payment and earnout liability. A one-percentage point change in the discount rate would increase or decrease the fair value of the Big Fish Games deferred payment and earnout liability by $3.8 million.
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 Bluff contingent consideration subsequent to the acquisition date will be recognized in the Company's Consolidated Statements of Comprehensive Earnings.
The Company's $300 million par value Senior Unsecured Notes are disclosed at their fair value which is based on unadjusted quoted prices for similar liabilities in markets that are not active. The fair value of the Senior Unsecured Notes was $308.3 million and $299.3 million as of September 30, 2015 and December 31, 2014, respectively.
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:
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.
During the nine months ended September 30, 2015, the Company did not measure any assets at fair value on a non-recurring basis.
NOTE 8 — LONG-TERM INCENTIVE PLANS
2015 Awards
On September 22, 2015, the Board of Directors approved the adoption of the Executive Long-Term Incentive Compensation Plan (the “ELTI Plan”), pursuant to which certain named executive officers (“NEOs”) and other key executives ("Grantees") may earn variable equity payouts based upon the Company achieving certain key performance metrics over a 30-month period ending December 31, 2017 and fixed equity payouts over service periods ending December 31, 2016 and December 31, 2017. The ELTI Plan was adopted pursuant to the 2007 Churchill Downs Incorporated Omnibus Stock Incentive Plan (the "New Company LTIP"), which was previously approved by the shareholders of the Company. As a way to continue to encourage innovation, an entrepreneurial approach, and careful risk assessment, and in order to retain key executives, the ELTI Plan and New Company LTIP offer long-term incentive compensation to the Company's NEOs and Grantees as further described in the Company's Schedule 14A Proxy Statement filed on March 23, 2015.
On September 22, 2015, NEOs and Grantees received 22,142 restricted stock units ("RSU") vesting equally over two service periods ending December 31, 2016 and December 31, 2017 and 22,142 performance share units ("PSU") with vesting contingent on financial performance measures at the end of a 30-month performance period ending December 31, 2017. The performance criteria for the PSUs consists of the following financial measures during the performance period: (i) cumulative Adjusted EBITDA; (ii) cumulative free cash flow and (iii) the Company's relative total shareholder return ("TSR"). The Company's TSR will be ranked versus the companies in the Russell 2000 index and will be calculated based on the Company's relative placement against the Russell 2000 index. Measurement against these criteria will be determined against a payout curve which provides a maximum

13


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

number of performance share units of 250% of the original award. The total compensation cost the Company will recognize under the PSUs will be based upon the results of the two financial measures.
For the nine months ended September 30, 2015, the Company did not recognize compensation expense related to these awards. At September 30, 2015, unrecognized compensation expense attributable to unvested RSU and PSU awards was $3.0 million and $3.4 million, respectively and the weighted average period over which the Company expects to recognize the compensation expense approximates 21 months and 27 months, respectively.
Executive Retirement
On July 14, 2015, the Company's Executive Chairman of the Board of Directors and former Chief Executive Officer, Robert L. Evans, announced his retirement as Executive Chairman, effective September 30, 2015. In conjunction with Mr. Evans' retirement, the Company amended his previous Change in Control, Severance, and Indemnity Agreement and upon his retirement, Mr. Evans received 29,218 shares of restricted stock which were previously awarded. The Company recorded compensation expense of $1.3 million during the three months ended September 30, 2015 for the accelerated vesting of the restricted stock awards.
2013 and 2015 Awards
During 2013, the Board of Directors approved the terms and conditions of performance share awards issued pursuant to the New Company LTIP which offers long-term incentive compensation to the Company's NEOs and Grantees.
During the nine months ended September 30, 2015, NEOs, Grantees and certain Big Fish Games employees received approximately 129,700 restricted shares of the Company's common stock vesting over service periods ranging from seven months to three years.
During 2013, the NEOs and 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 years ended December 31, 2014 and 2013, the Company's closing stock price achieved the twenty consecutive trading days closing stock price requirement for 239,500 restricted shares. During the nine months ended September 30, 2015, the Company's closing stock price achieved the stock price requirement for the final 84,500 restricted shares.
During the three and nine months ended September 30, 2015, the Company recognized $3.0 million and $7.2 million, respectively, of compensation expense included in selling general and administrative expenses related to service period awards under the New Company LTIP, which includes compensation expense for the Big Fish Games employee grant. As of September 30, 2015, unrecognized compensation expense attributable to unvested service period awards was $8.8 million. The weighted average period over which the Company expects to recognize the remaining compensation expense under service period awards approximates 14 months at September 30, 2015. There is no remaining unrecognized expense under the market condition awards.
NOTE 9 — 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):

14


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
 
 
 
 
 
 
 
Numerator for basic earnings per common share:
 
 
 
 
 
 
 
Net earnings
$
4,203

 
$
3,531

 
$
57,689

 
$
60,164

Net earnings allocated to participating securities
(67
)
 
(37
)
 
(927
)
 
(623
)
Numerator for basic earnings per common share
$
4,136

 
$
3,494

 
$
56,762

 
$
59,541

 
 
 
 
 
 
 
 
Numerator for diluted earnings per common share
$
4,203

 
$
3,531

 
$
57,689

 
$
60,164

 
 
 
 
 
 
 
 
Denominator basic and diluted net loss per common share:
 
 
 
 
 
 
 
Basic
17,347

 
17,020

 
17,316

 
17,322

Plus dilutive effect of stock options and restricted stock
139

 
102

 
116

 
167

Plus dilutive effect of participating securities
283

 
181

 
283

 
181

Diluted
17,769

 
17,303

 
17,715

 
17,670

 
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.24

 
$
0.21

 
$
3.28

 
$
3.44

Diluted
$
0.24

 
$
0.20

 
$
3.26

 
$
3.40

NOTE 10 — SEGMENT INFORMATION
The Company operates in the following five segments: (1) Big Fish Games; (2) Casinos, which includes video poker and casino operations at Calder Casino, Fair Grounds Slots, Harlow’s Casino Resort & Spa ("Harlow's"), the Company's equity investment in MVG, Oxford Casino (“Oxford”), Riverwalk Casino Hotel ("Riverwalk"), Video Services, LLC (“VSI”) and management fee revenue from Saratoga Casino and Raceway in Saratoga Springs, New York ("Saratoga"); (3) TwinSpires, which includes TwinSpires, our Advance Deposit Wagering (“ADW”) business, Fair Grounds Account Wagering, Bloodstock Research Information Services and Velocity, a business focused on high wagering-volume international customers, as well as the Company's equity investment in HRTV, LLC ("HRTV"), prior to its sale during January 2015; (4) Racing, which includes Churchill Downs, Arlington International Race Course ("Arlington") and its ten off-track betting facilities ("OTBs"), Fair Grounds Race Course ("Fair Grounds") and the pari-mutuel activity generated at its twelve OTBs and Calder Race Course ("Calder"), which ceased pari-mutuel operations on July 1, 2014; and (5) Other Investments, which includes United Tote, Bluff, I-Gaming and the Company's other minor investments. Eliminations include the elimination of intersegment transactions.
In order to evaluate the performance of these operating segments internally, the Company's chief operating decision maker uses Adjusted EBITDA (defined as earnings before interest, taxes, depreciation, amortization, and adjusted for insurance recoveries net of losses, 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, Calder exit costs 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. The Company utilizes the Adjusted EBITDA metric because it believes the inclusion or exclusion of certain 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. 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 table below presents information about the reported segments for the three and nine months ended September 30, 2015 and 2014 (in thousands):

15


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Net revenues from external customers:
 
 
 
 
 
 
 
Big Fish Games
$
103,540

 
$

 
$
299,969

 
$

Casinos:
 
 
 
 
 
 
 
Calder Casino
18,561

 
18,104

 
58,726

 
58,560

Fair Grounds Slots
8,789

 
9,453

 
29,324

 
30,823

VSI
9,011

 
8,008

 
27,584

 
25,241

Harlow's Casino
11,741

 
12,197

 
37,471

 
38,425

Oxford Casino
22,338

 
21,887

 
60,799

 
58,808

Riverwalk Casino
12,003

 
11,974

 
37,724

 
37,931

Saratoga
236

 

 
236

 

Total Casinos
82,679

 
81,623

 
251,864

 
249,788

TwinSpires
50,346

 
46,266

 
156,409

 
149,426

Racing:
 
 
 
 
 
 
 
Churchill Downs
7,863

 
8,021

 
136,663

 
128,511

Arlington
24,978

 
26,974

 
48,909

 
54,289

Calder
638

 
786

 
2,029

 
18,524

Fair Grounds
5,388

 
5,274

 
31,140

 
29,745

Total Racing
38,867

 
41,055

 
218,741

 
231,069

Other Investments
4,093

 
4,249

 
12,200

 
12,864

Corporate
240

 
290

 
731

 
949

Net revenues from external customers
$
279,765

 
$
173,483

 
$
939,914

 
$
644,096

Intercompany net revenues:
 
 
 
 
 
 
 
TwinSpires
$
234

 
$
240

 
$
781

 
$
714

Racing:
 
 
 
 
 
 
 
Churchill Downs
685

 
678

 
6,302

 
5,851

Arlington
1,665

 
2,001

 
4,109

 
4,795

Calder

 

 

 
707

Fair Grounds
11

 
15

 
869

 
744

Total Racing
2,361

 
2,694

 
11,280

 
12,097

Other Investments
792

 
829

 
2,680

 
2,937

Eliminations
(3,387
)
 
(3,763
)
 
(14,741
)
 
(15,748
)
Net revenues
$

 
$

 
$

 
$

Reconciliation of segment Adjusted EBITDA to net earnings:
 
 
 
 
 
 
 
Big Fish Games
$
33,295

 
$

 
$
81,559

 
$

Casinos
25,037

 
24,937

 
81,779

 
78,362

TwinSpires
13,759

 
11,098

 
41,666

 
35,135

Racing
283

 
(1,229
)
 
76,281

 
66,600

Other Investments
(78
)
 
(899
)
 
35

 
(2,475
)
Total segment Adjusted EBITDA
72,296

 
33,907

 
281,320

 
177,622

Corporate Adjusted EBITDA
(1,685
)
 
(1,398
)
 
(5,239
)
 
(3,645
)
Insurance recoveries, net of losses

 

 

 
431

Big Fish Games acquisition charges
(2,810
)
 

 
(17,410
)
 

Big Fish Games changes in deferred revenue
(10,907
)
 

 
(32,003
)
 

Share-based compensation
(4,485
)
 
(2,213
)
 
(10,580
)
 
(10,567
)
Calder exit costs
(12,737
)
 
(2,298
)
 
(13,490
)
 
(2,298
)
MVG interest expense, net
(535
)
 
(819
)
 
(1,625
)
 
(1,956
)
Other charges and recoveries, net

 
(355
)
 
6,114

 
(832
)
Depreciation and amortization
(27,452
)
 
(17,280
)
 
(82,129
)
 
(48,324
)
Interest (expense) income, net
(6,732
)
 
(5,167
)
 
(21,104
)
 
(15,092
)
Income tax provision
(750
)
 
(846
)
 
(46,165
)
 
(35,175
)
Net earnings
4,203

 
3,531

 
57,689

 
60,164

Foreign currency translation, net of tax effect
58

 

 
(357
)
 

Comprehensive earnings
$
4,261

 
$
3,531

 
$
57,332

 
$
60,164


16


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

The table below presents equity in earnings of unconsolidated investments included in the Company’s reported segments for the three months and nine ended September 30, 2015 and 2014 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Casinos
$
2,337

 
$
1,839

 
$
7,754

 
$
6,676

TwinSpires

 
(289
)
 

 
(41
)
Other Investments
52

 
(493
)
 
490

 
(782
)
 
$
2,389

 
$
1,057

 
$
8,244

 
$
5,853

The table below presents total assets for the reported segments (in thousands):
 
September 30, 2015
 
December 31, 2014
Total assets:
 
 
 
Big Fish Games
$
1,052,842

 
$
1,009,668

Casinos
608,396

 
621,240

TwinSpires
184,830

 
182,322

Racing
377,594

 
518,517

Other Investments
36,653

 
30,757

 
$
2,260,315

 
$
2,362,504

The table below presents total capital expenditures for the reported segments for the nine months ended September 30, 2015 and 2014 (in thousands):
 
Nine Months Ended September 30,
 
2015
 
2014
Capital expenditures:
 
 
 
Big Fish Games
$
2,987

 
$

Casinos
15,383

 
6,629

TwinSpires
3,098

 
4,716

Racing
8,359

 
33,491

Other Investments
1,011

 
4,018

 
$
30,838

 
$
48,854

NOTE 11 — 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, individually or in the aggregate, on our business, financial condition and results of operations.
Big Fish Casino
On April 17, 2015, Cheryl Kater, by and through counsel, filed a Complaint - Class Action styled Cheryl Kater v. Churchill Downs Incorporated. Plaintiff, Cheryl Kater, filed the purported class action lawsuit in the United States District Court, for the Western District of Washington, in Seattle, alleging, among other claims, that the Company’s “Big Fish Casino” violates Washington law, including the Washington Consumer Protection Act, by facilitating unlawful gambling through its virtual casino games (namely the Company’s slots, blackjack, poker, and roulette games offered through Big Fish Casino). On June 30, 2015, the Company filed its Motion to Dismiss the Complaint. On July 15, 2015, Plaintiff and the Company, (collectively, the "Parties"), filed a Stipulation and Proposed Order to Extend the Briefing Schedule for Defendants' Motion to Dismiss. On July 16, 2015, the U.S. District Court accepted the Parties Stipulation and issued an Order extending Plaintiffs' deadline to file opposition to the Company's Motion to Dismiss to August 7, 2015, and moving the Company's deadline to file its reply to Plaintiff's opposition to August 28, 2015. On August 18, 2015, Plaintiff filed her response to the Company’s Motion to Dismiss. In turn, the Company filed its reply

17


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

brief in support of its Motion to Dismiss on September 18, 2015. The Company awaits the U.S. District Court’s ruling on its Motion to Dismiss.
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 Civil District Court for the Parish of Orleans, State of Louisiana ("District Court").  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. The Louisiana Racing Commission requested and received memoranda from the parties in the case on the issue of whether plaintiffs have standing to pursue the claims against Fair Grounds. On August 24, 2015, the Louisiana Racing Commission ruled that the plaintiffs did not have standing or a right of action to pursue the case. On September 18, 2015, the plaintiffs filed a Petition for Appeal of Administrative Order Dismissing Case for No Right of Action in the District Court seeking a reversal of the Louisiana Racing Commission’s ruling. The plaintiffs’ appeal is pending.
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. 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. Oral arguments on the parties’ Motions for Summary Judgment occurred on March 5, 2015. On May 14, 2015, the Tax and Miscellaneous Remedies Section of the Circuit Court of Cook County issued an Opinion and Order, granting in part, the Company’s Motion for Summary Judgment on the issue of the Department’s erroneous inclusion of handle in the sales factor used to determine applicable tax owed to the State of Illinois. In rendering its Opinion and Order, the Court found that the Company is entitled to a full refund of the Protest Payment. The State of Illinois did not appeal the Order of the Court, and the Company received a refund of the $2.9 million Protest Payment on July 16, 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 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

18


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

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. On September 17, 2015, Kentucky Downs, LLC, et. al. filed Petitioners’ Motion for Summary Judgment on Court II of the Amended Petition previously filed. The Company has until November 23, 2015 to file its response to the Petitioners' Motion for Summary Judgment.
There are no other material pending legal proceedings.
NOTE 12 — RECENT ACCOUNTING PRONOUNCEMENTS
In September 2015, the Financial Accounting Standards Board ("FASB") issued ASU No. 2015-16, Simplifying the Accounting for Measurement Period Adjustments, which requires companies to recognize adjustments to provisional amounts associated with an acquisition that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. Prior to the issuance of the standard, adjustments were required to be retrospectively presented in the balance sheet at the acquisition date. The Company adopted the new standard as of September 30, 2015, and it did not have a material impact on the Company's business, financial condition or results of operations.
In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance cost to be presented in the balance sheet as a direct deduction of the carrying value of the associated debt liability, consistent with the presentation of a debt discount. Prior to the issuance of the standard, debt issuance costs were required to be presented in the balance sheet as a deferred asset. Furthermore, in August 2015, the FASB issued ASU No. 2015-15, Interest - Presentation and Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. ASU No. 2015-15 provides a similar treatment for debt issuance costs related to line-of-credit agreements as noted under ASU No. 2015-03. The new standards will become effective for annual fiscal periods beginning after December 15, 2015. The Company does not expect adoption to have a material impact on the Company's business, financial condition or results of operations.
In August 2014, the FASB issued ASU No. 2014-15, Disclosures 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, which provides a five-step analysis of transactions to determine when and how revenue is recognized.  The core principle is that a company should recognize revenue in a manner that depicts the transfer of promised 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. The revised guidance will become effective for annual periods beginning after December 15, 2017 and will be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is assessing the impact of the new accounting guidance and cannot currently estimate the financial statement impact of adoption.
NOTE 13 — CALDER EXIT COSTS
On July 1, 2014, the Company 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, involves a lease to TSG of Calder’s racetrack and certain other racing and training facilities. TSG operates live horse racing at Calder, under Calder’s racing permits, in compliance with all applicable laws and licensing requirements 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 receives the associated revenues. The Company continues to own and operate the Calder Casino.
During 2015, the Company continued its assessment of potential alternative uses of the Calder facility not associated with the TSG lease agreement. As a result, Calder razed its barns not associated with the TSG agreement and commenced the demolition of the

19


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Calder grandstand and certain ancillary facilities. During the nine months ended September 30, 2015, the Company recognized Calder exit costs of $13.5 million consisting of a non-cash impairment charge of $12.7 million to reduce the net book value of the grandstand assets to zero and $0.8 million in expenditures for demolition costs related to the removal of the barns and to prepare the stable area for alternate future uses. Furthermore, the Company reclassified $2.3 million of severance and other benefit costs which were previously reported in selling, general and administrative expenses for the three and nine months ended September 30, 2014 into Calder exits costs.
NOTE 14 — HRTV EQUITY INVESTMENT DIVESTITURE
As part of the TSG agreement related to the cessation of Calder pari-mutuel operations during 2014, 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. During January 2015, we received $6.0 million in proceeds from the sale of the ownership interest. During the nine months ended September 30, 2015, the Company recorded a gain of $5.8 million in its Other Investments segment, which has been excluded from Segment Adjusted EBITDA and is included in other charges and recoveries in the reconciliation of Segment Adjusted EBITDA to Comprehensive Earnings.
NOTE 15 — SUBSEQUENT EVENTS
Annual Dividend Declaration
On October 26, 2015, the Company's Board of Directors declared an annual cash dividend of $1.15 per share, to be paid January 6, 2016 to all shareholders of record on December 4, 2015.
Stock Repurchase Program
On October 26, 2015, the Company's Board of Directors authorized the repurchase of up to $150 million of the Company's stock in a stock repurchase program. This amount includes and is not in addition to any unspent amounts remaining under the prior authorization which would have expired at the end of 2015. Repurchases may be made at management’s discretion from time to time on the open market (either with or without a 10b5-1 plan) or through privately negotiated transactions. The repurchase program has no time limit and may be suspended for periods or discontinued at any time.

20


ITEM 2. 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 “Act”) provides certain “safe harbor” provisions for forward-looking statements. All forward-looking statements made in this Quarterly Report on Form 10-Q are made pursuant to the 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: the effect of global economic conditions, including any disruptions in the credit markets; a decrease in consumers’ discretionary income; the effect (including possible increases in the cost of doing business) resulting from future war and terrorist activities or political uncertainties; the impact of increasing insurance costs; the impact of interest rate fluctuations; maintaining favorable relationships we have with third-party mobile platforms, the inability to secure new content from third-party developers on favorable terms, keeping our games free from programming errors or flaws, the effect if smart phone and tablet usage to facilitate game platforms does not continue to increase; the financial performance of our racing operations; the impact of casino competition (including lotteries, online gaming and riverboat, cruise ship and land-based casinos) and other sports and entertainment options in the markets in which we operate; our ability to maintain racing and gaming licenses to conduct our businesses; the impact of live racing day competition with other Kentucky, Illinois, Louisiana or Ohio racetracks within those respective markets; the impact of higher purses and other incentives in states that compete with our racetracks; costs associated with our efforts in support of alternative gaming initiatives; costs associated with customer relationship management initiatives; a substantial change in law or regulations affecting pari-mutuel or casino activities; a substantial change in allocation of live racing days; changes in Kentucky, Illinois or Louisiana law or regulations that impact revenues or costs of racing in those states; the presence of wagering and casino operations at other states’ racetracks and casinos near our operations; our continued ability to effectively compete for the country’s horses and trainers necessary to achieve full field horse races; our continued ability to grow our share of the interstate simulcast market and obtain the consents of horsemen’s groups to interstate simulcasting; our ability to enter into agreements with other industry constituents for the purchase and sale of racing content for wagering purposes; our ability to execute our acquisition strategy and to complete or successfully operate acquisitions and planned expansion projects including the effect of required payments in the event we are unable to complete acquisitions; our ability to successfully complete any divestiture transaction; market reaction to our expansion projects; the inability of our totalisator company, United Tote, to maintain its processes accurately, keep its technology current or maintain its significant customers; our accountability for environmental contamination; the ability of Big Fish Games or TwinSpires to prevent security breaches within their online technologies; the loss of key personnel; the impact of natural and other disasters on our operations and our ability to obtain insurance recoveries in respect of such losses (including losses related to business interruption); our ability to integrate any businesses we acquire into our existing operations, including our ability to maintain revenues at historic or anticipated levels and achieve anticipated cost savings; the impact of wagering laws, including changes in laws or enforcement of those laws by regulatory agencies; the outcome of pending or threatened litigation; changes in our relationships with horsemen’s groups and their memberships; our ability to reach agreement with horsemen’s groups on future purse and other agreements (including, without limitation, agreements on sharing of revenues from casinos and advance deposit wagering); the effect of claims of third parties to intellectual property rights; and the volatility of our stock price.
You should read this discussion in conjunction with the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2014 for further information, including Part I – Item 1A, "Risk Factors" of our Form 10-K for a discussion regarding some of the reasons that actual results may be materially different from those we anticipate.

21


Overview
We are one of the world's largest producers and distributors of online and mobile casual games. We are also a diversified provider of casino gaming, online account wagering on horseracing and pari-mutuel horseracing.
We operate in five operating segments as follows:
1.
Big Fish Games, Inc. ("Big Fish Games"), which is headquartered in Seattle, Washington with locations in Oakland, California and Luxembourg. Big Fish Games is a producer of premium paid, casual free-to-play and casino-style games for PCs and mobile devices which we acquired on December 16, 2014.
2.
Casinos, which includes:
Oxford Casino ("Oxford") in Oxford, Maine, which operates approximately 850 slot machines, 26 table games and various dining facilities;
Riverwalk Casino Hotel ("Riverwalk") in Vicksburg, Mississippi, which operates approximately 680 slot machines, 13 table games, a five story, 80-room attached hotel, a multi-functional event center and dining facilities;
Harlow’s Casino Resort & Spa (“Harlow’s”) in Greenville, Mississippi, which operates approximately 750 slot machines, 15 table games, a five story, 105-room attached hotel and dining facilities;
Calder Casino, a slot facility in Florida adjacent to Calder Race Course ("Calder"), which operates approximately 1,100 slot machines. Results for the nine months ended September 30, 2014 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 770 video poker machines in Louisiana;
Management fee revenue from Saratoga Casino and Raceway in Saratoga Springs, New York ("Saratoga"); and
Our equity investment in Miami Valley Gaming, LLC ("MVG"), a 50% joint venture harness racetrack and video lottery terminal facility in Lebanon, Ohio. MVG has approximately 1,600 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; and
Bloodstock Research Information Services (“BRIS”), a data service provider for the equine industry.
4.
Racing, which includes:
Churchill Downs Racetrack (“Churchill Downs”) in Louisville, Kentucky, an internationally known thoroughbred racing operation and home of the Kentucky Oaks and 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;
Calder, a thoroughbred racing operation in Miami Gardens, Florida which ceased pari-mutuel operations on July 1, 2014; and
Fair Grounds Race Course (“Fair Grounds”), a thoroughbred racing operation in New Orleans along with twelve OTBs in Louisiana.
5.
Other Investments, which includes:
United Tote Company and United Tote Canada (collectively “United Tote”), which manufacture and operate pari-mutuel wagering systems for racetracks, OTBs and other pari-mutuel wagering business;
Bluff Media (“Bluff’), a multimedia poker content brand company;
Churchill Downs Interactive Gaming ("I-Gaming"), a technology workforce that is building an Internet-based interactive gaming platform; and

22


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, 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, Calder exit costs 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. See the Adjusted Segment EBITDA sections of this Item 2 for a reconciliation from Adjusted EBITDA to comprehensive earnings.
During the three months ended September 30, 2015, total handle for the pari-mutuel industry, according to figures published by Equibase, increased 3.7%, compared to the same period of 2014. TwinSpires handle increased $21.2 million, or 9.4%, while pari-mutuel handle from our Racing segment decreased $45.5 million, or 16.0% during the three months ended September 30, 2015 compared to the same period of 2014, primarily due to a decline in handle at Arlington related to four fewer race days, reduced races per day, and simulcasting declines.
During the nine months ended September 30, 2015, total handle for the pari-mutuel industry, according to figures published by Equibase, increased 0.9%, compared to the same period of 2014. TwinSpires handle increased $46.4 million, or 6.6%, during the nine months ended September 30, 2015, compared to the same period in 2014. Pari-mutuel handle from our Racing segment decreased 17.7% during the nine months ended September 30, 2015, compared to the same period of 2014 primarily due to the cessation of pari-mutuel operations at Calder on July 1, 2014 and a decline in handle at Arlington related to twelve fewer race days and reduced races per day.
Revenues and earnings associated primarily with our Racing segment are seasonal in nature. Therefore, Racing revenues and operating results for any interim quarter are generally not 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. For instance, 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 the Kentucky Oaks. We conducted 60 live thoroughbred racing days during the third quarter of 2015, which compares to 65 live thoroughbred racing days during the third quarter of 2014. For the nine months ended September 30, 2015, the Company conducted 183 live thoroughbred racing days, which compares to 276 live racing days during the nine months ended September 30, 2014. This decrease is primarily related to the cessation of pari-mutuel operations at Calder Race Course in July 2014. Furthermore, Casino revenues and earnings have historically been higher during the first quarter due to seasonal revenues from our predominately southern gaming properties. Our revenues from Big Fish Games segment also have a seasonal component and are typically lower during the summer months.
We believe that, despite uncertain economic conditions, we are in a strong financial position. As of September 30, 2015, there was $397.5 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
Subsequent Events
Annual Dividend Declaration
On October 26, 2015, our Board of Directors declared an annual cash dividend of $1.15 per share, to be paid January 6, 2016 to all shareholders of record on December 4, 2015.
Stock Repurchase Program
On October 26, 2015, our Board of Directors authorized the repurchase of up to $150 million of our stock in a stock repurchase program. This amount includes and is not in addition to any unspent amounts remaining under the prior authorization which would have expired at the end of 2015. Repurchases may be made at management’s discretion from time to time on the open market (either with or without a 10b5-1 plan) or through privately negotiated transactions. The repurchase program has no time limit and may be suspended for periods or discontinued at any time.
Saratoga Harness Racing, Inc. Equity Investment and Management Agreement
On October 2, 2015, the Company completed the acquisition of a 25% ownership interest in Saratoga Casino Holdings LLC ("SCH") for approximately $24.8 million. SCH is a newly formed entity that includes Saratoga Casino and Raceway ("Saratoga")

23


in Saratoga Springs, New York and a 50% interest in a joint venture with Delaware North Companies to manage the Gideon Putnam Hotel and Resort in Saratoga Springs. Saratoga Casino and Raceway includes a $40 million hotel expansion under construction which is scheduled to open during the spring of 2016. The purchase price remains subject to final adjustments for SCH's working capital related to the transferred New York operations.
Under the terms of the original agreement, Saratoga Harness Racing, Inc. ("SHRI") would also transfer its controlling interest in Saratoga Casino Black Hawk in Black Hawk, Colorado to SCH. During the three months ended September 30, 2015, we commenced a five-year management agreement pursuant to which we will manage Saratoga Casino and Raceway. Approvals from the Colorado Division of Gaming are expected to require several more months for this transaction, at which time, the Company will pay the remainder of the purchase price of approximately $6.4 million to SHRI for the Company's pro-rata ownership of the Colorado operations, subject to adjustments for working capital, and commence a five-year management agreement for Saratoga Casino Black Hawk. 
Calder Exit Costs
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, involves a lease to TSG of Calder’s racetrack and certain other racing and training facilities. TSG operates live horse racing at Calder, under Calder’s racing permits, in compliance with all applicable laws and licensing requirements 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 receives the associated revenues. We continue to own and operate the Calder Casino.
During 2015, we continued our assessment of potential alternative uses of the Calder facility not associated with the TSG lease agreement. As a result, we razed the Calder barns not associated with the TSG agreement and commenced the demolition of the Calder grandstand and certain ancillary facilities. During the nine months ended September 30, 2015, we recognized Calder exit costs of $13.5 million consisting of a non-cash impairment charge of $12.7 million to reduce the net book value of the grandstand assets to zero and $0.8 million in expenditures for demolition costs related to the removal of the barns and to prepare the stable area for alternate future uses. We expect to obtain operational efficiencies as a result of the demolition including savings in property taxes, repair and maintenance, utilities, permitting and environmental maintenance expenditures. Furthermore, we reclassified $2.3 million of severance and other benefit costs which were previously reported in selling, general and administrative expenses for the three and nine months ended September 30, 2014 into Calder exits costs.
We expect to incur additional demolition costs of approximately $3.6 million, which will be expensed as incurred.  We expect to recognize such expense beginning in the fourth quarter of 2015 and continuing through the third quarter of 2016.
Retirement of Executive Chairman of the Board of Directors
On July 14, 2015, our Executive Chairman of the Board of Directors and former Chief Executive Officer, Robert L. Evans, announced his retirement as Executive Chairman, effective September 30, 2015. Mr. Evans will continue with the Company as the non-executive Chairman of the Board. In conjunction with Mr. Evans' retirement, we amended his previous Change in Control, Severance, and Indemnity Agreement and upon his retirement, Mr. Evans received a 2015 annual bonus award of $0.6 million. In addition, we accelerated vesting on 29,218 shares of restricted stock which were previously awarded and recognized compensation expense of $1.3 million during the three months ended September 30, 2015 for the acceleration of the restricted stock awards.
California Internet Gaming
During May 2015, our Internet real-money gaming operations, I-Gaming, entered into an agreement with a licensed California card room operator ("Licensed Operator") to provide Internet-based interactive gaming services within California, should enabling legislation be enacted which would permit such activities. The term of the agreement commences after enabling legislation and upon the acceptance of the first customer wager, continuing thereafter for a ten-year period. The venture provides for I-Gaming and the Licensed Operator to jointly provide a platform for operations, to obtain and maintain required licenses and regulatory approvals and to otherwise market and operate the venture, which may include poker and other real-money gaming activities, to California residents. At this time, it is difficult to assess whether this legislation will be enacted into law, and the effect it would have on our business, financial condition and results of operation.
HRTV Equity Investment Divestiture
As part of an agreement with The Stronach Group ("TSG") 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 and recorded a gain of $5.8 million from the sale of our remaining investment in HRTV in our Other Investments segment, which has been excluded from Segment Adjusted EBITDA and is included in other charges and recoveries in the reconciliation of Segment Adjusted EBITDA to Comprehensive Earnings for the nine months ended September 30, 2015.

24


Legislative and Regulatory Changes
Federal
Horse Racing Legislation
In May 2015, the Teller All Gone Horseracing Deregulation Act was filed for consideration in the Senate. Identical legislation, Coronado Heights Horseracing Deregulation Act, was filed in the House of Representatives. The proposed legislation would repeal the Interstate Horseracing Act, effectively prohibiting the operation of advance deposit wagering on horse races. If enacted into law, the legislation could have a material negative impact on our business, financial condition and results of operation.
In July 2015, the Horseracing Integrity and Safety Act of 2015 was filed. Under the terms of the legislation, the United States Anti-Doping Agency ("USADA") is designated as the organization responsible for regulating drugs, medications and treatments used in racing and would prohibit interstate wagering without consent from USADA. If enacted into law, the legislation could have a material negative impact on our business, financial condition or results of operation.
Federal Internet Gaming
On February 4, 2015, the Restoration of America’s Wire Act ("HR 707") was reintroduced for consideration in the House of Representatives. 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.
In June 2015, the Restoration of America’s Wire Act was introduced in the Senate. While the legislation is substantially similar to the version introduced in the House, the Senate bill would allow the Internet to be used to facilitate on-premises sales of lottery tickets and lottery subscriptions, but does not authorize the sale of lottery tickets online. 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 operation.
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. On February 5, 2015, House Bill 300, a constitutional amendment authorizing casino gaming in Kentucky, was introduced. The amendment would have allowed for six casinos in the state to be approved by local referendum and limited to counties with populations of at least 85,000, and authorized the Kentucky Lottery Corporation to regulate and to operate casino facilities. Legislation related to expanded gaming failed to advance during the 2015 session. Should similar future legislation be enacted into law, it could have a material positive impact on our business, financial condition and results of operations.
Sweepstakes Cafes
On March 23, 2015 the Governor of Kentucky signed Senate Bill 28 effectively prohibiting Internet cafes from operating in the state. The bill became effective immediately upon becoming law. We expect the legislation to have a positive impact on our business, financial condition and results of operation.
Illinois
Expanded Gaming Legislation
On March 27, 2015, House Bill 2939 and House Bill 3564 were filed in the Illinois legislature. House Bill 2939 would authorize a state owned Chicago casino with 4,000 to 12,000 gaming positions. House Bill 3564 proposes to authorize five new casinos, a Chicago casino and electronic gaming at all Illinois racetracks except Fairmount Park Racetrack. Cook County racetracks would be authorized to operate 600 positions, while certain other racetracks would be authorized for 450 positions. If enacted, the legislation could have a material positive impact on our business, financial condition and results of operations.
Ohio
Racetrack Payments
In June 2015, Governor of Ohio signed Ohio’s budget bill into law which includes a requirement for racinos to make payments of $0.3 million to their local municipal or township in each of December 2015 and December 2016. We expect our joint venture, MVG, to fund these payments during the fourth quarters of 2015 and 2016.

25


Video Lottery Sales
In April 2015, State Bill 140 was introduced which would remove the ability of a video lottery sales agent, such as our joint venture investment in MVG, to offer promotional play unless specific criteria are met. Under the terms of the bill, in order for a video lottery sales agent to offer promotional play, the agent must have at least 90% of the statutorily allocated video lottery terminals on the gaming floor and the agent must generate at least $165 million in revenue. If the agent meets the both criteria, not only will they qualify to offer up to $5 million of promotional play, the agent may offer expanded types of video lottery games. If enacted, we expect the legislation to have a material adverse impact on our business, financial condition and results of operation.
Florida
Expanded Gaming
On March 2, 2015, House Bill 1233 was filed for consideration during the 2015 legislative session. House Bill 1233 would provide that all outstanding, dormant pari-mutuel wagering permits revert to the state, prohibit the portability of pari-mutuel permits, allow for the decoupling of dog tracks, allow existing slot machine facilities to be open continuously, place a moratorium on the issuance of new gaming permits, provide for slot machines at pari-mutuel operations in Palm Beach and Lee counties, if their authorization is exempted in the Compact, and permit Miami Dade and Broward counties to conduct a referendum related to destination resort locations. The legislation failed to advance during the 2015 session. At this time, it is not possible to determine if this or similar legislation would have a material impact on our business, financial condition and results of operation.
On April 3, 2015 proposed Senate Bill 7088 was filed for consideration. The bill would extend a provision of the Seminole Compact allowing the Tribe to exclusively offer banked card games, allow for the decoupling of all slot machine licensees in the state and grant slot machines to pari-mutuel operations in Palm Beach and Lee counties for an extension of one year, to end on July 31,2016. The legislation failed to advance during the 2015 session. At this time it is not possible to determine if this or similar legislation would have a material impact on our business, financial condition and results of operation.
Maine
Expanded Gaming
In April 2015, legislation was filed for consideration that would expand gaming locations in the state and allow for entities such as Native American tribes and a harness track located in Southern Maine to operate casino facilities. Legislation authorizing a northern Maine casino benefiting Native American tribes expired during the legislative session. Proposed legislation allowing for a Southern Maine casino was rolled over to be considered during the 2016 legislative session. Should gaming expansion occur in Maine, it could have a material negative impact on our business, financial condition and results of operations.
New York
Gaming Legislation
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 not possible to determine the impact casino gaming could have on our business, financial condition and results of operations.
The New York state budget was approved in April, 2015 and included a provision authorizing the expansion of video lottery terminal games at six racetracks, including Saratoga Casino and Raceway. Specifically, the measure will allow racetracks to add electronic blackjack and poker games under the classification of games of chance and not skill. We expect approval of the legislation to result in a favorable impact to our business, financial condition and results of operation.
California
Internet Poker
In February 2015, Senate Bill 278 and Assembly Bill 431 were introduced. The identical bills would authorize Internet poker in the state and direct the Gambling Control Commission, in consultation with the Department of Justice, to establish regulations governing the operation of Internet poker in California. Legislation related to the authorization of online poker failed to advance prior to the end of the 2015 legislative session. The potential effect of Senate Bill 278 or Assembly Bill 431 on our business, financial condition and results of operations cannot be determined at this time.

26


Louisiana
Smoking Ban
On January 22, 2015, the New Orleans City Council approved a smoking ban in bars and other public places, including casinos, in Orleans Parish which took effect on April 22, 2015. For the nine months ended September 30, 2015, the smoking ban had a negative impact on Fair Grounds Slots which was partially offset by VSI, whose OTB locations are located outside of New Orleans Parish. During the third quarter of 2015, we opened an outdoor smoking patio for our patrons at Fair Grounds Slots. At this time, it is not possible to determine the full impact the smoking ban could have on our business, financial condition and results of operations.
Unclaimed Tickets
In May 2015, legislation was signed into law that will direct all revenue from unclaimed pari-mutuel wagering tickets and electronic gaming jackpots to a crime victims reparations fund to help pay for medical related expenses of sexual assault victims. We do not expect the legislation to have a material negative impact on our business, financial condition and results of operations.
Pennsylvania
Internet Poker
During February and March 2015, House Bill 649 and House Bill 695 authorizing Internet poker in Pennsylvania were introduced for consideration during the 2015 legislative session and would authorize existing Pennsylvania casinos to offer Internet poker, require a license fee of $5 million, establish a 14% tax on gross gaming revenues and permit the state to enter into interactive gaming agreements with other jurisdictions. The potential impact of this legislation on our business, financial condition and results of operation cannot be determined at this time.
On April 7, 2015, House Bill 920, was introduced and would allow existing casinos to offer Internet gaming on casino style games, establish a $5 million licensing fee, institute a 28% tax rate on gross gaming revenue and allow the state to enter into interstate compacts or reciprocal agreements with other jurisdictions. The potential impact of the legislation on our business, financial condition and results of operation cannot be determined at this time.

27


RESULTS OF CONTINUING OPERATIONS
Big Fish Games Activity
The following table sets forth, for the periods indicated, statistical Big Fish Games information (in thousands):
 
Three Months Ended September 30,
 
Change
 
Nine Months Ended September 30,
 
Change
 
2015
 
2014 (1)
 
$
 
%
 
2015
 
2014 (1)
 
$
 
%
Bookings  (2)
 
 
 
 

 

 
 
 
 
 
 
 
 
Casino
$
47,390

 
$

 
$
47,390

 
F
 
$
144,940

 
$

 
$
144,940

 
F
Casual free-to-play
40,303

 

 
40,303

 
F
 
103,809

 

 
103,809

 
F
Premium
26,754

 

 
26,754

 
F
 
83,223

 

 
83,223

 
F
Total bookings
$
114,447

 
$

 
$
114,447

 
F
 
$
331,972

 
$

 
$
331,972

 
F
 
 
 
 
 

 
 
 
 
 
 
 

 

Revenue
 
 
 
 

 
 
 
 
 
 
 

 

Casino
$
47,395

 
$

 
$
47,395

 
F
 
$
145,411

 
$

 
$
145,411

 
F
Casual free-to-play
32,657

 

 
32,657

 
F
 
84,008

 

 
84,008

 
F
Premium
23,488

 

 
23,488

 
F
 
70,550

 

 
70,550

 
F
Total revenue
$
103,540

 
$

 
$
103,540

 
F
 
$
299,969

 
$

 
$
299,969

 
F
Change in deferred revenue
10,907

 

 
10,907

 
F
 
32,003

 

 
32,003

 
F
Total bookings
$
114,447

 
$

 
$
114,447

 
F
 
$
331,972

 
$

 
$
331,972

 
F
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NM: not meaningful U:>100% unfavorable F:>100% favorable
(1)
On December 16, 2014, we completed the acquisition of Big Fish Games, therefore the results of Big Fish Games are not included for the three and nine months ended September 30, 2014.
(2)
Bookings is a non-GAAP financial measure equal to the revenue recognized plus the change in deferred revenue for the periods presented.

28



Casino Activity
The following table sets forth, for the periods indicated, statistical casino information (in thousands, except for average daily information):
 
Three Months Ended September 30,
 
Change
 
Nine Months Ended September 30,
 
Change
 
2015
 
2014 (1)
 
$
 
%
 
2015
 
2014 (1)
 
$
 
%
Calder Casino
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net casino revenues
$
17,831

 
$
17,412

 
$
419

 
2
 %
 
$
56,440

 
$
56,402

 
$
38

 
 %
Slot handle
$
232,664

 
$
228,464

 
$
4,200

 
2
 %
 
$
750,594

 
$
726,375

 
$
24,219

 
3
 %
Net slot revenues
$
17,864

 
$
17,361

 
$
503

 
3
 %
 
$
56,566

 
$
55,576

 
$
990

 
2
 %
Average daily net win per slot machine
$
177

 
$
167

 
$
10

 
6
 %
 
$
188

 
$
180

 
$
8

 
4
 %
Average daily number of slot machines
1,097

 
1,130

 
(33
)
 
(3
)%
 
1,099

 
1,130

 
(31
)
 
(3
)%
Average daily poker revenue
$

 
$

 
$

 
-

 
$

 
$
4,148

 
$
(4,148
)
 
(100
)%
Fair Grounds Slots and Video Poker
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net casino revenues
$
17,739

 
$
17,315

 
$
424

 
2
 %
 
$
57,239

 
$
55,586

 
$
1,653

 
3
 %
Slot handle
$
95,265

 
$
98,997

 
$
(3,732
)
 
(4
)%
 
$
318,447

 
$
322,536

 
$
(4,089
)
 
(1
)%
Net slot revenues
$
8,522

 
$
9,158

 
$
(636
)
 
(7
)%
 
$
29,165

 
$
29,946

 
$
(781
)
 
(3
)%
Average daily net win per slot machine
$
149

 
$
161

 
$
(12
)
 
(7
)%
 
$
174

 
$
179

 
$
(5
)
 
(3
)%
Average daily number of slot machines
620

 
620

 

 
 %
 
620

 
620

 

 
 %
Average daily video poker revenue
$
100,604

 
$
89,019

 
$
11,585

 
13
 %
 
$
103,508

 
$
94,400

 
$
9,108

 
10
 %
Average daily net win per video poker machine
$
131

 
$
128

 
$
3

 
2
 %
 
$
140

 
$
128

 
$
12

 
9
 %
Average daily number of video poker machines
770

 
693

 
77

 
11
 %
 
741

 
735

 
6

 
1
 %
Oxford Casino
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net casino revenues
$
21,245

 
$
20,787

 
$
458

 
2
 %
 
$
57,816

 
$
55,890

 
$
1,926

 
3
 %
Slot handle
$
206,388

 
$
198,873

 
$
7,515

 
4
 %
 
$
550,985

 
$
519,924

 
$
31,061

 
6
 %
Net slot revenues
$
17,577

 
$
16,893

 
$
684

 
4
 %
 
$
47,188

 
$
44,955

 
$
2,233

 
5
 %
Average daily net win per slot machine
$
225

 
$
214

 
$
11

 
5
 %
 
$
202

 
$
192

 
$
10

 
5
 %
Average daily number of slot machines
851

 
858

 
(7
)
 
(1
)%
 
854

 
858

 
(4
)
 
 %
Average daily net win per table
$
1,554

 
$
1,635

 
$
(81
)
 
(5
)%
 
$
1,505

 
$
1,618