Annual Report





UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
 ACT OF 1934
For the fiscal year ended December 31, 2016
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
CHURCHILLDOWNSLOGOA32.JPG  
(Exact name of registrant as specified in its charter)
Kentucky
 
61-0156015
(State or other jurisdiction of incorporation or organization)
 
(IRS 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)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, No Par Value
 
The NASDAQ Stock Market LLC
(Title of each class registered)
 
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   x   No   o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes   o     No   x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   o
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   o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o
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   o     No   x
As of February 23, 2016 , 16,430,884 shares of the Registrant’s Common Stock were outstanding. As of June 30, 2016 (based upon the closing sale price for such date on the NASDAQ Global Market), the aggregate market value of the shares held by non-affiliates of the Registrant was $1,696,748,433 .
Portions of the Registrant’s Proxy Statement for its Annual Meeting of Shareholders to be held on April 25, 2017 are incorporated by reference herein in response to Items 10, 11, 12, 13 and 14 of Part III of Form 10-K. This Form 10-K filing includes 106 pages, which includes an exhibit index on pages 103-106.





CHURCHILL DOWNS INCORPORATED
INDEX TO ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2016
 
 
 
 
 
 
 
 
 
 
Financial Statements  and Supplemental Data
 
 
 
 
 
 
 
 
 
 
 
 
 

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Cautionary Statement Regarding Forward-Looking Information
This Annual Report on Form 10-K (“Report”) including the information incorporated by reference herein, 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 Report 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,” “seek,” “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 factors described in Item 1A. Risk Factors of this Report.

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PART I
ITEM 1.
BUSINESS
A.    Introduction
Churchill Downs Incorporated (the "Company", "we", "us", "our") is an industry-leading racing, gaming and online entertainment company anchored by our iconic flagship event - The Kentucky Derby . We are a leader in brick-and-mortar casino gaming with approximately 9,030 gaming positions in seven states, and we are the largest, legal mobile and online platform for betting on horseracing in the United States. We are also one of the world's largest producers and distributors of mobile games. We were organized as a Kentucky corporation in 1928, and our principal executive offices are located in Louisville, Kentucky.
B.    Business Segments
We manage our operations through six operating segments: Racing, Casinos, TwinSpires, Big Fish Games, Other Investments and Corporate. Financial information about these segments is set forth in Item 8. Financial Statements and Supplementary Data, Note 19 of Notes to Consolidated Financial Statements contained within this report.  Further discussion of financial results by operating segment is provided in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations contained within this report.
Racing Segment
Our Racing segment includes our four racetracks: Churchill Downs Racetrack ("Churchill Downs"), Arlington International Race Course ("Arlington"), Fair Grounds Race Course ("Fair Grounds") and Calder Race Course ("Calder"). We conduct live horseracing at Churchill Downs, Arlington and Fair Grounds. On July 1, 2014, we entered into a racing services agreement with The Stronach Group ("TSG") to allow Gulfstream Park to manage and operate Calder through December 31, 2020.
Our racing revenue includes commissions on pari-mutuel wagering at our racetracks and off-track betting facilities ("OTBs") plus simulcast host fees earned from other wagering sites. In addition, ancillary revenue generated by the pari-mutuel facilities includes admissions, sponsorships and licensing rights, and food and beverage sales. Racing revenue and income are influenced by our racing calendar. Racing dates are generally approved annually by the respective state racing authorities. Therefore, racing revenue and operating results for any interim quarter are not generally indicative of the revenue and operating results for the year. The majority of our live racing revenue occurs during the second quarter with the running of the Kentucky Oaks and Kentucky Derby at Churchill Downs.
Churchill Downs, Arlington, Fair Grounds, our ten OTBs in Illinois and twelve OTBs in Louisiana offer year-round simulcast wagering. Gulfstream Park took over operations of Calder’s simulcast wagering beginning July 1, 2014. The OTBs accept wagers on races at the respective racetrack or on races simulcast from other locations.
We generate a significant portion of our pari-mutuel wagering revenue by sending signals of races from our racetracks to other facilities and businesses ("export") and receiving signals from other racetracks ("import"). Revenue is earned through pari-mutuel wagering on signals that we both import and export.
Churchill Downs
Churchill Downs is located in Louisville, Kentucky and is an internationally known thoroughbred racing operation best known as the home of the iconic Kentucky Derby. We have conducted thoroughbred racing continuously at Churchill Downs since 1875. The Kentucky Derby is the longest continuously held annual sporting event in the United States and is the first race of the annual series of races for 3-year old thoroughbreds known as the Triple Crown. Our history of record attendance, increasing wagering and television viewership is attractive to presenting sponsors and contributed to the seventh consecutive year of earnings growth in 2016. We conducted 74 live race days in 2014 , 70 in 2015 and 70 in 2016 . We anticipate having 70 live race days in 2017 .
In 2002, as part of the financing of improvements to the Churchill Downs facility, we transferred title of the Churchill Downs facility to the City of Louisville, Kentucky and leased back the facility. Subject to the terms of the lease, we can re-acquire the facility at any time for $1.00.
The facility consists of approximately 147 acres of land with a one-mile dirt track, a seven-eighths (7/8) mile turf track, a grandstand, luxury suites and a stabling area. The facility accommodates approximately 59,000 patrons in our clubhouse, grandstand, Jockey Club Suites, Finish Line Suites, Turf Club, Grandstand Terrace, Rooftop Garden and Mansion. We have a saddling paddock, accommodations for groups and special events and parking areas for the public. Our racetrack also has permanent lighting in order to accommodate night races. The stable area has barns sufficient to accommodate approximately 1,400 horses and a 114-room dormitory for backstretch personnel. The Churchill Downs facility also includes a simulcast wagering facility.
We have continued to invest in the facility to enhance the experience of our customers. During 2014, we completed the installation of a 15,224 square-foot, state of the art, high-definition video board that provides an enhanced viewing experience for patrons.

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We also created The Mansion, which provides premium accommodations for 298 guests. We also opened the Grandstand Terrace and Rooftop Garden, which together added 2,400 new seats, wagering windows, and food and beverage offerings.
During the second quarter of 2015, we opened our new winner’s circle suites and a courtyard. The winner’s circle suites include 20 private, open-air suites reserved specifically for Kentucky Oaks and Kentucky Derby horsemen. The courtyard is a spacious lawn area in front of the winner’s circle suites.
During the second quarter of 2016, we finalized our $19.0 million renovation of the Turf Club and other premium areas. The Turf Club is an exclusive, members-only lounge and dining room located in the clubhouse section of Churchill Downs, directly overlooking the racetrack's finish line.
In October 2016, we announced a $16.0 million renovation to modernize 95,000 square feet of the second floor clubhouse. The capital project is designed to improve the venue circulation and service as well as to enhance food and beverage offerings. The project is expected to be completed prior to the 2017 Kentucky Derby.
In November 2016, we announced a $37.0 million capital project that will deliver more than 1,800 new seats for the 2018 Kentucky Derby through the addition of 36 new luxury starting gate suites and interior dining tables.
We also provide additional stabling and training facilities sufficient to accommodate 500 horses and a three-quarter (3/4) mile dirt track at a facility known as Trackside Louisville, which is located approximately five miles from the racetrack facility.
Arlington
The Arlington racetrack is located in Arlington Heights, Illinois and is a thoroughbred racing operation with ten OTBs. The Arlington racetrack hosts a significant stakes race, the Arlington Million. We conducted 89 live race days in 2014 , 77 in 2015 and 74 in 2016 . We anticipate having 71 live race days in 2017 .
The racetrack sits on 336 acres, has a one and one-eighth (1 1/8) mile synthetic track, a one-mile turf track and a five-eighths (5/8) mile training track. The facility includes a clubhouse, grandstand and suite seating for approximately 7,500 persons, and food and beverage facilities. The stable area can accommodate 2,200 horses and has 546 rooms of temporary housing.
Fair Grounds
The Fair Grounds racetrack is located in New Orleans, Louisiana and is a racing operation with twelve OTBs in Louisiana. The Fair Grounds racetrack hosts a significant stakes race, the Louisiana Derby. We conducted 82 thoroughbred live race days in 2014 , 83 in 2015 and 78 in 2016 . We anticipate having 81 thoroughbred live race days in 2017 . We conducted 12 quarter horse live race days in 2014 , 10 in 2015 and 10 in 2016 . We anticipate having 10 quarter horse live race days in 2017 .
The Fair Grounds facility consists of approximately 145 acres of land, a one-mile dirt track, a seven-eighths (7/8) mile turf track, a grandstand and a stabling area. The facility includes clubhouse and grandstand seating for approximately 5,000 persons, a general admissions area and food and beverage facilities. The stable area consists of barns that can accommodate 1,897 horses and living quarters for 132 people.
Calder
Calder is located in Miami Gardens, Florida and is adjacent to Hard Rock Stadium, home of the Miami Dolphins. Calder is a thoroughbred racing facility that consists of approximately 170 acres of land with a one-mile dirt track, 7/8-mile turf track, barns and stabling facilities.
On July 1, 2014, we finalized an agreement with TSG that expires on December 31, 2020 under which we permit TSG to operate and manage Calder’s racetrack and certain other racing and training facilities and to provide live horseracing under Calder’s racing permits. During the term of the agreement, TSG pays Calder a racing services fee and is responsible for the direct and indirect costs of maintaining the racing premises, including the training facilities and applicable barns, and TSG receives the associated revenue from the operation.
In late 2014 and into 2015, we assessed potential alternative uses of the Calder property that are not associated with the TSG lease agreement. Based on our analysis, we razed the barns that were not associated with the TSG agreement and commenced the demolition of the grandstand and certain ancillary facilities. The Company recognized Calder exit costs of $2.5 million in 2016, $13.9 million in 2015 and $2.3 million in 2014 related to demolition costs for the removal of the grandstand. The Calder exit costs recognized in 2015 included a non-cash impairment charge of $12.7 million to reduce the net book value of the grandstand assets to zero.
On November 8, 2016, we completed the sale of 61 acres of excess, undeveloped land at Calder for which we received total proceeds of $25.6 million.

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Casinos Segment
We are also a provider of brick-and-mortar real-money casino gaming with approximately 9,030 gaming positions located in seven states. We own five casinos (Oxford Casino, Riverwalk Casino, Harlow’s Casino, Calder Casino and Fair Grounds Slots and Video Services, LLC) and two hotels (Riverwalk and Harlow’s). In addition, we have a 50% equity investment in Miami Valley Gaming, LLC ("MVG") and a 25% equity investment in Saratoga Casino Holdings LLC ("SCH"). Our casino revenue is primarily generated from slot machines, video poker and table games while ancillary revenue includes hotel and food and beverage sales.
Oxford
Our Oxford Casino ("Oxford") is located in Oxford, Maine. Oxford is a 27,000 square-foot casino with approximately 870 slot machines, 28 table games and two dining facilities on approximately 97 acres of land.
On April 28, 2016, we announced plans to construct a new attached $25.0 million hotel at the Oxford property. The capital project includes expansion of the existing Oxford gaming floor and the hotel will feature over 100 new guest rooms including standard rooms and suites, as well as additional dining options. We anticipate the hotel opening in the second half of 2017.
Riverwalk
Our Riverwalk Casino ("Riverwalk") is located in Vicksburg, Mississippi. Riverwalk is a 25,000 square-foot casino with approximately 640 slot machines, 15 table games, a five-story 80-room attached hotel and two dining facilities on approximately 22 acres of land.
Harlow’s
Our Harlow’s Casino ("Harlow’s") is located in Greenville, Mississippi. Harlow’s is a 33,000 square-foot casino with approximately 740 slot machines, 15 table games, a 105-room attached hotel, a 5,600 square-foot multi-functional event center and four dining facilities. Harlow’s is located on approximately 84 acres of leased land adjacent to U.S. Highway 82 in Greenville, Mississippi.
Calder
Our Calder Casino ("Calder Casino") is located in Miami Gardens, Florida near Hard Rock Stadium and is adjacent to Calder Race Course. Calder Casino is a 106,000 square-foot facility with approximately 1,090 slot machines and two dining facilities on a single-level.
Fair Grounds Slots and Video Services, LLC
Fair Grounds Slots is located in New Orleans, Louisiana adjacent to Fair Grounds Race Course. Fair Grounds Slots is a 33,000 square-foot slot facility that operates approximately 620 slot machines with two concession areas, a bar, a simulcast facility and other amenities for slots and pari-mutuel wagering patrons. Video Services, LLC ("VSI") is the owner and operator of approximately 790 video poker machines in ten OTBs in Louisiana.
Miami Valley Gaming Equity Investment
We have a 50% equity investment in MVG that owns a video lottery terminal ("VLT") facility and harness racetrack on 120 acres in Lebanon, Ohio, which opened on December 12, 2013. MVG is an 186,000 square-foot facility with approximately 1,710 VLTs, a racing simulcast center, a 5/8- mile harness racetrack and four dining facilities. MVG conducted 64 days of live harness racing in 2014 , 89 days of live harness racing in 2015 and 86 days of live harness racing in 2016 . MVG expects to conduct 87 days of live harness racing in 2017 .
Saratoga Casino Holdings LLC Equity Investment
On October 2, 2015, we completed the acquisition of a 25% equity investment in SCH which owns Saratoga Casino and Raceway ("Saratoga's New York facility") in Saratoga Springs, New York, for $24.5 million from Saratoga Harness Racing, Inc. ("SHRI"). Saratoga's New York facility has a casino with approximately 1,700 VLT machines, a 1/2-mile harness racetrack with a racing simulcast center and three dining facilities. Saratoga's New York facility has a 50% interest in a joint venture with Delaware North Companies Gaming & Entertainment Inc. ("DNC") to manage the Gideon Putnam Hotel and Resort. We also signed a five-year management agreement with SCH to manage Saratoga's New York facility for which we receive management fee revenue.
On July 6, 2016, Saratoga's New York facility completed a $40.0 million expansion including a 117-room hotel, additional dining facilities and a 3,000 square-foot multi-functional event space. Saratoga's New York facility conducted 160 days in 2014 , 170 days in 2015 and 169 days of live harness racing in 2016 . Saratoga's New York facility expects to conduct 170 days of live harness racing in 2017 .
On November 21, 2016, we completed the acquisition of a 25% equity investment in Saratoga Casino Black Hawk in Black Hawk, Colorado ("Saratoga's Colorado facility") for $6.5 million from SHRI. Saratoga's Colorado facility has a casino with approximately 450 slot machines, nine table games, three lounges and two dining facilities.

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Our equity gain or loss from Saratoga's New York facility and Saratoga's Colorado facility are reported as Saratoga (collectively, "Saratoga").
Ocean Downs Equity Investment
In August 2016, we signed a limited liability company operating agreement with SCH, with each entity having a 50% interest, and formed Old Bay Gaming and Racing LLC (“Old Bay”). The Old Bay agreement provides both the Company and SCH equal participating rights, and both entities must consent to Old Bay’s operating, investing and financing decisions.
On January 3, 2017, Old Bay acquired all of the equity interests of Ocean Enterprise 589 LLC, Ocean Downs LLC and Racing Services LLC (collectively, “Ocean Downs”). Ocean Downs, located near Ocean City, Maryland, owns and operates VLTs at the Casino at Ocean Downs and conducts harness racing at Ocean Downs Racetrack. The Company’s 25% interest in SCH provides an additional 12.5% interest, resulting in an effective 62.5% interest in Ocean Downs. Since both the Company and SCH have participating rights and both must consent to Old Bay’s operating, investing and financing decisions, the Company will account for Ocean Downs using the equity method of accounting.
The casino at Ocean Downs has approximately 800 VLTs and two dining facilities. The racetrack at Ocean Downs conducted 48 days in 2014 , 48 days in 2015 and 47 days of live harness racing in 2016 . The racetrack at Ocean Downs expects to conduct 48 days of live harness racing in 2017 .
TwinSpires Segment
Our TwinSpires segment includes TwinSpires.com, Fair Grounds Account Wagering ("FAW"), Velocity, Churchill Downs Interactive Gaming ("I-Gaming"), Bluff Media ("Bluff") and Bloodstock Research Information Services ("BRIS").
TwinSpires.com is headquartered in Louisville, Kentucky and operates our mobile and online wagering business, which is our platform for betting on horseracing. We are the country’s largest legal online gaming platform in the U.S. TwinSpires accepts pari-mutuel wagers from customers residing in certain states who establish and fund an account from which they may place wagers via telephone, mobile device (through a browser or the TwinSpires mobile app) or through the Internet at www.twinspires.com . Our business is licensed as a multi-jurisdictional simulcasting and interactive wagering hub in the state of Oregon. We offer our customers streaming video of live horse races, as well as replays, and an assortment of racing and handicapping information. In addition, we provide technology services to third parties, and we earn commissions from white label advance deposit wagering products and services. Under these arrangements, we typically provide an advance deposit wagering platform and related operational services while the third party typically provides a brand name, marketing and limited customer functions. We believe that TwinSpires.com is a key component to our growth, and our gaming platform positions us to be a continued market leader in online gaming.
Our FAW business is a mobile and online wagering business licensed in the state of Louisiana that is operated by Fair Grounds Race Course for Louisiana residents through a contractual agreement with TwinSpires.com.
Velocity is a mobile and online wagering business licensed under TwinSpires.com, which focuses on high dollar wagering international customers. During December 2016, we completed the transition of Velocity customers to the TwinSpires.com Oregon license.
I-Gaming is our Internet real-money gaming operation. During May 2015, I-Gaming entered into an agreement with a licensed card room operator to provide Internet-based interactive gaming services within California, should enabling legislation be enacted that would permit such activities. The term of the agreement commences after enabling legislation and upon the acceptance of the first customer wager and will then continue for a ten-year period. Under the agreement, I-Gaming and the licensed operator will jointly provide a platform for operations, obtain and maintain required licenses and regulatory approvals, and operate Internet-based interactive gaming services that will be marketed to California residents. These Internet-based interactive gaming services may include poker and other real-money gaming activities. 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.
Bluff operated a multimedia poker periodical ( BLUFF Magazine and BluffMagazine.com), maintained a comprehensive online database (ThePokerDB) that tracked and ranked the performance of poker players and tournaments, and provided various other news and content forums. We acquired Bluff in February 2012, and we ceased operations of BLUFF Magazine in July 2015.
BRIS is a data service provider with one of the world’s largest computerized databases of handicapping and pedigree information for the thoroughbred horse industry. We provide special reports, statistical information, handicapping information, pedigrees and other data through our websites Brisnet.com and TwinSpires.com.
HRTV, LLC ("HRTV") was an equity investment in a horseracing television channel. We divested HRTV on January 2, 2015.

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Big Fish Games Segment
On December 16, 2014, we completed the acquisition of Big Fish Games, Inc. ("Big Fish Games"), a global producer and distributor of social casino, casual and mid-core free-to-play and premium paid games for PC, Mac and mobile devices. Big Fish Games is headquartered in Seattle, Washington and has locations in Oakland, California and Luxembourg, with approximately 700 employees.
We utilize a portfolio approach to game development and have six internal studios with distinct production strategies as well as a large network of third-party developers to supplement our internal game production capabilities. We are a major producer of content and a direct-to-consumer, analytics-focused marketer and distributor of content across multiple platforms, including PC, Mac and mobile (including iOS and Android devices). We focus on delivering high quality game play and scaling these games to large audiences. When we release new games, we have an advanced marketing and analytic platform that allows us to quickly reach a broad game audience while leveraging a positive spread between the cost to acquire users and the expected net revenue from those users.
We have distributed more than 2.8 billion games to customers in 150 countries and are currently ranked as the seventh largest mobile publisher by combined iOS and Android sales in the U.S. based on 2016 gross revenue. The business operates in three business lines: 1) social casino, 2) casual and mid-core free-to-play and 3) premium paid games.
Social Casino Games
Social casino games are free to download through PC, Mac and mobile devices with a free-to-play business model. Monetization occurs through the consumer purchase of in-app virtual currency to enhance the game-playing experience. We view Big Fish Casino as a social game platform within a single app that includes multiple casino-style games such as blackjack, poker, slots, craps and roulette. Big Fish Casino is consistently a top-five social casino title on iOS and Google Play app stores based on gross revenue. Jackpot City Slots and Vegas Party Slots are other examples of our social casino games.
Casual and Mid-core Free-to-play Games
Casual and mid-core free-to-play games are also free to download through PC, Mac and mobile devices. Casual games consist of non-casino game genres such as match three, puzzle, hidden object and solitaire. Mid-core free-to-play games include non-casino game genres such as simulation, role-playing, adventure, collectible card and strategy. These games are monetized through the consumer purchase of in-app virtual currency which players can use to buy virtual items to enhance the game-playing experience. Over time, we have experienced a significant increase in our monthly average users largely due to the continued growth of our mobile free-to-play offerings. Gummy Drop! and Fairway Solitaire are examples of our casual free-to-play games and Dungeon Boss is an example of our mid-core free-to-play games.
Premium Paid Games
Premium paid games are those where customers pay a single price upfront to download a game on their PC, Mac and mobile devices. There is no further monetization through in-game purchases. The games tend to be linear in nature and have a distinct beginning, middle and end.
Other Investments Segment
Our Other Investments Segment includes United Tote, Capital View Casino & Resort Joint Venture ("Capital View") and our other minor investments.
United Tote
Our subsidiaries, United Tote Company and United Tote Canada (collectively "United Tote"), manufacture and operate pari-mutuel wagering systems for racetracks, OTBs and other pari-mutuel wagering businesses. United Tote provides totalisator services which accumulate wagers, record sales, calculate payoffs and display wagering data to patrons who wager on horse races. United Tote has contracts to provide totalisator services to a significant number of third-party racetracks, OTBs and other pari-mutuel wagering businesses and also provides these services at many of our facilities.
Capital View Casino & Resort Joint Venture
Capital View is a 50% joint venture with SHRI that unsuccessfully bid on the development of a destination casino and resort in the Capital Region of New York.
Corporate Segment
Our Corporate segment includes miscellaneous and other revenue, compensation expense, professional fees and other general and administrative expense not allocated to our other operating segments.

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C.    Competition
Overview
We operate in a highly competitive industry with a large number of participants, some of which have financial and other resources that are greater than ours. The industry faces competition from a variety of sources for discretionary consumer spending, including spectator sports, fantasy sports and other entertainment and gaming options. Internet-based interactive gaming and wagering, both legal and illegal, is growing rapidly and we anticipate competition in this area will become more intense as new Internet-based ventures enter the industry and as state and federal regulations on Internet-based activities are clarified. Additionally, our brick-and-mortar casinos compete with traditional and Native American casinos, video lottery terminals, state-sponsored lotteries and other forms of legalized gaming in the U.S. and other jurisdictions.
Legalized gambling is currently permitted in various forms in many states and Canada. Other jurisdictions could legalize gambling in the future, and established gaming jurisdictions could award additional gaming licenses or permit the expansion of existing gaming operations. If additional gaming opportunities become available near our racing or gaming operations, such gaming operations could have a material adverse impact on our business.
Racing
In 2016 , approximately 42,000 thoroughbred horse races were conducted in the United States. Of these races, we hosted 2,073 races, or 4.9% of the total. As a content provider, we compete for wagering dollars in the simulcast market with other racetracks conducting races at or near the same times as our races. As a racetrack operator, we also compete for horses with other racetracks running live racing meets at or near the same time as our races. Our ability to compete is substantially dependent on the racing calendar, number of horses racing and purse sizes. In recent years, competition has increased as more states legalize gaming and allow slot machines at racetracks with mandatory purse contributions. Over 89 percent of pari-mutuel handle is bet at off-track locations, either at other racetracks, OTBs, casinos, or through mobile and online wagering channels. As a content distributor, we compete for these dollars to be wagered at our racetracks, OTBs, casinos and via our mobile and online wagering business.
Churchill Downs
Churchill Downs faces competition from freestanding casinos and racetracks that are combined with casinos ("racinos") in Indiana, West Virginia and Ohio. In Indiana, these casinos include Horseshoe Indiana, in Elizabeth, Indiana; Belterra Casino in Florence, Indiana and French Lick Resort in French Lick, Indiana. In Indiana, there are two racinos: Hoosier Park which operates 2,000 slot machines, and Indiana Grand Racing & Casino, which operates 2,200 slot machines. In West Virginia, there is one racino, Mountaineer Casino Racetrack and Resort. In Ohio, seven racetracks offer VLT facilities.
In New York, Aqueduct Racetrack has a gaming facility with more than 5,400 VLTs and electronic table games. As a result of the addition of gaming activities, New York purse payments at each of the three New York racetracks were greatly enhanced compared to historical levels.
These developments may result in Indiana, Ohio and New York racetracks attracting horses that would otherwise race at Kentucky racetracks, including Churchill Downs, thus negatively affecting the number of starters that, in turn, may have a negative effect on handle.
Arlington
Arlington competes in the Chicago market against a variety of entertainment options. In addition to other racetracks in the area such as Hawthorne Race Course, there are ten riverboat casino operations that draw from the Chicago market including Rivers Casino, in Des Plaines, Illinois. Additionally, Native American gaming operations in Wisconsin may also adversely affect Arlington.
The Video Gaming Act was enacted in July 2009, authorizing the placement of up to five Video Gaming Terminals ("VGTs") in licensed retail establishments, truck stops, and veteran and fraternal establishments. There are currently over 22,000 VGTs distributed among more than 5,000 establishments throughout Illinois.
Fair Grounds
Fair Grounds competes in Louisiana in both thoroughbred and quarter horse racing with Louisiana Downs, Evangeline Downs, Harrah's Louisiana Downs and Delta Downs as well as with other southern state racetracks, including Gulfstream Park in Florida and Oaklawn Park in Arkansas.
Casinos
Oxford
Oxford competes with Hollywood Casino in Bangor, Maine. Oxford also competes with Plainridge Park Casino in Plainville, Massachusetts, which opened in June 2015. Two other casinos are expected to open in Massachusetts in the future.

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Riverwalk
Riverwalk competes in the Vicksburg, Mississippi area and is one of four casinos in the local market. Our principal local competitors are Ameristar Casino, Lady Luck Casino and WaterView Casino & Hotel. In addition, Riverwalk faces regional competition from Magnolia Bluff Casino and the Pearl River Resort in Mississippi.
Harlow’s
Harlow’s competes in Greenville, Mississippi with a variety of regional riverboat and land-based casinos. Our primary local competitor is Trop Casino, which reopened its renovated property during October 2014. Harlow’s also faces regional competition from a casino in Lula, Mississippi, eight casinos in Tunica, Mississippi and two casinos in Arkansas.
The Mississippi Gaming Control Act does not limit the number of licenses that may be granted.
Calder Casino
Calder Casino competes with seven pari-mutuel casinos as well as four Indian-owned casinos, all of which are located in Miami-Dade or Broward County, Florida. We also face competition from a large number of cruise ship operators in Miami and Ft. Lauderdale. Native American casinos offer a variety of table games and are taxed at lower rates and therefore, are generally able to spend more money marketing their facilities to consumers.
Fair Grounds Slots and Video Services, LLC
Fair Grounds Slots competes in the New Orleans, Louisiana area with two riverboat casinos and Harrah’s, which is the largest, closest and only land-based casino competitor to Fair Grounds. Fair Grounds Slots faces significant gambling competition along the Mississippi Gulf Coast. Fair Grounds Slots and VSI also compete with video poker operations located at various OTBs, truck stops and restaurants in the area. In 2015, Fair Grounds Slots was adversely impacted by a smoking ban in Orleans Parish which enhanced competition with properties outside of Orleans Parish.
MVG
MVG competes with Hollywood Gaming at Dayton Raceway, a VLT facility in Dayton, Ohio and JACK Cincinnati, a slot machine and table games casino in Cincinnati, Ohio.  MVG also faces regional competition from three casinos in Indiana and two other gaming properties in Columbus, Ohio.
Saratoga
Saratoga's New York facility competes with Rivers Casino, a new casino in Schenectady, New York, which opened in February 2017. Saratoga's Colorado facility competes in Black Hawk, Colorado with a variety of casinos including Ameristar Casino, Isle of Capri Hotel & Casino and The Lodge & Hotel at Black Hawk, all of which offer hotel accommodations, slot machines and poker and other table games.
Ocean Downs
Ocean Downs competes with Harrington Raceway & Casino, in Harrington Delaware, which has slot machines, table games, simulcasting and live racing. Ocean Downs also faces competition from Dover Downs Hotel and Casino, in Dover, Delaware, which offers slot machines, table games, hotel accommodations and a spa facility.
TwinSpires
TwinSpires.com competes with other mobile and online wagering businesses for both customers and racing content, and it also competes with online gaming sites. Our competitors include Betfair Limited (d/b/a TVG), The Stronach Group (d/b/a XpressBet), Premier Turf Club, Lien Games (d/b/a BetAmerica), AmWest Entertainment, The New York Racing Association (d/b/a NYRA Rewards), Connecticut OTB, Penn National Gaming Inc. and Racing2Day LLC.
Our BRIS business competes with companies such as Equibase and the Daily Racing Form.
Big Fish Games
Big Fish Games faces significant competition in all aspects of our business. Specifically, we compete for the leisure time, attention and discretionary spending of our players with other game developers on the basis of a number of factors, including quality of player experience, brand awareness and access to distribution channels.
  We believe we compete favorably on these factors; however, our industry is evolving rapidly and is becoming increasingly competitive. Other developers and distributors of social casino, casual and mid-core free-to-play and premium paid games could develop more compelling content that competes with our games and adversely affects our ability to attract and retain players and their entertainment time. These competitors, including companies of which we may not be currently aware, may take advantage of social networks or access to a larger user base to grow their networks rapidly and virally.

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Our social casino games compete in a rapidly evolving market against an increasing number of competitors, including Caesars Interactive, Zynga and IGT. Our casual and mid-core free-to-play game customers may also play other games on PCs, Macs, mobile devices and console devices, and some of these games may include unique features that our games do not have. Given the open nature of the development and distribution of games for mobile devices, we compete with a vast number of developers and distributors who are able to create and launch games and other content for these devices using relatively limited resources and with relatively limited start-up time or expertise. It has been estimated that more than 2.2 million applications, including more than 488,000 active games, were available on Apple’s U.S. App Store as of December 31, 2016. The proliferation of titles potentially makes it difficult for us to differentiate ourselves from other developers and to compete for customers who download and purchase content for their devices without substantially increasing our marketing and other development and distribution costs.
Other Investments
In North America, United Tote competes primarily with Sportech and AmTote International, Inc. Our competition outside of North America is very fragmented.
D.    Governmental Regulations and Potential Legislative Changes
We are subject to various federal, state and international laws and regulations that affect our businesses. The ownership, operation and management of our racing operations, our casino operations, TwinSpires and Big Fish Games are subject to regulation under the laws and regulations of each of the jurisdictions in which we operate. The ownership, operation and management of our segments are also subject to legislative actions at both the federal and state level.
Racing Regulations
Horseracing is a highly regulated industry. In the U.S., individual states control the operations of racetracks located within their respective jurisdictions with the intent of, among other things, protecting the public from unfair and illegal gambling practices, generating tax revenue, licensing racetracks and operators and preventing organized crime from being involved in the industry. Although the specific form may vary, states that regulate horseracing generally do so through a horseracing commission or other gambling regulatory authority. In general, regulatory authorities perform background checks on all racetrack owners prior to granting them the necessary operating licenses. Horse owners, trainers, jockeys, drivers, stewards, judges and backstretch personnel are also subject to licensing by governmental authorities. State regulation of horse races extends to virtually every aspect of racing and usually extends to details such as the presence and placement of specific race officials, including timers, placing judges, starters and patrol judges. We currently satisfy the applicable licensing requirements of the racing and gambling regulatory authorities in each state where we maintain racetracks or pari-mutuel operations and/or businesses.
The total number of days on which each racetrack conducts live thoroughbred racing fluctuates annually according to each calendar year and the determination of applicable regulatory authorities.
In the United States, interstate pari-mutuel wagering on horseracing is subject to the Interstate Horseracing Act of 1978 ("IHA"), as amended in 2000. Through the IHA, racetracks can commingle wagers from different racetracks and wagering facilities and broadcast horseracing events to other licensed establishments.
Kentucky
Horseracing tracks in Kentucky are subject to the licensing and regulation of the Kentucky Horse Racing Commission ("KHRC"). The KHRC is responsible for overseeing horseracing and regulating the state equine industry. Licenses to conduct live thoroughbred racing meets, to participate in simulcasting and to accept advance deposit wagers from Kentucky residents are approved annually by the KHRC based upon applications submitted by the racetracks in Kentucky. To some extent, Churchill Downs competes with other racetracks in Kentucky for the award of racing dates; however, the KHRC is required by state law to consider and seek to preserve each racetrack’s usual and customary live racing dates.
Illinois
In Illinois, licenses to conduct live thoroughbred racing and to participate in simulcast wagering are approved by the Illinois Racing Board ("IRB"). In September 2016, the IRB appointed Arlington the dark host track in Illinois for 61 simulcast host days during 2017, a decrease of 3 days compared to 2016.  In addition, Arlington was awarded 154 live host days for 2017, an increase of 2 days as compared to 2016.  In total, Arlington was awarded 215 live and dark host days in 2017, a decrease of 1 day as compared to 2016.
On May 26, 2016, the Illinois legislature passed a bill to reauthorize advance deposit wagering though December 21, 2018 and continued incremental surcharges on winning wagers. The bill was signed by the Governor of Illinois in August 2016.
Florida
In Florida, licenses to conduct live thoroughbred racing and to participate in simulcast wagering are approved by the Department of Business and Professional Regulation's Division of Pari-mutuel Wagering ("DPW"). The DPW is responsible for overseeing

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the network of state offices located at every pari-mutuel wagering facility, as well as issuing the permits necessary to operate a pari-mutuel wagering facility. The DPW also issues annual licenses for thoroughbred, standardbred and quarter horse races but does not approve the specific live race days.
Louisiana
In Louisiana, licenses to conduct live thoroughbred racing and to participate in simulcast wagering are approved by the Louisiana State Racing Commission ("LSRC"). The LSRC is responsible for overseeing the awarding of licenses for the conduct of live racing meets, the conduct of thoroughbred horseracing, the types of wagering that may be offered by pari-mutuel facilities and the disposition of revenue generated from wagering. Off-track wagering is also regulated by the LSRC. Louisiana law requires live racing at a licensed racetrack for at least 80 days over a 20 week period each year to maintain the license and to conduct slot operations.
With the addition of slot machines at Fair Grounds, Louisiana law requires live quarter horseracing to be conducted at the racetrack. We conducted quarter horseracing at Fair Grounds for 12 days in 2014, 10 days in 2015 and 10 days in 2016. We expect to conduct quarter horseracing for 10 days in 2017.
In March 2016, during a special session held to address Louisiana’s budget deficit, legislation was passed which temporarily removed the sales tax exemption Fair Grounds qualified for as a pari-mutuel. From April 1, 2016 through June 30, 2016, Fair Grounds paid the statutory state tax of 4% on all purchases related to racing operations. Effective July 1, 2016 through June 30, 2018, Fair Grounds is required to pay a 2% state tax on purchases related to racing operations. During the same special session, the Legislature also added another one percent to the state tax base until July 1, 2018. The sales tax exemption is scheduled to be reinstated July 1, 2018.  The legislation is expected to have an adverse impact on our business.
Casino Regulations and Potential Legislative Changes
Casino laws are generally designed to protect casino consumers and the viability and integrity of the casino industry. Casino laws may also be designed to protect and maximize state and local revenue derived through taxes and licensing fees imposed on casino industry participants as well as to enhance economic development and tourism. To accomplish these public policy goals, casino laws establish procedures to ensure that participants in the casino industry meet certain standards of character and fitness. In addition, casino laws require casino industry participants to:
Ensure that unsuitable individuals and organizations have no role in casino operations;
Establish procedures designed to prevent cheating and fraudulent practices;
Establish and maintain responsible accounting practices and procedures;
Maintain effective controls over financial practices, including establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenue;
Maintain systems for reliable record keeping;
File periodic reports with casino regulators;
Ensure that contracts and financial transactions are commercially reasonable, reflect fair market value and are arms-length transactions;
Establish programs to promote responsible gambling and inform patrons of the availability of help for problem gambling; and
Enforce minimum age requirements.
Typically, a state regulatory environment is established by statute and administered by a regulatory agency with broad discretion to regulate the affairs of owners, managers and persons with financial interests in casino operations. Among other things, casino authorities in the various jurisdictions in which we operate:
Adopt rules and regulations under the implementing statutes;
Interpret and enforce casino laws;
Impose disciplinary sanctions for violations, including fines and penalties;
Review the character and fitness of participants in casino operations and make determinations regarding suitability or qualification for licensure;
Grant licenses for participation in casino operations;
Collect and review reports and information submitted by participants in casino operations;

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Review and approve transactions, such as acquisitions or change-of-control transactions of casino industry participants, securities offerings and debt transactions engaged in by such participants; and
Establish and collect fees and taxes.
Any change in the laws or regulations of a casino jurisdiction could have a material adverse impact on our casino operations.
Licensing and Suitability Determinations
Gaming laws require us, each of our subsidiaries engaged in casino operations, certain of our directors, officers and employees, and in some cases, certain of our shareholders, to obtain licenses from casino authorities. Licenses typically require a determination that the applicant qualifies or is suitable to hold the license. Gaming authorities have very broad discretion in determining whether an applicant qualifies for licensing or should be deemed suitable. Criteria used in determining whether to grant a license to conduct casino operations, while varying between jurisdictions, generally include consideration of factors such as the good character, honesty and integrity of the applicant; the financial stability, integrity and responsibility of the applicant, including whether the operation is adequately capitalized in the state and exhibits the ability to maintain adequate insurance levels; the quality of the applicant’s casino facilities; the amount of revenue to be derived by the applicable state from the operation of the applicant’s casino; the applicant’s practices with respect to minority hiring and training; and the effect on competition and general impact on the community.
In evaluating individual applicants, casino authorities consider the individual’s business experience and reputation for good character, the individual’s criminal history and the character of those with whom the individual associates.
Many casino jurisdictions limit the number of licenses granted to operate casinos within the state and some states limit the number of licenses granted to any one casino operator. Licenses under casino laws are generally not transferable without approval. Licenses in most of the jurisdictions in which we conduct casino operations are granted for limited durations and require renewal from time to time. There can be no assurance that any of our licenses will be renewed. The failure to renew any of our licenses could have a material adverse impact on our casino operations.
In addition to our subsidiaries engaged in casino operations, casino authorities may investigate any individual who has a material relationship to or material involvement with, any of these entities to determine whether such individual is suitable or should be licensed as a business associate of a casino licensee. Our officers, directors and certain key employees must file applications with the casino authorities and may be required to be licensed, qualify or be found suitable in many jurisdictions. Gaming authorities may deny an application for licensing for any cause that they deem reasonable. Qualification and suitability determinations require submission of detailed personal and financial information followed by a thorough investigation. The applicant must pay all the costs of the investigation. Changes in licensed positions must be reported to casino authorities. In addition to casino authorities' ability to deny a license, qualification or finding of suitability, casino authorities have jurisdiction to disapprove a change in a corporate position.
If one or more casino authorities were to find that an officer, director or key employee fails to qualify or is unsuitable for licensing or unsuitable to continue having a relationship with us, we would be required to sever all relationships with such person. In addition, casino authorities may require us to terminate the employment of any person who refuses to file appropriate applications.
Moreover, in many jurisdictions, certain of our shareholders may be required to undergo a suitability investigation similar to that described above. Many jurisdictions require any person who acquires beneficial ownership of more than a certain percentage of our voting securities, typically 5%, to report the acquisition to casino authorities, and casino authorities may require such holders to apply for qualification or a finding of suitability. Most casino authorities, however, allow an "institutional investor" to apply for a waiver. An "institutional investor" is generally defined as an investor acquiring and holding voting securities in the ordinary course of business as an institutional investor, and not for the purpose of causing, directly or indirectly, the election of a member of our board of directors, any change in our corporate charter, bylaws, management, policies or operations, or those of any of our casino affiliates, or the taking of any other action which casino authorities find to be inconsistent with holding our voting securities for investment purposes only. Even if a waiver is granted, an institutional investor generally may not take any action inconsistent with its status when the waiver was granted without once again becoming subject to the foregoing reporting and application obligations.
Generally, any person who fails or refuses to apply for a finding of suitability or a license within the prescribed period after being advised it is required by casino authorities may be denied a license or found unsuitable, as applicable. Any shareholder found unsuitable or denied a license and who holds, directly or indirectly, any beneficial ownership of our voting securities beyond such period of time as may be prescribed by the applicable casino authorities may be guilty of a criminal offense. Furthermore, we may be subject to disciplinary action if, after we receive notice that a person is unsuitable to be a shareholder or to have any other relationship with us or any of our subsidiaries, we: (i) pay that person any dividend or interest upon our voting securities; (ii) allow that person to exercise, directly or indirectly, any voting right conferred through securities held by that person; (iii) pay remuneration in any form to that person for services rendered or otherwise; or (iv) fail to pursue all lawful efforts to require such unsuitable

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person to relinquish voting securities including, if necessary, the immediate purchase of said voting securities for cash at fair market value.
Violations of Gaming Laws
If we violate applicable casino laws, our casino licenses could be limited, conditioned, suspended or revoked by casino authorities, and we and any other persons involved could be subject to substantial fines. A supervisor or conservator can be appointed by casino authorities to operate our casino properties, or in some jurisdictions, take title to our casino assets in the jurisdiction, and under certain circumstances, income generated during such appointment could be forfeited to the applicable state or states. Violations of laws in one jurisdiction could result in disciplinary action in other jurisdictions. As a result, violations by us of applicable casino laws could have a material adverse impact on our casino operations.
Some casino jurisdictions prohibit certain types of political activity by a casino licensee, its officers, directors and key employees. A violation of such a prohibition may subject the offender to criminal and/or disciplinary action.
Reporting and Record-keeping Requirements
We are required periodically to submit detailed financial and operating reports and furnish any other information that casino authorities may require. Under federal law, we are required to record and submit detailed reports of currency transactions involving greater than $10,000 at our casinos and racetracks as well as any suspicious activity that may occur at such facilities. Failure to comply with these requirements could result in fines or cessation of operations. We are required to maintain a current stock ledger that may be examined by casino authorities at any time. If any securities are held in trust by an agent or by a nominee, the record holder may be required to disclose the identity of the beneficial owner to casino authorities. A failure to make such disclosure may be grounds for finding the record holder unsuitable. Gaming authorities may require certificates for our securities to bear a legend indicating that the securities are subject to specified casino laws.
Review and Approval of Transactions
Substantially all material loans, leases, sales of securities and similar financing transactions must be reported to and in some cases approved by casino authorities. We may not make a public offering of securities without the prior approval of certain casino authorities. Changes in control through merger, consolidation, stock or asset acquisitions, management or consulting agreements, or otherwise are subject to receipt of prior approval of casino authorities. Entities seeking to acquire control of us or one of our subsidiaries must satisfy casino authorities with respect to a variety of stringent standards prior to assuming control. Gaming authorities may also require controlling shareholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction.
License Fees and Gaming Taxes
We pay substantial license fees and taxes in many jurisdictions in connection with our casino operations which are computed in various ways depending on the type of gambling or activity involved. Depending upon the particular fee or tax involved, these fees and taxes are payable with varying frequency. License fees and taxes are based upon such factors as a percentage of the gross casino revenue received; the number of gambling devices and table games operated; or a one-time fee payable upon the initial receipt of license and fees in connection with the renewal of license. In some jurisdictions, casino tax rates are graduated such that the tax rates increase as gross casino revenue increases. Tax rates are subject to change, sometimes with little notice, and such changes could have a material adverse impact on our casino operations.
Operational Requirements
In most jurisdictions, we are subject to certain requirements and restrictions on how we must conduct our casino operations. In certain states, we are required to give preference to local suppliers and include minority and women-owned businesses and organized labor in construction projects to the maximum extent practicable. We may be required to give employment preference to minorities, women and in-state residents in certain jurisdictions. Our ability to conduct certain types of games, introduce new games or move existing games within our facilities may be restricted or subject to regulatory review and approval. Some of our operations are subject to restrictions on the number of gaming positions we may have and the maximum wagers allowed to be placed by our customers.
Specific State Casino Regulations and Potential Legislative Changes
Maine
The ownership and operation of casino gaming facilities in the State of Maine is subject to extensive state and local regulation and is subject to licensing and regulatory control by the Maine Gambling Control Board (the "MGCB"). The laws, regulations and supervisory procedures of the MGCB are based upon declarations of public policy that are concerned with, among other things: (1) the regulation, supervision and general control over casinos and the ownership and operation of slot machines and table games; (2) the investigation of complaints made regarding casinos; (3) the establishment and maintenance of responsible accounting

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practices and procedures; (4) the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenue and providing for reliable record keeping; and (5) the prevention of cheating and fraudulent practices. The regulations are subject to amendment and interpretation by the MGCB. Changes in Maine laws or regulations may limit or otherwise materially affect the types of gaming that may be conducted and such changes, if enacted, could have an adverse impact on our Maine gaming operations. The failure to comply with the rules and regulations of the MGCB could have a material adverse impact on our business.
Potential Expanded Gaming in Maine
In 2016, legislation was filed that would expand gaming locations in the state and allow for entities such as Native American tribes in northern Maine and a harness track in southern Maine to operate casino facilities. The legislative proposals were defeated during the 2016 session. In January 2017, legislation was again filed that will allow Native American tribes to qualify for a casino license. A citizen’s initiative to allow for a York county casino has been certified by the Secretary of State’s office to appear on the November 2017 ballot. If the initiative receives more than 50% of voter approval in November, the measure will become law. Should gaming expansion occur in Maine, it could have an adverse impact on our business.
Mississippi
The ownership and operation of casino gaming facilities in the State of Mississippi is subject to extensive state and local regulation, including the Mississippi Gaming Commission (the "Mississippi Commission"). The laws, regulations and supervisory procedures of the Mississippi Commission are based upon declarations of public policy that are concerned with, among other things: (1) the prevention of unsavory or unsuitable persons from having direct or indirect involvement with gaming at any time or in any capacity; (2) the establishment and maintenance of responsible accounting practices and procedures; (3) the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenue, providing for reliable record keeping and requiring the filing of periodic reports with the Mississippi Commission; (4) the prevention of cheating and fraudulent practices; (5) providing a source of state and local revenue through taxation and licensing fees; and (6) ensuring that gaming licensees, to the extent practicable, employ Mississippi residents. The regulations are subject to amendment and interpretation by the Mississippi Commission. Changes in Mississippi laws or regulations may limit or otherwise materially affect the types of gaming that may be conducted and such changes, if enacted, could have an adverse impact on our Mississippi gaming operations. The failure to comply with the rules and regulations of the Mississippi Commission could have a material adverse impact on our business.
Florida
The ownership and operation of casino gaming facilities in the State of Florida is subject to extensive state and local regulation, primarily by the Florida Department of Business and Professional Regulation (the "DBPR"), within the executive branch of Florida’s state government. The DBPR is charged with the regulation of Florida’s pari-mutuel, card room and slot gaming industries, as well as collecting and safeguarding associated revenue due to the state. The DBPR has been designated by the Florida legislature as the state compliance agency with the authority to carry out the state’s oversight responsibilities in accordance with the provisions outlined in the compact between the Seminole Tribe of Florida and the State of Florida. Changes in Florida laws or regulations may limit or otherwise materially affect the types of gaming that may be conducted and such changes, if enacted, could have an adverse impact on our Florida gaming operation. The laws and regulations of Florida are based on policies of maintaining the health, welfare and safety of the general public and protecting the video gaming industry from elements of organized crime, illegal gambling activities and other harmful elements, as well as protecting the public from illegal and unscrupulous gaming to ensure the fair play of devices. The failure to comply with the rules and regulations of the DBPR could have a material adverse impact on our business.
Potential Seminole Compact and Potential Decoupling in Florida
In December 2015, Florida’s Governor signed a twenty-year Seminole Compact with the Seminole Tribe preserving the Tribe's geographic exclusivity and right to exclusively operate blackjack, craps and roulette games and providing the state with an expected $3.0 billion in additional state revenue over a seven-year period beginning in 2017. The Seminole Compact addresses other issues such as the potential for pari-mutuel operations to add blackjack in a limited fashion as well as the potential for expanded licenses in Palm Beach and Miami-Dade counties. The Seminole Compact must be approved by the Florida Legislature. In February 2016, legislation authorizing the Seminole Compact was introduced for consideration, but it has not been ratified.
In January 2017, legislation was filed in the Florida Senate that would allow pari-mutuel racetracks in Miami-Dade and Broward counties to decouple their pari-mutuel and gaming operations. The bill authorizes up to eight additional casino licenses in counties that have approved slot machine gaming through a local referendum and also provides for two additional gaming licenses in Miami-Dade and Broward. The legislation provides for a 10% reduced tax rate on slot machine revenues and permits 24 hour operation for casinos. Under the terms of the proposed bill, the Compact negotiated in 2015 between the Governor and the Seminole Tribe would be ratified.

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At this time it is not possible to determine what impact legislation with respect to authorizing the Seminole Compact or decoupling would have on our business.
Louisiana
The manufacture, distribution, servicing and operation of video draw poker devices in Louisiana are subject to the Louisiana Video Draw Poker Devices Control Law and the rules and regulations promulgated thereunder. The manufacture, distribution, servicing and operation of video poker devices and slot machines are governed by the Louisiana Gaming Control Board (the "Louisiana Board") which oversees all licensing for all forms of legalized gaming in Louisiana. The Video Gaming Division and the Slots Gaming Division of the Gaming Enforcement Section of the Office of the State Police within the Department of Public Safety and Corrections (the "Division") performs the video poker and slots gaming investigative functions for the Louisiana Board. The laws and regulations of Louisiana are based on policies of maintaining the health, welfare and safety of the general public and protecting the video gaming industry from elements of organized crime, illegal gambling activities and other harmful elements, as well as protecting the public from illegal and unscrupulous gaming to ensure the fair play of devices. The Louisiana Board also regulates slot machine gaming at racetrack facilities pursuant to the Louisiana Pari-Mutuel Live Racing Facility Economic Redevelopment and Gaming Control Act. Changes in Louisiana laws or regulations may limit or otherwise materially affect the types of gaming that may be conducted and such changes, if enacted, could have an adverse impact on our Louisiana gaming operations. In addition, the LSRC also issues licenses required for Fair Grounds to operate slot machines at the racetrack and video poker devices at its OTBs. The failure to comply with the rules and regulations of the Louisiana Board or the LSRC could have a material adverse impact on our business.
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. The smoking ban had a negative impact on Fair Grounds Slots which was partially offset by VSI, whose OTB locations are located outside of Orleans Parish.
Ohio
Video Lottery was introduced in the State of Ohio in 2012 when the Governor of Ohio signed Executive Order 2011-22K which authorized the Ohio Lottery Commission ("the OLC") to amend and adopt rules necessary to implement a video lottery program at Ohio’s seven horse racing facilities. The ownership and operation of VLT facilities in the State of Ohio is subject to extensive state and local regulation. The laws, regulations and supervisory procedures of the OLC include 1) regulating the licensing of video lottery sales agents, key gaming employees and VLT manufacturers; 2) collecting and disbursing VLT revenue; and 3) maintaining compliance in regulatory matters. Changes in Ohio laws or regulations may limit or otherwise materially affect the types of gaming that may be conducted and such changes, if enacted, could have an adverse impact on our Ohio gaming operations. The failure to comply with the rules and regulations of the OLC could have a material adverse impact on our business.
New York
The ownership and operation of VLT facilities in New York are governed by the New York State Gaming Commission ("NYSGC") under the New York State Lottery for Education Law. The laws, regulations and supervisory procedures of the NYSGC include: 1) regulating the licensing of video lottery gaming agents, principal key gaming employees and VLT manufacturers; 2) collecting and disbursing VLT revenue; and 3) maintaining compliance in regulatory matters. Changes in New York laws or regulations may limit or otherwise materially affect the types of gaming that may be conducted and such changes, if enacted, could have an adverse impact on our New York gaming operations. The failure to comply with the rules and regulations of the NYSGC could have a material impact on our business.
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. As of December 31, 2016, New York has awarded four of the seven casino licenses. After a 7-year exclusivity period, the state may award additional licenses. 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.
Potential New York Interactive Gaming Legislation
In January 2017, legislation was filed that would authorize VLT operators and casino licensees to be eligible for an interactive gaming license. The bill provides that an interactive gaming licensee would be authorized to offer online poker games under a ten-year license. The proposed legislation limits the number of licenses to ten, establishes an initial $10.0 million license fee and establishes a tax rate of 15% of interactive gross gaming revenue. If passed, the legislation could result in a favorable impact to our business.

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Maryland
In January 2017, legislation was filed that would allow casinos to qualify for a 10% gaming tax reduction on slot machine revenue. In order to qualify for the gaming tax reduction, casinos must purchase or acquire the right to lease all of their VLTs prior to January 1, 2018. If casinos do not purchase or assume the right to lease prior to January 1, 2018, then they will be required to assume ownership or lease the terminals by March 31, 2020 without receiving the full tax reduction.
TwinSpires Regulations and Potential Legislative Changes
TwinSpires is licensed in Oregon under a multi-jurisdictional simulcasting and interactive wagering totalisator hub license issued by the Oregon Racing Commission ("ORC") and in accordance with Oregon law. TwinSpires also holds advance deposit wagering licenses in certain other states where required such as California, Illinois, Idaho, Kentucky, Maryland, Virginia, Colorado, Arizona, Wyoming, Arkansas, New York and Washington. Changes in the form of new legislation or regulatory activity at the state or federal level could adversely impact our mobile and online business.
Pennsylvania
In February 2016, legislation was signed by the Governor which is intended to provide regulatory reform to Pennsylvania’s racing industry.  The legislation includes provisions related to the operation of advance deposit wagering in the state.  Under the terms of the legislation, an initial license fee of $0.5 million and annual renewal fee of $0.1 million would be established.  The previous ten percent tax on wagers would be removed and replaced with a one and one-half percent tax on win, place and show wagers, and a two and one-half percent tax on exotic wagers.  Neither an ADW operator nor a racetrack may accept wagers within thirty-five miles of a racetrack operating a live meet. On September 3, 2016, the Company filed a lawsuit in the Commonwealth Court of Pennsylvania challenging the constitutionality of a Pennsylvania law granting each Pennsylvania race track a local monopoly over all wagers placed by telephone or through the Internet by Pennsylvania residents located within a 35-mile radius of the track, as well as requiring out-of-state advance deposit wagering companies to pay initial and annual license fees.
Big Fish Games Regulations and Potential Legislative Changes
We are subject to various federal, state and international laws and regulations that affect our business, including those relating to the privacy and security of customer and employee personal information and those relating to the Internet, behavioral tracking, mobile applications, advertising and marketing activities, sweepstakes and contests. Additional laws in all of these areas are likely to be passed in the future which could result in significant limitations on or changes to the ways in which we can collect, use, host, store or transmit the personal information and data of our customers or employees, communicate with our customers, and deliver products and services, or may significantly increase our compliance costs. As our business expands to include new uses or collection of data that is subject to privacy or security regulations, our compliance requirements and costs will increase and we may be subject to increased regulatory scrutiny.
Some of our games and features are based upon traditional casino games such as slots and table games. We structure and operate these games and features, including Big Fish Casino , Jackpot City Slots and Vegas Party Slots , with the gambling laws in mind and believe that these games and features do not constitute gambling.
E.    Environmental Matters
We are subject to various federal, state and local environmental laws and regulations that govern activities that may have adverse environmental effects, such as discharges to air and water, as well as the management and disposal of solid, animal and hazardous wastes and exposure to hazardous materials. These laws and regulations which are complex and subject to change, include United States Environmental Protection Agency ("EPA") and state laws and regulations that address the impacts of manure and wastewater generated by Concentrated Animal Feeding Operations ("CAFO") on water quality, including, but not limited to, storm and sanitary water discharges. CAFO and other water discharge regulations include permit requirements and water quality discharge standards. Enforcement of these regulations has been receiving increased governmental attention. Compliance with these and other environmental laws can, in some circumstances, require significant capital expenditures. We may incur future costs under existing and new laws and regulations pertaining to storm water and wastewater management at our racetracks. Moreover, violations can result in significant penalties and, in some instances, interruption or cessation of operations.
In the ordinary course of our business, we may receive notices from regulatory agencies regarding our compliance with CAFO regulations that may require remediation at our facilities. On December 6, 2013, we received a notice from the EPA regarding alleged CAFO non-compliance at Fair Grounds. We are currently in discussions with the EPA and United States Department of Justice, and we expect to incur certain capital expenditures to remediate the alleged CAFO non-compliance. These capital expenditures are expected to extend the life of the related Fair Grounds assets.
We also are subject to laws and regulations that create liability and cleanup responsibility for releases of hazardous substances into the environment. Under certain of these laws and regulations, a current or previous owner or operator of property may be liable for the costs of remediating hazardous substances or petroleum products on its property, without regard to whether the owner or operator knew of, or caused, the presence of the contaminants, and regardless of whether the practices that resulted in the

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contamination were legal at the time they occurred. The presence of, or failure to remediate properly, such substances may materially adversely affect the ability to sell or rent such property or to borrow funds using such property as collateral. Additionally, the owner of a property may be subject to claims by third parties based on damages and costs resulting from environmental contamination emanating from the property.
F.    Marks and Internet Properties
We hold numerous state and federal service mark registrations on specific names and designs in various categories including the entertainment business, apparel, paper goods, printed matter, housewares and glass. We license the use of these service marks and derive revenue from such license agreements.
G.    Employees
As of December 31, 2016, we employed approximately 4,000 full-time and part-time employees Company-wide. Due to the seasonal nature of our live racing business, the number of seasonal and part-time persons employed will vary throughout the year.
H.    Available Information
Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and other Securities and Exchange Commission ("SEC") filings, and any amendments to those reports and any other filings that we file with or furnish to the SEC under the Securities Exchange Act of 1934 are made available free of charge on our website ( www.churchilldownsincorporated.com ) as soon as reasonably practicable after we electronically file the materials with the SEC and are also available at the SEC’s website at www.sec.gov . These reports may also be obtained from the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549 or by calling the SEC at (800) SEC-0330.

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ITEM 1A.
RISK FACTORS
Risks Related to the Company
In addition to risks and uncertainties in the ordinary course of business that are common to all businesses, important factors that are specific to our industry and us could materially impact our future performance and results. The factors described below are the most significant risks that could have a material impact our business.
Our business is sensitive to economic conditions which may affect consumer confidence, consumers’ discretionary spending, or our access to credit in a manner that adversely impacts our operations
Economic trends can impact consumer confidence and consumers’ discretionary spending.
Negative economic conditions and the persistence of elevated levels of unemployment can impact consumers’ disposable incomes and, therefore, impact the demand for entertainment and leisure activities.
Declines in the residential real estate market, increases in individual tax rates and other factors that we cannot accurately predict may reduce the disposable income of our customers.
Decreases in consumer discretionary spending could affect us even if such decreases occur in other markets. For example, reduced wagering levels and profitability at racetracks from which we carry racing content could cause certain racetracks to cancel races or cease operations and therefore reduce the content we could provide to our customers.
Lower consumer confidence or reductions in consumers’ discretionary spending could result in fewer patrons spending money at our racetracks, gaming and wagering facilities and our online wagering sites and could reduce consumer spending within Big Fish Games.
Our access to and cost of credit may be impacted to the extent global and U.S. credit markets are affected by downward economic trends. Economic trends can also impact the financial viability of other industry constituents, making collection of amounts owed to us uncertain. Our ability to respond to periods of economic contraction may be limited, as certain of our costs remain fixed or even increase when revenue declines.
We are vulnerable to additional or increased taxes and fees
We believe that the prospect of raising significant additional revenue through taxes and fees is one of the primary reasons that certain jurisdictions permit legalized gaming. As a result, gaming companies are typically subject to significant taxes and fees in addition to the normal federal, state, provincial and local income taxes and such taxes and fees may be increased at any time. From time to time, legislators and officials have proposed changes in tax laws or in the administration of laws affecting the gaming industry. Many states and municipalities, including ones in which we operate, are currently experiencing budgetary pressures that may make it more likely they would seek to impose additional taxes and fees on our operations. It is not possible to determine the likelihood or extent of any such future changes in tax laws or fees, or changes in the administration of such laws; however, if enacted, such changes could have a material adverse impact on our business.
A lack of confidence in the integrity of our core businesses could affect our ability to retain our customers and engage with new customers
The integrity of the casual gaming, horseracing, casino gaming and pari-mutuel wagering industries must be perceived as fair to patrons and the public at large. To prevent cheating or erroneous payouts, the necessary oversight processes must be in place to ensure that such activities cannot be manipulated. A loss of confidence in the fairness of our industries could have a material adverse impact on our business.
We depend on key and highly skilled personnel to operate our business, and if we are unable to retain our current personnel or hire additional personnel, our ability to develop and successfully grow our business could be harmed
We believe that our success depends in part on our highly-skilled employee base, and our ability to hire, develop, motivate and retain highly qualified and skilled employees throughout our organization. If we do not successfully hire, develop, motivate and retain highly qualified and skilled employees, it is likely that we could experience significant disruptions in our operations and our ability to develop and successfully grow our business could be impaired which could harm our business.
Competition for the type of talent we seek to hire is increasingly intense in the geographic areas in which we operate. This is particularly the case with regard to software developers and engineers, IT staff, and game designers and producers involved in our Big Fish Games line of business. As a result, we may incur significant costs to attract and retain highly-skilled employees. We may be unable to attract and retain the personnel necessary to sustain our business or support future growth.
All of our officers and other employees in the United States are at-will employees, which means they may terminate their employment relationship with us at any time and their knowledge of our business and industry would be difficult to replace. In our Big Fish Games line of business, the loss of any key employees or the inability to attract or retain qualified personnel could

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delay the development and distribution of games and may impair our ability to sell our games and other products and services, harm our reputation and impair our ability to execute our business plans.
Our continued success and our ability to maintain our competitive position is largely dependent upon, among other things, the skills and efforts of our senior executives and management team. We cannot guarantee that these individuals will remain with us, and their retention is affected by the competitiveness of our terms of employment and our ability to compete effectively against other companies. Certain of our key employees are required to file applications with the gaming authorities in each of the jurisdictions in which we operate and are required to be licensed or found suitable by these gaming authorities. If the gaming authorities were to find a key employee unsuitable for licensing, we may be required to sever the employee relationship, or the gaming authorities may require us to terminate the employment of any person who refuses to file appropriate applications. Either result could significantly impair our operations. Our inability to retain key personnel could have a material adverse impact on our business.
Our debt facilities contain restrictions that limit our flexibility in operating our business
Our debt facilities contain a number of covenants that impose significant operating and financial restrictions, including restrictions on our ability to, among other things, take the following actions:
incur additional debt or issue certain preferred shares;
pay dividends on or make distributions in respect of our capital stock, repurchase common shares or make other restricted payments;
make certain investments;
sell certain assets or consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
create liens on certain assets;
enter into certain transactions with our affiliates; and
designate our subsidiaries as unrestricted subsidiaries.
As a result of these covenants, we are limited in the manner in which we conduct our business and we may be unable to engage in favorable business activities or finance future operations or capital needs.
We have pledged a significant portion of our assets as collateral under our debt facilities. If any of these lenders accelerate the repayment of borrowings, we may not have sufficient assets to repay our indebtedness and our lenders could exercise their rights against the collateral we have granted them.
Under our debt facilities, we are required to satisfy and maintain specified financial ratios. Our ability to meet those financial ratios can be affected by events beyond our control, and as a result, we may be unable to meet those ratios. A failure to comply with the covenants contained in our debt facilities or our other indebtedness could result in an event of default under our debt facilities or our other indebtedness which, if not cured or waived, could have a material adverse impact on our business. In the event of any default under our debt facilities or our other indebtedness, the lenders thereunder:
will not be required to lend any additional amounts to us;
could elect to declare all borrowings outstanding, together with accrued and unpaid interest and fees, to be due and payable and terminate all commitments to extend further credit; or
require us to apply all of our available cash to repay these borrowings.
If the indebtedness under our debt facilities or our other indebtedness were to be accelerated, our assets may not be sufficient to repay such indebtedness in full.
Ownership and development of real estate requires significant expenditures and is subject to risk
Our operations require us to own extensive real estate holdings. All real estate investments are subject to risks including the following: general economic conditions, such as the availability and cost of financing; local and national real estate conditions, such as an oversupply of residential, office, retail or warehousing space, or a reduction in demand for real estate in the area; governmental regulation, including taxation of property and environmental legislation; and the attractiveness of properties to potential purchasers or tenants. Significant expenditures, including property taxes, mortgage payments, maintenance costs, insurance costs and related charges, must be made throughout the period of ownership of real property. Such expenditures may negatively impact our operating results.
We are subject to a variety of federal, state and local governmental laws and regulations relating to the use, storage, discharge, emission and disposal of hazardous materials. Environmental laws and regulations could hold us responsible for the cost of

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cleaning up hazardous materials contaminating real property that we own or operate (or previously owned or operated) or properties at which we have disposed of hazardous materials, even if we did not cause the contamination. If we fail to comply with environmental laws or if contamination is discovered, a court or government agency could impose severe penalties or restrictions on our operations or assess us with the costs of taking remedial actions.
Catastrophic events and system failures could cause a significant and continued disruption to our operations
A disruption or failure in our systems or operations in the event of a major earthquake, weather event, cyber-attack, terrorist attack or other catastrophic event could interrupt our operations, damage our properties and reduce the number of customers who visit our facilities in the affected areas. Flooding, blizzards, windstorms, earthquakes or hurricanes could adversely affect our locations. While we maintain insurance coverage that may cover certain of the costs that we incur as a result of some natural disasters, our coverage is subject to deductibles, exclusions and limits on maximum benefits. We may not be able to fully collect, if at all, on any claims resulting from extreme weather conditions or other disasters. If any of our properties are damaged or if our operations are disrupted or face prolonged closure as a result of natural disasters in the future, or if natural disasters adversely impact general economic or other conditions in the areas in which our properties are located or from which we draw our patrons, the disruption could have a material adverse impact on our business.
Our mobile and online wagering, Big Fish Games and brick-and-mortar casino businesses depend upon our communications hardware and our computer hardware. We have built certain redundancies into our systems to avoid downtime in the event of outages, system failures or damage; however, certain risks still exist. Our systems also remain vulnerable to damage or interruption from floods, fires, power loss, telecommunication failures, terrorist cyber-attacks, hardware or software error, computer viruses, computer denial-of-service attacks and similar events. Despite any precautions we may take, the occurrence of a natural disaster or other unanticipated problems could result in lengthy interruptions in our services. Any unscheduled interruption in the availability of our website and our services results in an immediate, and possibly substantial, loss of revenue. Interruptions in our services or a breach of customers’ secure data could cause current or potential users to believe that our systems are unreliable, leading them to switch to our competitors or to avoid our site, and could permanently harm our reputation and brand. These interruptions also increase the burden on our engineering staff which, in turn, could delay our introduction of new features and services on our websites and in our games. We have property and business interruption insurance covering damage or interruption of our systems; however, this insurance might not be sufficient to compensate us for all losses that may occur.
Although we have "all risk" property insurance coverage for our operating properties which covers damage caused by a casualty loss (such as fire, natural disasters, acts of war, or terrorism), each policy has certain exclusions. Our level of property insurance coverage, which is subject to policy maximum limits, may not be adequate to cover all losses in the event of a major casualty. In addition, certain casualty events may not be covered at all under our policies. Therefore, certain acts could expose us to substantial uninsured losses.
We renew our insurance policies on an annual basis. The cost of coverage may become so high that we may need to further reduce our policy limits or agree to certain exclusions from our coverage.
Our debt instruments and other material agreements require us to meet certain standards related to insurance coverage. Failure to satisfy these requirements could result in an event of default under these debt instruments or material agreements.
We may not be able to identify and complete expansion, acquisition or divestiture projects on time, on budget or as planned
We expect to pursue expansion, acquisition and divestiture opportunities, and we regularly evaluate opportunities for development, including acquisitions or other strategic corporate transactions which may expand our business operations.
We could face challenges in identifying development projects that fit our strategic objectives, identifying potential acquisition or divestiture candidates and/or development partners, finding buyers, negotiating projects on acceptable terms, and managing and integrating the acquisition or development projects. New developments or acquisitions may not be completed or integrated successfully. The divestiture of existing businesses may be affected by our ability to identify potential buyers. Current or future regulation may postpone a divestiture pending certain resolutions to federal, state or local legislative issues. New properties or developments may not be completed or integrated successfully.
We may experience difficulty in integrating recent or future acquisitions into our operations
We have completed acquisition transactions in the past, and we may pursue acquisitions from time to time in the future. The successful integration of newly acquired businesses into our operations has required and will continue to require the expenditure of substantial managerial, operating, financial and other resources and may also lead to a diversion of our attention from our ongoing business concerns. We may not be able to successfully integrate new businesses, manage the combined operations or realize projected revenue gains, cost savings and synergies in connection with those acquisitions on the timetable contemplated, if at all. Management of the new business operations, especially those in new lines of business or different geographic areas, may require that we increase our managerial resources. The process of integrating new operations may also interrupt the activities

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of those businesses which could have a material adverse impact on our business. The costs of integrating businesses we acquire could significantly impact our short-term operating results. These costs could include the following:
restructuring charges associated with the acquisitions;
non-recurring acquisition costs, including accounting and legal fees, investment banking fees and recognition of transaction-related costs or liabilities; and
costs of imposing financial and management controls (such as compliance with Section 404 of the Sarbanes-Oxley Act of 2002) and operating, administrative and information systems.
Although we perform financial, operational and legal diligence on the businesses we purchase an unavoidable level of risk remains regarding the actual condition of these businesses and our ability to continue to operate them successfully and integrate them into our existing operations. In any acquisition we make, we face risks that include the following:
the risk that the acquired business may not further our business strategy or that we paid more than the business was worth;
the risk that the financial performance of the acquired business declines or fails to meet our expectations from and after the date of acquisition;
the potential adverse impact on our relationships with partner companies or third-party providers of technology or products;
the possibility that we have acquired substantial undisclosed liabilities for which we may have no recourse against the sellers or third party insurers;
costs and complications in maintaining required regulatory approvals or obtaining further regulatory approvals necessary to implement the acquisition in accordance with our strategy;
the risks of acquiring businesses and/or entering markets in which we have limited or no prior experience;
the potential loss of key employees or customers;
the possibility that we may be unable to retain or recruit managers with the necessary skills to manage the acquired businesses; and
changes to legal and regulatory guidelines which may negatively affect acquisitions.
If we are unsuccessful in overcoming these risks, it could have a material adverse impact on our business.
The legalization of online real money gaming in the United States and our ability to predict and capitalize on any such legalization may impact our business
Nevada, Delaware and New Jersey have enacted legislation to legalize online real money gaming. In recent years, California, Florida, Mississippi, Hawaii, Massachusetts, Iowa, Illinois, New York, Pennsylvania, Washington D.C. and the Federal government have considered such legislation. If a large number of additional states or the Federal government enact online real money gaming legislation and we are unable to obtain the necessary licenses to operate online real money gaming websites in United States jurisdictions where such games are legalized, our future growth in real money gaming could be materially impaired.
States or the Federal government may legalize online real money gaming in a manner that is unfavorable to us. Several states and the Federal government are considering draft laws that require online casinos to also have a license to operate a brick-and mortar casino, either directly or indirectly through an affiliate. If, like Nevada and New Jersey, state jurisdictions enact legislation legalizing online real money casino gaming subject to this brick-and-mortar requirement, we may be unable to offer online real money gaming in such jurisdictions if we are unable to establish an affiliation with a brick-and-mortar casino in such jurisdiction on acceptable terms.
In the online real money gaming industry, a significant "first mover" advantage exists. Our ability to compete effectively in respect of a particular style of online real money gaming in the United States may be premised on introducing a style of gaming before our competitors. Failing to do so ("move first") could materially impair our ability to grow in the online real money gaming space. We may fail to accurately predict when online real money gaming will be legalized in significant jurisdictions. The legislative process in each state and at the Federal level is unique and capable of rapid, often unpredictable change. If we fail to accurately forecast when and how, if at all, online real money gaming will be legalized in additional state jurisdictions, such failure could impair our readiness to introduce online real money gaming offerings in such jurisdictions which could have a material adverse impact on our business.

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We may not be able to respond to rapid technological changes in a timely manner which may cause customer dissatisfaction
Casinos, TwinSpires, and the Big Fish Games segments are characterized by the rapid development of new technologies and continuous introduction of new products. Our main technological advantage versus potential competitors is our software lead-time in the market and our experience in operating an Internet-based wagering network; however, we may not be able to maintain our competitive technological position against current and potential competitors, especially those with greater financial resources. Our success depends upon new product development and technological advancements including the development of new wagering platforms and features. While we expend resources on research and development and product enhancement, we may not be able to continue to improve and market our existing products or technologies or develop and market new products in a timely manner. Further technological developments may cause our products or technologies to become obsolete or noncompetitive.
We may inadvertently infringe on the intellectual property rights of others
In the course of our business, we may become aware of potentially relevant patents or other intellectual property rights held by other parties. Many of our competitors as well as other companies and individuals have obtained, and may obtain in the future, patents or other intellectual property rights that concern products or services related to the types of products and services we currently offer or may plan to offer in the future. We evaluate the validity and applicability of these intellectual property rights and determine in each case whether we must negotiate licenses to incorporate or use the proprietary technologies in our products.
Claims of intellectual property infringement may also require us to enter into costly royalty or license agreements. However, we may not be able to obtain royalty or license agreements on terms acceptable to us. We also may be subject to significant damages or injunctions against the development and sale of our products and services if we become subject to litigation relating to intellectual property infringement.
We may be unable to adequately protect our own intellectual property rights
Our results may be affected by the outcome of litigation within our industry and the protection and validity of our intellectual property rights. Any litigation regarding patents or other intellectual property used in our products, including in the areas of advance deposit wagering could be costly and time consuming and could divert our management and key personnel from our business operations.
Some of our businesses, including our Big Fish Games line of business, are based upon the creation, acquisition, use and protection of intellectual property. Some of this intellectual property is in the form of software code, patented and other technologies and trade secrets that we use to develop and market our games. Other intellectual property that we create includes audio-visual elements, such as graphics, music and storylines. We rely on trademark, copyright and patent law, trade secret protection and contracts to protect our intellectual property rights. If we are not successful in protecting these rights, the value of our brands and our business could be adversely impacted.
Competitors may devise new methods of competing with us which may not be covered by our patents or patent applications. Our patent applications may not be approved, the patents we have may not adequately protect our intellectual property or ongoing business strategies and our patents may be challenged by third parties or found to be invalid or unenforceable.
Effective trademark, service mark, copyright and trade secret protection may not be available in every country in which our games and other products and services may be provided. The laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States and, therefore in certain jurisdictions, we may be unable to protect our intellectual property and proprietary technologies adequately against unauthorized copying or use which could harm our competitive position. We have licensed in the past, and expect to license in the future, certain of our proprietary rights, such as trademarks or copyrighted material to third parties. These licensees may take actions that could diminish the value of our proprietary rights or harm our reputation, even if we have agreements prohibiting such activity. To the extent third parties are obligated to indemnify us for breaches of our intellectual property rights, these third parties may be unable to meet these obligations. Any of these events could harm our business.
Our business is subject to online security risk, including security breaches, and loss or misuse of our stored information as a result of such a breach, including customers’ personal information, could lead to government enforcement action or other litigation, potential liability, or otherwise harm our business
We receive, process, store and use personal information and other customer data. There are numerous federal, state and local laws regarding privacy and the storing, sharing, use, processing, disclosure and protection of personal information and other data. Any failure or perceived failure by us to comply with our privacy policies, our privacy-related obligations to customers or other third parties, or our privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other player data, may result in governmental enforcement actions, litigation or public statements against us by consumer advocacy groups or others and could cause our customers to lose trust in us which could have an adverse impact on our business.

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In the area of information security and data protection, many states have passed laws requiring notification to customers when there is a security breach for personal data, such as the 2002 amendment to California’s Information Practices Act, or requiring the adoption of minimum information security standards that are often vaguely defined and difficult to practically implement. The costs of compliance with these types of laws may increase in the future as a result of changes in interpretation or changes in law. Any failure on our part to comply with these types of laws may subject us to significant liabilities.
Third parties we work with, such as vendors, may violate applicable laws or our policies, and such violations may also put our customers’ information at risk and could in turn have an adverse impact on our business. We are also subject to payment card association rules and obligations under each association’s contracts with payment card processors. Under these rules and obligations, if information is compromised, we could be liable to payment card issuers for the associated expense and penalties. If we fail to follow payment card industry security standards, even if no customer information is compromised, we could incur significant fines or experience a significant increase in payment card transaction costs.
Security breaches, computer malware and computer hacking attacks have become more prevalent in our industry. Many companies, including ours, have been the targets of such attacks. Any security breach caused by hacking which involves efforts to gain unauthorized access to information or systems, or to cause intentional malfunctions or loss or corruption of data, software, hardware or other computer equipment, and the inadvertent transmission of computer viruses could harm our business. Though it is difficult to determine what harm may directly result from any specific interruption or breach, any failure to maintain performance, reliability, security and availability of our network infrastructure to the satisfaction of our players may harm our reputation and our ability to retain existing players and attract new players.
We take significant measures to protect the secrecy of large portions of our source code. If unauthorized disclosure of our source code occurs, we could potentially lose future trade secret protection for that source code. This could make it easier for third parties to compete with our products by copying functionality which could adversely affect our revenue and operating margins. Unauthorized disclosure of source code also could increase security risks.
Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems, change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Although we have developed systems and processes that are designed to protect customer information and prevent data loss and other security breaches, including systems and processes designed to reduce the impact of a security breach at a third party vendor, such measures cannot provide absolute security.
We are subject to payment-related risks, such as risk associated with the fraudulent use of credit or debit cards which could have adverse effects on our business due to chargebacks from customers
We allow funding and payments to accounts using a variety of methods, including electronic funds transfer ("EFT"), and credit and debit cards. As we continue to introduce new funding or payment options to our players, we may be subject to additional regulatory and compliance requirements. We also may be subject to the risk of fraudulent use of credit or debit cards, or other funding and/or payment options. For certain funding or payment options, including credit and debit cards, we may pay interchange and other fees which may increase over time and, therefore, raise operating costs and reduce profitability. We rely on third parties to provide payment-processing services and it could disrupt our business if these companies become unwilling or unable to provide these services to us. We are also subject to rules and requirements governing EFT which could change or be reinterpreted to make it difficult or impossible for us to comply. If we fail to comply with these rules or requirements, we may be subject to fines and higher transaction fees or possibly lose our ability to accept credit or debit cards, or other forms of payment from customers which could have a material adverse impact on our business.
Chargebacks occur when customers seek to void credit card or other payment transactions. Cardholders are intended to be able to reverse card transactions only if there has been unauthorized use of the card or the services contracted for have not been provided. In our business, customers occasionally seek to reverse online gaming losses through chargebacks. Although we place great emphasis on control procedures to protect from chargebacks, these control procedures may not be sufficient to protect us from adverse effects on our business or results of operations.
Any violation of the Foreign Corrupt Practices Act, other similar laws and regulations, or applicable anti-money laundering regulations could have a negative impact on us
We are subject to risks associated with doing business outside of the United States, including exposure to complex foreign and U.S. regulations such as the Foreign Corrupt Practices Act (the "FCPA") and other anti-corruption laws which generally prohibit U.S. companies and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or retaining business. Violations of the FCPA and other anti-corruption laws may result in severe criminal and civil sanctions and other penalties. It may be difficult to oversee the conduct of any contractors, third-party partners, representatives or agents who are not our employees, potentially exposing us to greater risk from their actions. If our employees or agents fail to comply with applicable laws or company policies governing our international operations, we may face legal proceedings and actions which

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could result in civil penalties, administration actions and criminal sanctions. Any determination that we have violated any anti-corruption laws could have a material adverse impact on our business.
We also deal with significant amounts of cash in our operations and are subject to various reporting and anti-money laundering regulations. Any violation of anti-money laundering laws or regulations by any of our properties could have a material adverse impact on our business.
Work stoppages and other labor problems could negatively impact our future plans
Some of our employees are represented by labor unions. A strike or other work stoppage at one of our properties could have an adverse impact on our business and results of operations. From time to time, we have also experienced attempts to unionize certain of our non-union employees. We may experience additional and more successful union activity in the future.
Risks Related to Our Racing Business
We may not be able to attract a sufficient number of horses and trainers to achieve full field horseraces
We believe that patrons prefer to wager on races with a large number of horses, commonly referred to as full fields. A failure to offer races with full fields results in less wagering on our horseraces. Our ability to attract full fields depends on several factors, including our ability to offer and fund competitive purses and the overall horse population available for racing. Various factors have led to declines in the horse population in certain areas of the country, including competition from racetracks in other areas, increased costs and changing economic returns for owners and breeders, and the spread of various debilitating and contagious equine diseases. If any of our racetracks is faced with a sustained outbreak of a contagious equine disease, it could have a material impact on our profitability. If we are unable to attract horse owners to stable and race their horses at our racetracks by offering a competitive environment, including improved facilities, well-maintained racetracks, better conditions for backstretch personnel involved in the care and training of horses stabled at our racetracks and a competitive purse structure, our profitability could also decrease.
We also face increased competition for horses and trainers from racetracks that are licensed to operate slot machines and other electronic gaming machines that provide these racetracks an advantage in generating new additional revenue for race purses and capital improvements. Churchill Downs and Arlington have experienced heightened competition from racinos in Indiana, Pennsylvania, Delaware and West Virginia whose purses are supplemented by gaming revenue. The opening of the Genting New York Resort at Aqueduct racetrack has enhanced the purse structure at New York racetracks as compared to historical levels. In Ohio, seven video lottery terminal facilities have opened and in New York, the Rivers Casino & Resort Schenectady opened in February 2017. Competition from these facilities could harm our ability to attract full fields, which could have a material adverse impact on our business.
We depend on agreements with industry constituents including horsemen and other racetracks
The Interstate Horseracing Act, or IHA, as well as various state racing laws, require that we have written agreements with the horsemen at our racetracks in order to simulcast races, and, in some cases, conduct live racing. Certain industry groups negotiate these agreements on behalf of the horsemen (the "Horsemen’s Groups"). These agreements provide that we must receive the consent of the Horsemen’s Groups at the racetrack conducting live races before we may allow third parties to accept wagers on those races. The agreements between other racetracks and their Horsemen’s Groups typically provide that those racetracks must receive consent from the Horsemen’s Groups before we can accept wagers on their races. We may not be able to maintain agreements with, or to obtain required consent from, Horsemen’s Groups. We currently negotiate formal agreements with the applicable Horsemen’s Groups at our racetracks on an annual basis. The failure to maintain agreements with, or obtain consents from, our horsemen on satisfactory terms or the refusal by a Horsemen’s Group to consent to third parties accepting wagers on our races or our accepting wagers on third parties’ races could have a material adverse impact on our business.
From time to time, the Thoroughbred Owners of California, the Horsemen’s Group representing horsemen in California, the Florida Horsemen’s Benevolent and Protective Association, Inc. (the "FHBPA") which represents horsemen in Florida and the Kentucky Horsemen’s Benevolent and Protective Association ("KHBPA") have withheld their consent to send or receive racing signals among racetracks. Failure to receive the consent of these Horsemen’s Groups for new and renewing simulcast agreements could have a material adverse impact on our business.
We also have written agreements with the Horsemen’s Groups with regards to the proceeds of gaming machines in Louisiana and Florida. Florida law requires Calder Casino to have an agreement with the FHBPA governing the contribution of a portion of revenue from slot machine gaming to purses on live thoroughbred races conducted by TSG at Calder and an agreement with the Florida Thoroughbred Breeders and Owners Association (the "FTBOA") governing the contribution of a portion of revenue from slot machine gaming to breeders’ stallion and special racing awards on live thoroughbred races conducted by TSG at Calder before Calder can receive a license to conduct slot machine gaming.

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We have agreements with other racetracks for the distribution of racing content through both the import of other racetracks’ signals for wagering at our properties and the export of our racing signal for wagering at other racetracks’ facilities. From time to time, we are unable to reach agreements on terms acceptable to us. As a result, we may be unable to distribute our racing content to other locations or to receive other racetracks’ racing content for wagering at our racetracks. The inability to distribute our racing content could have a material adverse impact on our business.
Horseracing is an inherently dangerous sport and our racetracks are subject to personal injury litigation
Personal injuries to jockeys may occur during races or daily workouts. Although we carry jockey accident insurance at each of our racetracks to cover such injuries, there are certain exclusions to our insurance coverage, and we are still subject to litigation from injured participants. We renew our insurance policies on an annual basis. The cost of coverage may become so high that we may need to further reduce our policy limits or agree to certain exclusions from our coverage. Our results may be affected by the outcome of litigation, as this litigation could be costly and time consuming and could divert our management and key personnel from our business operations.
Our business depends on utilizing and providing totalisator services
Our customers utilize information provided by United Tote and other totalisator companies that accumulates wagers, records sales, calculates payoffs and displays wagering data in a secure manner to patrons who wager on our horseraces. The failure to keep technology current could limit our ability to serve patrons effectively, limit our ability to develop new forms of wagering and/or affect the security of the wagering process, thus affecting patron confidence in our product. A perceived lack of integrity in the wagering systems could result in a decline in bettor confidence and could lead to a decline in the amount wagered on horseracing. A totalisator system failure could cause a considerable loss of revenue if betting machines are unavailable for a significant period of time or during an event with high betting volume.
United Tote also has licenses and contracts to provide totalisator services to a significant number of racetracks, OTBs and other pari-mutuel wagering businesses. Its totalisator systems provide wagering data to the industry in a secure manner. Errors by United Tote technology or personnel may subject us to liabilities, including financial penalties under our totalisator service contracts which could have a material adverse impact on our business.
Inclement weather and other conditions may affect our ability to conduct live racing
We conduct our racing business at three thoroughbred racetracks: Churchill Downs, Fair Grounds and Arlington; and, through separate joint ventures and equity investments, at three harness racetracks: Miami Valley, Ocean Downs, and Saratoga Harness. A significant portion of our racing revenue is generated during the Kentucky Oaks and Kentucky Derby week. If a business interruption were to occur and continue for a significant length of time at any of our racetracks, particularly one occurring at Churchill Downs at a time that would affect the Kentucky Oaks or Kentucky Derby, it could have a material adverse impact on our business.
Since horseracing is conducted outdoors, unfavorable weather conditions, including extremely high and low temperatures, heavy rains, high winds, storms, tornadoes and hurricanes, could cause events to be canceled and/or attendance to be lower, resulting in reduced wagering. Our operations are subject to reduced patronage, disruptions or complete cessation of operations due to weather conditions, natural disasters and other casualties. If a business interruption were to occur due to inclement weather and continue for a significant length of time at any of our racetracks, it could have a material adverse impact on our business.
Our racing business faces significant competition, and we expect competition levels to increase
All of our racetracks face competition from a variety of sources, including spectator sports and other entertainment and gaming options. Competitive gaming activities include traditional and Native American casinos, video lottery terminals, state-sponsored lotteries and other forms of legalized and non-legalized gaming in the U.S. and other jurisdictions.
All of our racetracks face competition in the simulcast market. In 2016, approximately 42,000 thoroughbred horse races were conducted in the United States. We hosted approximately 2,070 races, or about 4.9% of the total. As a content provider, we compete for wagering dollars in the simulcast market with other racetracks conducting races at or near the same times as our races. As a racetrack operator, we also compete with other racetracks running live meets at or near the same time as our horse races. In recent years, this competition has increased as more states have allowed additional, automated gaming activities, such as slot machines at racetracks with mandatory purse contributions.
Competition from web-based businesses presents additional challenges for our racing business. Unlike most online and web-based gaming companies, our racetracks require significant and ongoing capital expenditures for both continued operations and expansion. Our racing business also faces significantly greater operating costs compared to costs borne by online and web-based gaming companies. Our racing business cannot offer the same number of gaming options as online and Internet-based gaming companies. These companies may divert wagering dollars from pari-mutuel wagering venues, such as our racetracks. Our inability to compete successfully with these competitors could have a material adverse impact on our business.

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Our racing operations are highly regulated, and changes in the regulatory environment could adversely affect our business
Our racing business is subject to extensive state and local regulation, and we depend on continued state approval of legalized gaming in states where we operate. Our wagering and racing facilities must meet the licensing requirements of various regulatory authorities, including authorities in Kentucky, Illinois, Louisiana, Florida, Ohio, Maryland and New York. To date, we have obtained all governmental licenses, registrations, permits and approvals necessary for the operation of our racetracks. However, we may be unable to maintain our existing licenses. The failure to attain, loss of or material change in our racing business licenses, registrations, permits or approvals may materially limit the number of races we conduct, and could have a material adverse impact on our business.
In addition to licensing requirements, state regulatory authorities can have a significant impact on the operation of our business. In Illinois, the IRB has the authority to designate racetracks as "host track" for the purpose of receiving host track revenue generated during periods when no racetrack is conducting live races. Racetracks that are designated as "host track" obtain and distribute out of state simulcast signals for the State of Illinois. Under Illinois law, the "host track" is entitled to a larger portion of commissions on the related pari-mutuel wagering. Should Arlington cease to be a "host track" during this period, the loss of hosting revenue could have an adverse impact on our business. Arlington is statutorily entitled to recapture as revenue monies that are otherwise payable to Arlington’s purse account. These statutorily or regulatory established revenue sources are subject to change every legislative session, and a reduction or elimination of any of these revenue sources could have an adverse impact on our business.
We are also subject to a variety of other rules and regulations, including zoning, environmental, construction and land-use laws and regulations governing the serving of alcoholic beverages. If we are not in compliance with these laws, it could have a material adverse impact on our business.
The popularity of horseracing is declining
There has been a general decline in the number of people attending and wagering on live horse races at North American racetracks due to a number of factors, including increased competition from other wagering and entertainment alternatives as discussed above. According to industry sources, pari-mutuel handle declined 27% from 2007 to 2011 and has been relatively stable since 2011, experiencing less than a 1% decline in growth between 2011 and 2016. We believe lower interest in racing may have a negative impact on revenue and profitability in our racing business, as well as our mobile and online wagering business which is dependent on racing content provided by our racing business and other track operators. A continued decrease in attendance at live events and in on-track wagering, or a continued generalized decline in interest in racing, could have a material adverse impact on our business.
Our racing business experiences significant seasonal fluctuations in operating results and a decrease in live racing days may adversely impact our business
We experience significant fluctuations in quarterly and annual operating results due to seasonality and other factors. We have a limited number of live racing days at our racetracks, and the number of live racing days varies from year to year. The number of live racing days may be adversely impacted by factors including inclement weather, our ability to negotiate certain agreements with industry groups (in particular groups working on behalf of horsemen), jockey walkouts and other negotiation issues with independent contractors, and contagious equine disease. The number of live racing days we are able to offer directly affects our results of operations. A significant decrease in the number of live racing days and/or live races offered during our Kentucky Oaks and Kentucky Derby week could have a material adverse impact on our business.
Risks Related to Our Casino Business
Our casino business faces significant competition from brick-and-mortar casinos and other gaming and entertainment alternatives, and we expect competition levels to increase
Our casinos operate in a highly competitive industry with a large number of participants, some of which have financial and other resources that are greater than our resources. Our casino operations face competition from Native American casinos, video lottery terminals, state-sponsored lotteries and other forms of legalized gaming in the U.S. and other jurisdictions. Proposed additional casino licenses in Maine and the opening of the Rivers Casino & Resort Schenectady could provide additional competition. We do not enjoy the same access to the gaming public or possess the advertising resources that are available to state-sponsored lotteries or other competitors which may adversely affect our ability to compete effectively with them. Legislators in Florida continue to debate the expansion of Florida gaming to include Las Vegas-style destination resort casinos. Such casinos may be subject to taxation rates lower than the current gaming taxation structure. Should such legislation be enacted, it could have a material adverse impact on our business.
The gaming industry also faces competition from a variety of sources for discretionary consumer spending including spectator sports and other entertainment and gaming options. Web-based interactive gaming and wagering is growing rapidly and affecting competition in our industry as federal regulations on web-based activities are clarified. We anticipate that competition will

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continue to grow in the web-based interactive gaming and wagering channels because of ease of entry and such increased competition may have an adverse impact on our business.
Our casino business is highly regulated and changes in the regulatory environment could adversely affect our business
Our casino operations exist at the discretion of the states where we conduct business, and are subject to extensive state and local regulation. Like all gaming operators in the jurisdictions in which we operate, we must periodically apply to renew our gaming licenses or registrations and have the suitability of certain of our directors, officers and employees approved. While we have obtained all governmental licenses, registrations, permits and approvals currently necessary for the operation of our gaming facilities, we cannot be certain that we will be able to obtain such renewals or approvals in the future, or that we will be able to obtain future approvals that would allow us to expand our gaming operations.
Regulatory authorities also have input into important aspects of our operations, including hours of operation, location or relocation of a facility, numbers and types of machines and loss limits. Regulators may also levy substantial fines against or seize our assets or the assets of our subsidiaries or the people involved in violating gaming laws or regulations. Any of these events could have an adverse impact on our business. The high degree of regulation in the gaming industry is a significant obstacle to our growth strategy.
The development of new casino venues and the expansion of existing facilities is costly and susceptible to delays, cost overruns and other uncertainties
We may decide to develop, construct and open hotels, casinos or other gaming venues in response to opportunities that may arise. Future development projects and acquisitions may require significant capital commitments, the incurrence of additional debt, the incurrence of contingent liabilities and an increase in amortization expense related to intangible assets which could have a material adverse impact on our business.
The concentration and evolution of the slot machine manufacturing industry or other technological conditions could impose additional costs on us
The majority of our gaming revenue is attributable to slot and video poker machines operated by us at our casinos and wagering facilities. It is important for competitive reasons that we offer the most popular and up-to-date machine games with the latest technology to our guests. In recent years, the prices of new machines have escalated faster than the rate of inflation. In recent years, slot machine manufacturers have frequently refused to sell slot machines featuring the most popular games, instead requiring participating lease arrangements in order to acquire the machines. Participation slot machine leasing arrangements typically require the payment of a fixed daily rental. Such agreements may also include a percentage payment of coin-in or net win. Generally, a participating lease is substantially more expensive over the long term than the cost to purchase a new machine. For competitive reasons, we may be forced to purchase new slot machines or enter into participating lease arrangements that are more expensive than the costs associated with the continued operation of our existing slot machines.
We materially rely on a variety of hardware and software products to maximize revenue and efficiency in our operations. Technology in the gaming industry is developing rapidly, and we may need to invest substantial amounts to acquire the most current gaming and hotel technology and equipment in order to remain competitive in the markets in which we operate. We rely on a limited number of vendors to provide video poker and slot machines and any loss of our equipment suppliers could impact our operations. Ensuring the successful implementation and maintenance of any new technology acquired is an additional risk.
Our business may be adversely affected by legislation prohibiting tobacco smoking.
Legislation in various forms to ban indoor tobacco smoking in public places has been enacted or introduced in many states and local jurisdictions, including in or near jurisdictions in which we operate. The smoking bans and restrictions have negatively impacted our business in New Orleans, where the New Orleans City Council unanimously approved an ordinance prohibiting smoking in casinos, bars and restaurants beginning in 2015. The enactment of similar legislation in other areas where we operate may adversely affect our business.
Our casino business is geographically concentrated
We conduct our casino business at nine principal locations: Oxford, Maine; Vicksburg, Mississippi; Greenville, Mississippi; Miami Gardens, Florida; New Orleans, Louisiana; Lebanon, Ohio; Berlin, Maryland; Black Hawk, Colorado and Saratoga Springs, New York. We also operate video poker machines throughout Louisiana. If a business interruption were to occur and continue for a significant length of time at any of our principal gaming operations, or if economic or regulatory conditions were to become unfavorable in one or more of the regions in which our casino business operates, including a regional decrease in discretionary consumer spending, it could have a material adverse impact on our business.

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Risks Related to Our TwinSpires Business
Our mobile and online wagering business is highly regulated and changes in the regulatory environment could adversely affect our business
TwinSpires.com, our mobile and online wagering business, accepts advance deposit wagers from customers of certain states who set up and fund an account from which they may place wagers via telephone, mobile device or through the Internet at www.TwinSpires.com. The mobile and online wagering business is heavily regulated, and laws governing advance deposit wagering vary from state to state. Some states have expressly authorized advance deposit wagering by residents, some states have expressly prohibited pari-mutuel wagering and/or advance deposit wagering and other states have expressly authorized pari-mutuel wagering but have neither expressly authorized nor expressly prohibited residents of the state from placing wagers through advance deposit wagering hubs located in different states. We believe that a mobile and online wagering business may open accounts on behalf of and accept wagering instructions from residents of states where pari-mutuel wagering is legal and where providing wagering instructions to advance deposit wagering businesses in other states is not expressly prohibited by statute, regulations, or other governmental restrictions. However, state attorneys general, regulators, and other law enforcement officials may interpret state gaming laws, federal statutes, constitutional principles, and doctrines, and the related regulations in a different manner than we do. In the past, certain state attorneys general and other law enforcement officials have expressed concern over the legality of interstate advance deposit wagering.
Our expansion opportunities with respect to advance deposit wagering may be limited unless more states amend their laws or regulations to permit advance deposit wagering. Conversely, if states take affirmative action to make advance deposit wagering expressly unlawful, this could have a material adverse impact on our business. Previously existing advance deposit wagering regulations in Illinois expired on December 31, 2012, and we ceased accepting wagers from Illinois residents in January 2013 until Illinois advance deposit wagering regulations were extended in June 2013. We ceased accepting wagers from Texas residents in September 2013 due to the enforcement of an existing Texas law prohibiting advance deposit wagering. Regulatory and legislative processes can be lengthy, costly and uncertain. We may not be successful in lobbying state legislatures or regulatory bodies to obtain or renew required legislation, licenses, registrations, permits and approvals necessary to facilitate the operation or expansion of our mobile and online wagering business. From time to time, the United States Congress has considered legislation that would either inhibit or restrict Internet gambling in general or inhibit or restrict the use of certain financial instruments, including credit cards, to provide funds for advance deposit wagering.
Many states have considered and are considering interactive and Internet gaming legislation and regulations which may inhibit our ability to do business in such states. Anti-gaming conclusions and recommendations of other governmental or quasi-governmental bodies could form the basis for new laws, regulations, and enforcement policies that could have a material adverse impact on our business. The extensive regulation by both state and federal authorities of gaming activities also can be significantly affected by changes in the political climate and changes in economic and regulatory policies. Such effects could have a material adverse impact to the success of our advance deposit wagering operations.
Our mobile and online wagering business faces strong competition and we expect competition levels to increase
Our mobile and online wagering business is sensitive to changes and improvements to technology and new products and faces strong competition from other web-based interactive gaming and wagering businesses. Our ability to develop, implement and react to new technology and products for our mobile and online wagering business is a key factor in our ability to compete with other advance deposit wagering businesses. Some of our competitors may have greater resources than we do. We anticipate increased competition in our mobile and online business from various other forms of online gaming.
During 2011, the United States Department of Justice clarified its position on the Wire Act of 1961 (the "Wire Act") which had historically been interpreted to outlaw all forms of gambling across states lines. The department’s Office of Legal Counsel determined that the Wire Act applied only to a sporting event or contest, but did not apply to other forms of Internet gambling, including online betting unrelated to sporting events. The United States Department of Justice indicated that many forms of online gambling could become legal under federal law which could include legalized poker and generalized gaming including state lottery wagering. We anticipate increased competition to our mobile and online wagering business from various other forms of online gaming. It is difficult to predict the level of increased competition and the impact of increased competition on our mobile and online wagering business.
Our inability to retain our core customer base or our failure to attract new customers could harm our business
We utilize technology and marketing relationships to retain current customers and attract new customers. If we are unable to retain our core customer base through robust content offerings and other popular features, if we lose customers to our competitors, or if we fail to attract new customers, our businesses would fail to grow or would be adversely affected.

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Our mobile and online wagering business is subject to a variety of U.S. and foreign laws, many of which are unsettled and still developing and which could subject us to claims or otherwise harm our business
We are subject to a variety of laws in the United States and abroad, including laws regarding gaming, consumer protection and intellectual property that are continuously evolving and developing. The scope and interpretation of the laws that are or may be applicable to us are often uncertain and may be conflicting. Laws relating to the liability of providers of online services for activities of users and other third parties are currently being tested by a number of claims, including actions based on invasion of privacy and other torts, unfair competition, copyright and trademark infringement, and other theories. It is also likely that as our business grows and evolves we will become subject to laws and regulations in additional jurisdictions.
If we are not able to comply with these laws or regulations or if we become liable under these or new laws or regulations, we could be directly harmed, and we may be forced to implement new measures to reduce our exposure to this liability. This may require us to expend substantial resources or to modify our online services which could harm our business. The increased attention focused upon liability issues as a result of lawsuits and legislative proposals could harm our reputation or otherwise impact the growth of our business.
Failure to comply with laws requiring us to block access to certain individuals, based upon geographic location, may result in legal penalties or impairment to our ability to offer our mobile and online wagering products, in general
Individuals in jurisdictions in which online real money gaming is illegal may nonetheless seek to engage our online real money gaming products. While we take steps to block access by individuals in such jurisdictions, those steps may be unsuccessful. In the event that individuals in jurisdictions in which online real money gaming is illegal engage our online real money gaming systems, we may be subject to criminal sanctions, regulatory penalties, the loss of existing or future licenses necessary to offer online real money gaming or other legal liabilities, any one of which could have a material adverse impact on our businesses. Gambling laws and regulations in many jurisdictions require gaming industry participants to maintain strict compliance with various laws and regulations. If we are unsuccessful in blocking access to our online real money gaming products by individuals in a jurisdiction where such products are illegal, we could lose or be prevented from obtaining a license necessary to offer online real money gaming in a jurisdiction in which such products are legal.
Risks Related to Big Fish Games
We operate in an evolving and highly competitive market segment
The market segments in which we operate are highly competitive. The business of developing, distributing and marketing games for PC, Mac and mobile devices is characterized by frequent product introductions and rapidly emerging platforms and technologies. We compete with other game developers and content providers for the leisure time, attention, and discretionary spending of our players based on a number of factors, including game design, brand and consumer reviews, quality of gameplay experience and access to distribution channels. We also compete with other content providers to acquire rights to game properties developed or licensed by third parties, including with respect to royalty and other economic terms, porting and localization abilities, speed of execution and distribution capabilities and breadth.
Many of our primary competitors have greater financial, marketing and other resources dedicated to the development, distribution and promotion of their games. We are also faced with competition from a vast number of small, independent developers that have access to the same third party platforms as we do to market and distribute titles.
The competitive landscape is further complicated by frequent shifts and advancements in free-to-play games for smartphones, tablets and other next-generation platforms. Free-to-play games are games that players can download and play for free, but that allow players to access a variety of additional content and features for a fee and to engage with various advertisements and in-game offers that generate revenue for us. Our efforts to develop free-to-play games may prove unsuccessful or may take more time than we anticipate to achieve significant revenue because:
free-to-play games have a relatively limited history, and it is unclear how popular this style of game will remain, or its future revenue potential;
free-to-play strategy assumes that a large number of players will download our games because the games are free and that we will then be able to effectively monetize the games; and
even if our free-to-play games are widely downloaded, a significant portion of the revenue generated from these titles are derived from a relatively small concentration of players and we may fail to retain these or other users, or optimize the monetization of these games.

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We derive material revenue from distribution of our titles through third party mobile platforms, and if we are unable to maintain relationships with the owners of these platforms or if our access to these platforms is limited or unavailable for any prolonged period of time, our business could be adversely affected
If we are unable to maintain good relationships with third party mobile platform providers, such as Apple and Google, our business could be impacted. Our business could be harmed if access to these platforms is limited or suspended based on any change in terms or policies that made the continued distribution of our titles on these platforms unfeasible or less profitable, or that required us to spend significantly more on marketing campaigns or other means to enhance the discoverability of our titles on these platforms.
Our ability to transact business through these platforms is subject to our compliance with the standard terms and conditions which may be unilaterally amended at any time. The owners of these platforms set the revenue share the platform is entitled to receive and may change the revenue share without input from or advance notice to us. The standard terms and conditions of these platforms may impose restrictions on the types of content the platform will allow to be sold, the ways in which the content is offered and promoted, and the process and timing of accepting content for distribution. Such restrictions could impair our ability to successfully market and sell our mobile games. If any of the providers of these platforms determines that we are in violation of their standard terms and conditions, we may be prohibited from distributing our titles through these platforms which could harm our business.
We also rely on the ongoing availability of these platforms. If these platforms experience prolonged periods of unavailability, it could have a material impact on our ability to generate revenue through these platforms and our business could be harmed. If these platforms fail to provide adequate levels of service, our customers' ability to access our games may be impacted or customers may not receive any virtual items for which they have paid which may adversely affect our brand and consumer goodwill.
If we fail to develop and publish mobile games that achieve market acceptance, or continue to enhance our existing games, our revenue may suffer
Our business depends on developing and publishing social casino, casual and mid-core free-to-play and premium paid games that consumers will download and spend time and money on consistently. We continue to invest significant resources in research and development, analytics and marketing to introduce new games and update our existing titles, taking a "portfolio approach" this is not dependent on a limited number of "hit" titles. Our success depends, in part, on unpredictable factors beyond our control, including consumer preferences, competing games and other forms of entertainment, and the emergence of new platforms. If our games do not meet consumer expectations or our games are not brought to market in a timely and effective manner, our business could be adversely impacted. If we fail to update our games with compelling content or if there is a shift in the entertainment preferences of consumers, our business could be adversely impacted.
If we are unable to secure new or ongoing content from third party development partners, our business could be adversely affected
In addition to the games we develop internally, we acquire or license games, including some of our most successful games, from third party development partners located around the world. Our success depends in part on our ability to attract and retain talented and reliable development partners to source new content and update existing content. Our agreements with these development partners are in some instances not exclusive to us and will expire at various times. If we are unable to renew these agreements or if our development partners enter into similar agreements with our competitors or choose to publish their own titles, our business could be harmed.
Certain of our development partners are located in geographic regions of the world that continue to experience military and insurgency conflicts, and political turmoil and unrest. Any of these factors could impact the ability of these development partners to create and deliver content to us in a timely fashion or at all, and could restrict or prohibit our ability to remit payments to these development partners. If we are unable to deliver compelling content to our customers or update existing content, our ongoing business, operating results and financial condition could be harmed.
Our financial results could vary significantly from quarter to quarter and are difficult to predict
Our net revenue, net income, Adjusted EBITDA and other operating results could vary significantly from quarter to quarter due to a variety of factors, some of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Factors that may contribute to the variability of our quarterly results include:
Changes in the amount of money we spend marketing our games in a particular quarter, including the average amount we pay to acquire new users, as well as changes in the timing of other marketing and advertising expenses within the quarter;

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The popularity and monetization rates of our new mobile games released during the quarter and the ability of games released in prior periods to sustain their popularity and monetization rates;
The number and timing of new mobile games and game updates released by us and our competitors, in particular with respect to those games that may represent a significant portion of revenues in a quarter, which timing can be impacted by internal development delays, shifts in product strategy and how quickly app stores review and approve our games for commercial release;
The seasonality of our industry; and
Changes in accounting rules; such as those governing recognition of revenue, including the period of time over which we recognize revenue for in-app purchases of virtual goods and currency within certain of our mobile games.
If our games contain programming errors or flaws, if a significant number of customers experience technical difficulties downloading or launching our games, or if we fail to continue to provide our customers with a high-quality customer experience, it could harm our business and impair our ability to successfully execute our business strategy
A critical component of our strategy is providing a high-quality customer experience to our customers. Our games may contain errors, bugs, flaws or corrupted data, and these defects may only become apparent after launch, particularly as we launch new games under tight time constraints. Porting games to new devices or languages may also result in the creation of errors that did not exist in the game as originally released. Our customers may experience technical difficulties downloading and launching our games due to the effects of third-party software on their computers that we do not control. Our customer service team may be unable to resolve these types of technical difficulties, and if a significant number of our customers cannot download or launch our games, it would harm our business. We believe that if our customers have a negative experience with our games, they may be less inclined to continue or resume playing our games, recommend our games to other potential customers or they may post negative reviews that may dissuade other users from downloading or playing our games. Undetected programming errors, game defects, data corruption and issues with third-party software can disrupt our operations, adversely affect the game experience of our customers, harm our reputation, cause our customers to stop playing our games and divert our resources, any of which could result in legal liability to us, harm our reputation or adversely impact our business.
"Cheating" programs, scam offers, black-markets and other actions by third parties that seek to exploit our games and our players may affect our reputation and harm our operating results
Third parties have developed, and may continue to develop, "cheating" programs, scam offers, black-markets and other offerings that could decrease the revenue we generate from our virtual economies, divert our players from our games or otherwise harm us. Cheating programs enable players to exploit vulnerabilities in our games to obtain virtual currency or other items that would otherwise generate in-app purchases for us, play the games in automated ways or obtain unfair advantages over other players. Third parties may attempt to scam our players with fake offers for virtual goods or other game benefits. We devote significant resources to discover and disable these programs and activities, but if we are unable to do so quickly or effectively, it could damage our reputation and impact our business and results of operations.
If the use of smartphones and tablet devices to facilitate game platforms generally does not increase, our business could be adversely affected
While the number of people using mobile devices has increased dramatically in the past few years, the mobile gaming market is still emerging and it may not grow as rapidly or robustly as we anticipate. Our future success is partially dependent upon the continued growth and application of mobile devices for games. New and emerging technologies could make the mobile devices on which some of our games are currently released obsolete, requiring us to transition our business model to develop games for other next-generation platforms.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
We own the following real property:
Arlington International Race Course in Arlington Heights, IL
Oxford Casino in Oxford, ME
Riverwalk Casino in Vicksburg, MS
Calder Casino in Miami Gardens, FL

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Fair Grounds Slots and Video Services, LLC and Fair Grounds Race Course in New Orleans, LA
We lease the following facilities:
Churchill Downs Racetrack in Louisville, KY
Arlington - We lease seven OTBs in Illinois.
Fair Grounds - We lease ten OTBs in Louisiana.
Harlow's Casino in Greenville, MS - We lease the land on which the casino is located.
TwinSpires.com and Bloodstock Research Information Services in Lexington, KY
Big Fish Games in Seattle, WA; Oakland, CA and Luxembourg
United Tote in Louisville, KY; San Diego, CA and Portland, OR
Corporate and TwinSpires headquarters in Louisville, KY
In 2002, as part of financing improvements to the Churchill facility, we transferred title of the Churchill Downs facility to the City of Louisville, Kentucky and leased back the facility. Subject to the terms of the lease, we can re-acquire the facility at any time for $1.00.
ITEM 3.
LEGAL PROCEEDINGS
In addition to the matters described below, we are also involved in ordinary routine litigation matters which are incidental to our business.
Louisiana Environmental Protection Agency Non-Compliance Issue
On December 6, 2013, we received a notice from the United States Environmental Protection Agency regarding alleged concentrated animal feeding operation ("CAFO") non-compliance at Fair Grounds. We are currently in discussions with the EPA and United States Department of Justice and we expect to incur certain capital expenditures to remediate the alleged CAFO non-compliance. These capital expenditures are expected to extend the life of the related Fair Grounds assets.
Louisiana Horsemens' Purses Class Action Suit
On April 21, 2014, John L. Soileau and other individuals filed a Petition for Declaratory Judgment, Permanent Injunction, and Damages-Class Action styled John L. Soileau, et. al. versus Churchill Downs Louisiana Horseracing, LLC, Churchill Downs Louisiana Video Poker Company, LLC (Suit No. 14-3873) in the Parish of Orleans, State of Louisiana. The petition defined 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 alleged 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 requested 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 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. On July 13, 2016, the plaintiff’s filed their brief with the District Court and Fair Grounds filed its brief on August 12, 2016. A hearing was held at the District Court on September 15, 2016 and the District Court affirmed the Louisiana Racing Commission’s ruling. The plaintiff filed an appeal with the Louisiana Fourth Circuit Court of Appeals on December 7, 2016.

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Pennsylvania Advance Deposit Wagering Suit
On September 3, 2016, the Company filed a lawsuit in the Commonwealth Court of Pennsylvania styled Churchill Downs Incorporated and Churchill Downs Technology Initiatives Company v. The Commonwealth of Pennsylvania, acting by and through the Department of Revenue; Eileen H. McNulty, Secretary of Revenue of the Commonwealth of Pennsylvania, and her successors in office; Bruce Beemer, Attorney General of the Commonwealth of Pennsylvania, and his successors in office; The Pennsylvania State Horse Racing Commission; Corinne Sweeney; Thomas J. Ellis; C. Edward Rogers, Jr.; Russell B. Jones Jr.; Michele C. Ruddy, Salvatore M. De Bunda, and Russell C. Redding, in their Official Capacity as Commissioners of the Pennsylvania State Horse Racing Commission, and their successors in office (Docket No. 476 MD 2016) challenging the constitutionality of a Pennsylvania law granting each Pennsylvania race track a local monopoly over all wagers placed by telephone or through the Internet by Pennsylvania residents located within a 35-mile radius of the track, as well as requiring out-of-state advance deposit wagering companies to pay initial and annual license fees.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.

34




PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Common Stock
Our common stock is traded on the NASDAQ Global Market under the symbol CHDN. As of February 17, 2017, there were approximately 2,980 shareholders of record.
The following table sets forth the high and low closing sale prices, as reported by the NASDAQ Global Market, and dividend declaration information for our common stock during the last two years:
 
 
2016
 
2015
Quarter Ended
 
High
 
Low
 
High
 
Low
First Quarter
 
$
148.18

 
$
121.56

 
$
115.27

 
$
90.52

Second Quarter
 
$
149.05

 
$
118.76

 
$
129.01

 
$
111.93

Third Quarter
 
$
151.48

 
$
121.75

 
$
143.32

 
$
118.33

Fourth Quarter
 
$
157.15

 
$
131.70

 
$
152.98

 
$
130.74

Dividends
Since joining the NASDAQ exchange in 1993, we have declared and paid cash dividends on an annual basis at the discretion of our Board of Directors. The payment and amount of future dividends will be determined by the Board of Directors and will depend upon, among other things, our operating results, financial condition, cash requirements and general business conditions at the time such payment is considered. We declared a dividend of $1.32 in December 2016 which was paid in January 2017, and we declared a dividend of $1.15 in December of 2015 which was paid in January 2016.
Issuer Purchases of Common Stock
The following table provides information with respect to shares of common stock that we repurchased during the quarter ended December 31, 2016 :
Period
 
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares That May Yet Be Purchased under the Plans or Programs (in millions)
 
10/1/16-10/31/2016
 
638

 
$
143.63

 

 
$
135.0

 
11/1/16-11/30/2016
 
91,446

 
$
140.59

 
88,075

 
122.7

 
12/1/16-12/31/2016
 
40,615

 
$
150.42

 
1,857

 
122.4

 
Total
 
132,699

 
$
143.61

 
89,932

 
$
122.4

(1)  
(1)
Maximum dollar amount of shares of common stock that may yet be repurchased under our stock repurchase program.

35




Shareholder Return Performance Graph
The following performance graph and related information shall not be deemed "soliciting material" nor to be "filed" with the SEC, nor shall such information be incorporated by reference into any future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent we specifically incorporate it by reference into such filing.
The following graph depicts the cumulative total shareholder return, assuming reinvestment of dividends, for the periods indicated for our Common Stock compared to the S&P 500 Index and the Russell 2000 Index. We consider the Russell 2000 Index to be our most comparable industry peer group index due to our entry into social gaming technology as a result of our Big Fish Games acquisition and our other operations.
CHDN201312_CHART-57758A03.JPG
 
12/31/2011
 
12/31/2012
 
12/31/2013
 
12/31/2014
 
12/31/2015
 
12/31/2016
Churchill Downs Inc.
$
100.00

 
$
128.97

 
$
175.74

 
$
188.75

 
$
282.45

 
$
302.92

Russell 2000 Index
$
100.00

 
$
116.35

 
$
161.52

 
$
169.42

 
$
161.95

 
$
196.45

S&P 500 Index
$
100.00

 
$
116.00

 
$
153.57

 
$
174.60

 
$
177.01

 
$
198.18


36




ITEM 6.
SELECTED FINANCIAL DATA
 
Years Ended December 31,
(In millions, except per common share data)
2016
 
2015
 
2014 (1)
 
2013 (2)
 
2012 (3)
Operations:
 
 
 
 
 
 
 
 
 
Net revenue
$
1,308.6

 
$
1,212.3

 
$
812.2

 
$
779.0

 
$
731.3

Operating income
194.2

 
123.6

 
90.4

 
90.1

 
96.6

Income from continuing operations
108.1

 
65.2

 
46.4

 
55.0

 
58.2

Net income
108.1

 
65.2

 
46.4

 
54.9

 
58.3

Basic net income per common share
$
6.52

 
$
3.75

 
$
2.67

 
$
3.12

 
$
3.39

Diluted net income per common share
$
6.42

 
$
3.71

 
$
2.64

 
$
3.06

 
$
3.34

 
 
 
 
 
 
 
 
 
 
Balance sheet data at period end:
 
 
 
 
 
 
 
 
 
Total assets
$
2,254.4

 
$
2,277.4

 
$
2,356.3

 
$
1,352.3

 
$
1,114.3

Total debt
921.6

 
781.8

 
764.1

 
384.4

 
209.7

Total liabilities
1,569.4

 
1,660.2

 
1,656.3

 
647.5

 
470.0

Shareholders’ equity
685.0

 
617.2

 
700.0

 
704.8

 
644.3

Shareholders’ equity per common share
$
41.56

 
$
37.18

 
$
40.06

 
$
39.27

 
$
36.93

 
 
 
 
 
 
 
 
 
 
Other Data:
 
 
 
 
 
 
 
 
 
Cash flows from operating activities
$
226.8

 
$
264.5

 
$
141.6

 
$
144.9

 
$
144.1

Capital maintenance expenditures
30.9

 
31.1

 
22.7

 
16.9

 
17.2

Capital project expenditures
23.8

 
12.4

 
31.8

 
31.8

 
24.1

Dividends declared per common share
$
1.32

 
$
1.15

 
$
1.00

 
$
0.87

 
$
0.72

Common stock repurchases
$
27.6

 
$
138.1

 
$
61.6

 
$

 
$

The selected financial data presented above is subject to the following information:
(1)
The results from Big Fish Games are included from the date of acquisition on December 16, 2014 through December 31, 2014.
(2)
The results from Oxford are included from the date of acquisition on July 17, 2013 through December 31, 2013.
(3)
The results from Riverwalk are included from the date of acquisition on October 23, 2012 through December 31, 2012.

37




ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes included in "Item 8-Financial Statements and Supplementary Data".
Our Business
Executive Overview
We are an industry-leading racing, gaming and online entertainment company anchored by our iconic flagship event - The Kentucky Derby . We are a leader in brick-and-mortar casino gaming with approximately 9,030 gaming positions in seven states, and we are the largest, legal online account wagering platform for horseracing in the U.S. We are also one of the world's largest producers and distributors of mobile games. We were organized as a Kentucky corporation in 1928, and our principal executive offices are located in Louisville, Kentucky.
Our management monitors a variety of key indicators to evaluate our business results and financial condition. These indicators include changes in net revenue, operating expense, operating income, earnings per share, outstanding debt balance, operating cash flow and capital spend.
Our consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles ("U.S. GAAP"). We also use non-GAAP measures, including EBITDA (earnings before interest, taxes, depreciation and amortization) and Adjusted EBITDA. We believe that the use of Adjusted EBITDA as a key performance measure of results of operations enables management and investors to evaluate and compare from period to period our operating performance in a meaningful and consistent manner. Our chief operating decision maker utilizes Adjusted EBITDA to evaluate segment performance, develop strategy and allocate resources. Adjusted EBITDA is a supplemental measure of our performance that is not required by, or presented in accordance with U.S GAAP. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income (as determined in accordance with U.S. GAAP) as a measure of our operating results.
During 2016, we updated our definition of Adjusted EBITDA to exclude changes in Big Fish Games deferred revenue and to exclude depreciation and amortization from our equity investments. The prior year amounts were reclassified to conform to this presentation. We also prospectively implemented a change in accounting estimate for corporate expense allocated to other operating segments to use an activity based allocation rather than a revenue based allocation.
Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, adjusted for the following:
Adjusted EBITDA includes our portion of the EBITDA from our equity investments.
Adjusted EBITDA excludes:
Acquisition expense, net which includes:
Acquisition-related charges, including fair value adjustments related to earnouts and deferred payments; and
Transaction expense, including legal, accounting and other deal-related expense;
Stock-based compensation expense;
Gain on Calder land sale;
Calder exit costs; and
Other charges and recoveries
For segment reporting, Adjusted EBITDA includes intercompany revenue and expense totals that are eliminated in the Consolidated Statements of Comprehensive Income. See the Reconciliation of Comprehensive Income to Adjusted EBITDA included in this section for additional information.
Business Highlights
In 2016, we continued to take steps to position ourselves for sustainable value creation over the long term.
We delivered record revenue, net income, diluted EPS, and Adjusted EBITDA.
Revenue grew 7.9% to $1.3 billion;
Net income grew 65.8% to $108.1 million;

38




Diluted net income per share grew 73.0% to $6.42; and
Adjusted EBITDA grew 10.6% to $334.5 million.
Our Kentucky Derby and Oaks week of events set all time-records for attendance and all sources handle. Our ongoing investment to expand the Derby capacity, pricing, and customer experiences reflects our commitment to growing this iconic event.
Our Calder, Miami Valley Gaming and Oxford casino properties delivered strong organic growth. We benefited from a full year of equity income and management fee revenue from our equity investment in Saratoga. In November, we acquired a 25.0% interest in Saratoga’s Black Hawk Casino in Colorado. And, in January 2017, we partnered with Saratoga to acquire the casino and racetrack at Ocean Downs in Maryland.
Our TwinSpires.com handle grew to $1.1 billion, up 13.7% compared to 2015 as we outpaced the industry growth by 13.1 percentage points. Our TwinSpires.com handle represented 10.2% of all pari-mutuel industry handle in 2016, up 1.2 percentage points from 2015.
Our Big Fish Games segment delivered $486.2 million in bookings, up 7.3% compared to 2015. Big Fish Casino maintained its position as the #2 top grossing social casino iOS mobile app in the U.S. and #3 worldwide. We continued to refine our strategic growth plans for Big Fish Games with a renewed focus on disciplined user acquisition spending based on the long term return of investable games, increasing the number of new games in our development pipeline and refining our game development to better enable the ability to scale the audience for our games.
We maintained our focus on cost reductions across all properties and continued to be disciplined in our maintenance and project capital expenditures.
We accomplished these initiatives while returning approximately $58.0 million to shareholders through dividends and share repurchases.
As we look to 2017 and beyond, we remain committed to delivering long-term sustainable growth and strong financial results for our shareholders. We have strong cash flow and a solid balance sheet that supports organic growth as well as other strategic acquisitions and investment opportunities that will create additional long-term value for our shareholders in the coming years.
Our Operations
We manage our operations through six operating segments: Racing, Casinos, TwinSpires, Big Fish Games, Other Investments and Corporate.
Refer to Item 1. Business for more information on our operating segments and a description of our competition and government regulations and potential legislative changes that affect our business.
Consolidated Financial Results
The following table reflects our net revenue, operating income, net income, Adjusted EBITDA, and certain other financial information:
 
Years Ended December 31,
 
'16 vs. '15 Change
 
'15 vs. '14 Change
(in millions)
2016
 
2015
 
2014
 
 
Net revenue
$
1,308.6

 
$
1,212.3

 
$
812.2

 
$
96.3

 
$
400.1

Operating income
194.2

 
123.6

 
90.4

 
70.6

 
33.2

Operating income margin
14.8%

10.2%

11.1%
 


 


Net income
$
108.1

 
$
65.2

 
$
46.4

 
$
42.9

 
$
18.8

Adjusted EBITDA
334.5

 
302.5

 
204.1

 
32.0

 
98.4

Year Ended December 31, 2016, Compared to the Year Ended December 31, 2015
Our net revenue increased $96.3 million driven primarily by a $72.5 million increase from Big Fish Games primarily from casual and mid-core free-to-play game growth, a $20.4 million increase from TwinSpires due to a 13.7% increase in handle, a $3.1 million increase in Racing due to a strong Kentucky Derby and Oaks week performance and a $0.3 million net increase in other revenue.
Our operating income increased $70.6 million driven by a $26.6 million increase in our segment operating income primarily from TwinSpires handle growth, growth in our casual and mid-core free-to-play Big Fish Games, a strong Kentucky Derby and Oaks week and from Casinos revenue growth and operational efficiencies, a $23.7 million gain

39




on sale of Calder excess land, an $18.3 million reduction of acquisition expenses primarily related to the Big Fish Games acquisition and an $11.4 million decrease in Calder exit costs. Partially offsetting these improvements was a $9.4 million increase in selling, general and administrative expense.
Our net income increased $42.9 million driven by a $70.6 million increase in operating income and a $6.2 million increase in income from our equity investments and $0.1 million of other income. Partially offsetting these increases were a $15.1 million increase in net interest expense associated with higher outstanding debt balances, a $13.1 million increase in our income tax provision primarily from higher operating income from our segments and $5.8 million gain in 2015 from the sale of our remaining HRTV investment.
Our Adjusted EBITDA increased $32.0 million driven by a $10.9 million increase in Casinos as a result of our MVG and SCH investments, as well as organic growth and operational efficiencies within certain owned properties, a $10.6 million increase from Big Fish Games driven by the growth in our casual and mid-core free-to-play games, a $7.9 million increase from Racing primarily associated with Churchill Downs, and a $6.6 million increase from TwinSpires as a result of handle growth. Partially offsetting these increases were a $3.8 million increase in Corporate expenses driven primarily by a non-recurring 2015 benefit associated with our deferred compensation program and a $0.2 million decline from our Other Investments.
Year Ended December 31, 2015, Compared to the Year Ended December 31, 2014
Our net revenue increased $400.1 million in 2015 driven by $399.8 million from the full year impact of the Big Fish Games acquisition, $9.2 million from our TwinSpires segment due to a 7.5% increase in handle and $4.6 million from our Casinos segment as improvements at our Maine, Louisiana and Florida properties were partially offset by regional weakness in Mississippi. Partially offsetting these increases was a $13.4 million decline in Racing revenue as the cessation of Calder's pari-mutuel operations and declines at Arlington due to reductions of state purse subsidies more than offset higher revenue from a strong Kentucky Oaks and Kentucky Derby week, as well as a $0.1 million decrease in other revenue.
Our operating income increased $33.2 million in 2015 driven by a $18.9 million increase from the full year impact of the Big Fish Games acquisition, a $18.5 million increase from our Racing segment and a $4.5 million increase from TwinSpires as a result of a successful Kentucky Oaks and Kentucky Derby week and the effect of a strong Triple Crown season, a $9.5 million increase from Casinos as a result of revenue growth and operational cost savings at most of our casino properties, a $6.4 million decrease in acquisition-related expenses from Big Fish Games that did not recur in 2015 and a $5.5 million decrease from Luckity and Capital View Casino & Resort ("Capital View") non-cash impairment charges in 2014 that did not recur in 2015. Partially offsetting these improvements were an $11.6 million increase in incremental Calder exit costs, a $17.9 million increase in non-cash Big Fish Games acquisition expenses associated with fair value adjustments to the liabilities for the earnout and deferred payments to the founders and a $0.6 million increase in other expense.
Our net income increased $18.8 million in 2015 driven by a $33.2 million increase in operating income as discussed above, a $4.9 million increase in income from our equity investments and a $5.8 million gain from the sale of our remaining HRTV investment. Partially offsetting these increases were $7.8 million of additional interest expense associated with higher outstanding debt balances, $11.5 million of additional income tax expense associated with the increase in income from operations, $5.3 million of additional income tax expense as a result of certain non-deductible Big Fish Games acquisition expense and $0.5 million of other expense.
Our Adjusted EBITDA increased $98.4 million in 2015 driven by a $69.2 million increase from the full year impact of the Big Fish Games acquisition, a $10.6 million increase from Racing as strong Kentucky Oaks and Kentucky Derby week revenue growth and cost reductions to offset lower revenue at Calder and Arlington, an $8.8 million increase from TwinSpires as a result of increased handle and lower expense, a $7.7 million increase from Casinos as a result of organic growth and cost reductions, a $1.3 million increase in Other Investments primarily due to United Tote operations and a $0.8 million decrease in Corporate expense.

40




Financial Results by Segment
Net Revenue by Segment
The following table presents net revenue for our operating segments, including intercompany revenue:
 
Years Ended December 31,
 
'16 vs. '15 Change
 
'15 vs. '14 Change
(in millions)
2016
 
2015
 
2014
 
 
Racing:
 
 
 
 
 
 


 


Churchill Downs
$
165.2

 
$
158.9

 
$
150.2

 
$
6.3

 
$
8.7

Arlington
60.8

 
59.5

 
66.1

 
1.3

 
(6.6
)
Fair Grounds
39.5

 
41.1

 
39.7

 
(1.6
)
 
1.4

Calder
2.6

 
2.7

 
20.0

 
(0.1
)
 
(17.3
)
Total Racing
268.1

 
262.2

 
276.0

 
5.9

 
(13.8
)
Casinos:
 
 
 
 
 
 


 


Oxford Casino
84.6

 
80.4

 
76.5

 
4.2

 
3.9

Riverwalk Casino
46.1

 
49.8

 
50.1

 
(3.7
)
 
(0.3
)
Harlow's Casino
48.4

 
49.0

 
50.2

 
(0.6
)
 
(1.2
)
Calder Casino
79.1

 
77.4

 
77.0

 
1.7

 
0.4

Fair Grounds Slots
36.9

 
39.0

 
40.8

 
(2.1
)
 
(1.8
)
VSI
36.9

 
36.9

 
33.7

 

 
3.2

Saratoga
0.8

 
0.4

 

 
0.4

 
0.4

Total Casino
332.8

 
332.9

 
328.3

 
(0.1
)
 
4.6

TwinSpires
221.9

 
201.3

 
192.0

 
20.6

 
9.3

Big Fish Games:
 
 
 
 
 
 
 
 
 
Social casino
182.5

 
193.4

 
7.6

 
(10.9
)
 
185.8

Casual and mid-core free-to-play
212.7

 
125.3

 
2.1

 
87.4

 
123.2

Premium
91.0

 
95.0

 
4.2

 
(4.0
)
 
90.8

Total Big Fish Games
486.2

 
413.7

 
13.9

 
72.5

 
399.8

Other Investments
20.8

 
20.1

 
20.6

 
0.7

 
(0.5
)
Corporate
1.0

 
0.9

 
1.1

 
0.1

 
(0.2
)
Eliminations
(22.2
)
 
(18.8
)
 
(19.7
)
 
(3.4
)
 
0.9

Net Revenue
$
1,308.6

 
$
1,212.3

 
$
812.2

 
$
96.3

 
$
400.1

Year Ended December 31, 2016, Compared to the Year Ended December 31, 2015
Racing revenue increased $5.9 million due to a $6.3 million increase at Churchill Downs primarily due to a successful Kentucky Derby and Oaks week and a $1.3 million increase at Arlington due to an additional 37 host days during 2016 as compared to 2015. Partially offsetting these increases was a decrease of $1.7 million primarily at Fair Grounds driven by five fewer race days.
Casino revenue decreased $0.1 million due to a $3.7 million decrease at Riverwalk resulting from a loss of market share within an overall declining market, a $2.1 million decrease at Fair Grounds Slots as it maintained market share despite a decline in the overall New Orleans gaming market associated with stronger competition from the Mississippi Gulf Coast gaming market and a $0.6 million decrease at Harlow's due to a declining market which was negatively impacted by adverse weather conditions during 2016. Partially offsetting these decreases were a $4.2 million increase in Oxford due to successful promotional activities, favorable weather conditions and strong local economy, a $1.7 million increase at Calder Casino due to growth in the overall market as well as successful marketing and promotional activities and a $0.4 million increase at Saratoga from a full year of management fee revenue in 2016.
TwinSpires revenue increased $20.6 million primarily due to a 23.3% increase in active players who were acquired from marketing efforts primarily during big horse racing events. Handle growth of $131.8 million, or 13.7%, outpaced the U.S. thoroughbred industry performance by 13.1 percentage points.

41




Big Fish Games revenue increased $72.5 million primarily driven by an $87.4 million increase in casual and mid-core free-to-play revenue from multiple games as compared to the prior year. Partially offsetting this increase were a $4.0 million decrease in premium revenue from a reduction in game club redemptions and expirations and a $10.9 million decrease in social casino revenue associated with a reduction in bookings.
Other Investments revenue increased $0.7 million at United Tote due to incremental international equipment sales and higher totalisator fees from new customers.
Eliminations increased $3.4 million driven primarily by higher Churchill Downs intercompany revenue from increased wagering by TwinSpires customers on Kentucky Derby and Oaks week.
Year Ended December 31, 2015, Compared to the Year Ended December 31, 2014
Racing revenue decreased $13.8 million in 2015 driven by a $17.3 million decline in Calder revenue as a result of the July 1, 2014 cessation of pari-mutuel operations that was partially offset by rental income for the use of Calder's racetrack facilities. Arlington decreased $6.6 million due to twelve fewer live race days, smaller field sizes, fewer races per day and inclement weather for the Arlington Million which led to a decline in attendance, pari-mutuel wagering and other operational-based revenue. Partially offsetting these declines were an $8.7 million increase in Churchill Downs revenue primarily related to a successful Kentucky Oaks and Kentucky Derby week and a $1.4 million increase in Fair Grounds revenue from a 7.5% increase in handle.
Casinos revenue increased $4.6 million in 2015 driven by $3.9 million from Oxford due to successful promotional activities, a strengthening market and improvements in market share; $3.2 million from VSI due to the installation of upgraded video poker machines and the improved performance of OTB facilities that are not included within the Orleans Parish smoking ban limits; and a $0.8 million increase from Saratoga and Calder revenue. Partially offsetting these increases was a $1.8 million decline in Fair Grounds Slots revenue which was negatively impacted by a smoking ban in Orleans Parish which commenced on April 22, 2015 and a $1.5 million decline in our Mississippi properties as a result of aggressive competitors' offerings.
TwinSpires revenue increased $9.3 million in 2015, primarily driven by a $12.3 million increase in pari-mutuel and other revenue due to a 7.5% increase in TwinSpires.com handle compared to the industry increase of 1.2% for the period. The increase was partially offset by a $2.4 million decline as the result of the cancellation of a low-margin, third-party administrative call center services agreement during the fourth quarter of 2014 as well as a decline of $0.6 million due to the cessation of the print edition of BLUFF Magazine during January 2015.
Big Fish Games revenue increased $399.8 million in 2015 driven by the full year impact of the Big Fish Games acquisition. Big Fish Games net revenue includes amounts recognized from its social casino games, casual and mid-core free-to-play games and premium paid games. 
Other Investments revenue decreased $0.5 million in 2015 due to lower revenue at United Tote.
Eliminations decreased $0.9 million in 2015 driven by lower intercompany transactions between Racing and United Tote.

42




Additional Statistical Data by Segment
The following tables provide additional statistical data for our segments:
Racing and TwinSpires (1)
 
Years Ended December 31,
(in millions)
2016
 
2015
 
2014
Racing
 
 
 
 
 
Churchill Downs
 
 
 
 
 
Race days
70

 
70

 
74

Total handle
$
593.7

 
$
585.2

 
$
580.1

Net pari-mutuel revenue
$
61.5

 
$
60.9

 
$
60.1

Commission %
10.4
%
 
10.4
%
 
10.4
%
Arlington
 
 
 
 
 
Race days
74

 
77

 
89

Total handle
$
375.2

 
$
373.8

 
$
458.8

Net pari-mutuel revenue
$
48.2

 
$
46.0

 
$
53.1

Commission %
12.8
%
 
12.3
%
 
11.6
%
Calder (2)
 
 
 
 
 
Race days

 

 
79

Total handle
$

 
$

 
$
155.8

Net pari-mutuel revenue
$

 
$

 
$
16.9

Commission %
NM

 
NM

 
10.9
%
Fair Grounds
 
 
 
 
 
Race days
78

 
83

 
82

Total handle
$
289.5

 
$
296.9

 
$
276.1

Net pari-mutuel revenue
$
29.3

 
$
30.4

 
$
29.1

Commission %
10.1
%
 
10.2
%
 
10.5
%
Total Racing
 
 
 
 
 
Race days
222

 
230

 
324

Total handle
$
1,258.4

 
$
1,255.9

 
$
1,470.8

Net pari-mutuel revenue
$
139.0

 
$
137.3

 
$
159.2

Commission %
11.0
%
 
10.9
%
 
10.8
%
TwinSpires.com
 
 
 
 
 
Total handle
$
1,096.9

 
$
965.1

 
$
897.7

Net pari-mutuel revenue
$
201.8

 
$
183.6

 
$
172.2

Commission %
18.4
%
 
19.0
%
 
19.2
%
Eliminations (3)
 
 
 
 
 
Total handle
$
(128.4
)
 
$
(106.0
)
 
$
(112.7
)
Net pari-mutuel revenue
$
(16.6
)
 
$
(14.0
)
 
$
(14.5
)
Total
 
 
 
 
 
Handle
$
2,226.9

 
$
2,115.0

 
$
2,255.8

Net pari-mutuel revenue
$
324.2

 
$
306.9

 
$
316.9

Commission %
14.6
%
 
14.5
%
 
14.0
%
(1)
Total handle and net pari-mutuel revenue generated by Velocity are not included in total handle and net pari-mutuel revenue from TwinSpires.com.
(2)
Calder ceased pari-mutuel operations on July 1, 2014.
(3)
Eliminations include the elimination of intersegment transactions.

43




Casinos Activity
Certain key operating statistics specific to the gaming industry are included in our statistical data for our Casinos segment. Our slot facilities report slot handle as a volume measurement, defined as the gross amount wagered or cash and tickets placed into slot machines in the aggregate for the period cited. Net gaming revenue includes slot and table games revenue and is net of customer freeplay; however, it excludes other ancillary property revenue such as food and beverage, ATM, hotel and other miscellaneous revenue.
 
Years Ended December 31,
(in millions)
2016
 
2015
 
2014
Oxford Casino
 
 
 
 
 
Slot handle
$
774.0

 
$
722.6

 
$
675.4

Net slot revenue
64.9

 
62.1

 
58.4

Net gaming revenue
80.4

 
76.5

 
72.7

Riverwalk Casino
 
 
 
 
 
Slot handle
$
485.6

 
$
522.2

 
$
508.7

Net slot revenue
38.7

 
42.5

 
43.6

Net gaming revenue
43.7

 
47.2

 
47.4

Harlow’s Casino
 
 
 
 
 
Slot handle
$
535.1

 
$
538.6

 
$
554.9

Net slot revenue
42.0

 
42.6

 
43.3

Net gaming revenue
45.7

 
46.4

 
47.6

Calder Casino
 
 
 
 
 
Slot handle
$
1,044.7

 
$
986.2

 
$
961.1

Net slot revenue
75.8

 
74.4

 
73.2

Net gaming revenue
75.7

 
74.3

 
74.0

Fair Grounds Slots and Video Poker
 
 
 
 
 
Slot handle
$
405.5

 
$
417.1

 
$
428.0

Net slot revenue
35.8

 
38.0

 
39.6

Net gaming revenue
72.5

 
74.7

 
73.1

 
 
 
 
 
 
Total net gaming revenue
$
318.0

 
$
319.1

 
$
314.8


Big Fish Games
Our key operating statistic specific to Big Fish Games is bookings. Bookings represent the amount of virtual currency, virtual goods or premium games that consumers have purchased through third party app stores or the Big Fish Games website.
 
Years Ended December 31,
(in millions)
2016
 
2015
 
2014 (1)
Bookings
 
 
 
 
 
Social casino
$
182.3

 
$
193.0

 
$
9.0

Casual and mid-core free-to-play
211.0

 
151.2

 
3.8

Premium
92.9

 
109.0

 
5.6

Total bookings
$
486.2

 
$
453.2

 
$
18.4

(1)
We completed the acquisition of Big Fish Games on December 16, 2014.

44




Consolidated Operating Expense
The following table is a summary of our consolidated operating expense:
 
Years Ended December 31,
 
'16 vs. '15 Change
 
'15 vs. '14 Change
(in millions)
2016
 
2015
 
2014
 
 
 
 
 
 
 
 
 
 
 
 
Taxes & purses
$
186.8

 
$
184.1

 
$
189.9

 
$
2.7

 
$
(5.8
)
Platform & development fees
179.9

 
143.6

 
5.1

 
36.3

 
138.5

Marketing & advertising
151.0

 
130.7

 
28.8

 
20.3

 
101.9

Salaries & benefits
137.0

 
132.2

 
120.3

 
4.8

 
11.9

Depreciation and amortization
108.6

 
109.7

 
68.3

 
(1.1
)
 
41.4

Content expense
103.0

 
95.3

 
93.7

 
7.7

 
1.6

Selling, general and administrative expense
100.2

 
90.8

 
76.0

 
9.4

 
14.8

Research & development
39.0

 
39.4

 

 
(0.4
)
 
39.4

Acquisition expense, net
3.4

 
21.7

 
10.2

 
(18.3
)
 
11.5

Calder exit costs
2.5

 
13.9

 
2.3

 
(11.4
)
 
11.6

Gain on Calder land sale
(23.7
)
 

 

 
(23.7
)
 

Other operating expense
126.7

 
127.3

 
127.2

 
(0.6
)
 
0.1

Total expense
$
1,114.4

 
$
1,088.7

 
$
721.8

 
$
25.7

 
$
366.9

Percent of revenue
85
%
 
90
%
 
89
%
 
 
 
 
Year Ended December 31, 2016, Compared to the Year Ended December 31, 2015
Significant items affecting comparability of consolidated operating expense include:
Taxes and purses increased $2.7 million due to a $1.1 million increase in casino gaming taxes as a result of casino revenue growth at Oxford, a $0.9 million increase in purses primarily associated with 37 additional host days at Arlington and a $0.7 million increase in pari-mutuel taxes primarily related to TwinSpires.
Platform and development fees at Big Fish Games increased $36.3 million driven by the $72.5 million increase in Big Fish Games revenues.
Marketing and advertising expense increased $20.3 million relating to an increase in Big Fish Games user acquisition expense primarily associated with casual and mid-core free-to-play games.
Salaries and benefits expense increased $4.8 million primarily driven by a $2.7 million increase in additional personnel costs added at Big Fish Games to support the growth in the business, a $1.6 million increase in contract services related to Churchill Downs and a $0.5 million increase in other expense.
Depreciation and amortization expense decreased $1.1 million driven primarily by a $1.9 million decrease at Calder associated with fully depreciated assets, which was partially offset by a $0.8 million increase in expense in our other segments.
Content expense increased $7.7 million driven by a $7.1 million increase in third-party pari-mutuel content fees at TwinSpires associated with an increase in handle and a $0.6 million increase in other expense.
Selling, general and administrative expense increased $9.4 million driven primarily by a $5.1 million increase in stock-based compensation expense, a $1.5 million expense within our Casino segment arising from potential tax penalties associated with the untimely submission of certain informational tax returns, a $1.1 million increase in professional fees, an increase of $0.9 million in employee benefits for severance and relocation expenses and a $0.8 million increase in other expenses.
Research and development expense decreased $0.4 million resulting from higher capitalized payroll related to Big Fish Games software development expense.
Acquisition expense, net decreased $18.3 million driven by a decrease of $16.0 million as a result of the non-cash fair value adjustments related to the liabilities for the Big Fish Games earnout and deferred payments to the founders in 2016 compared to 2015 and a $2.3 million benefit recognized in 2016 related to the elimination of a contingent liability established in 2012 for the acquisition of Bluff.

45




Calder exit costs decreased $11.4 million due to the 2015 non-cash impairment of $12.7 million to reduce the net book value of Calder’s grandstand and ancillary facilities to zero, partially offset by an increase in ongoing grandstand demolition costs of $1.3 million during 2016 compared to 2015.
Gain on Calder land sale increased $23.7 million from the sale of 61 acres of excess land at Calder, which represents proceeds of $25.6 million less the book value $1.9 million.
Other operating expense decreased $0.6 million in 2016. Other operating expense includes utilities, maintenance, food and beverage costs, property taxes and insurance and other operating expense. Insurance and property taxes decreased $4.0 million primarily from the cessation of pari-mutuel racing and demolition of property at Calder. Partially offsetting the decrease was a $1.7 million increase in TwinSpires third party processing expense related to handle growth and a $1.7 million increase in corporate deferred compensation expense.
Year Ended December 31, 2015, Compared to the Year Ended December 31, 2014
Significant items affecting comparability of consolidated operating expense include:
Taxes and purses decreased $5.8 million in 2015 primarily as a result of an $8.2 million decline in Calder expense related to the cessation of racing operations. Partially offsetting this decline was a $2.4 million increase in casino gaming taxes as a result of 1.4% casino revenue growth.
Platform and development fees increased $138.5 million in 2015 related to digital storefronts and third-party game developers' expenditures based on Big Fish Games revenue.
Marketing and advertising expense increased $101.9 million in 2015 driven primarily by additional user acquisition and advertising expense from the full year impact of Big Fish Games.
Salaries and benefit expense increased $11.9 million in 2015 driven by $19.7 million of additional expense from the full year impact of Big Fish Games. Partially offsetting this increase was a $3.4 million decline in Calder salaries and benefit expense due to the cessation of pari-mutuel racing and the closure of its poker room and a $4.4 million reduction in salaries across our other segments in response to moderating revenue growth.
Depreciation and amortization expense increased $41.4 million in 2015 driven by $49.5 million of additional expense associated with the Big Fish Games acquisition. Partially offsetting this increase was a $3.4 million reduction in depreciation expense at Calder as certain gaming assets were fully depreciated during 2014, $4.2 million in depreciation expense at Calder from the cessation of pari-mutuel operation and $0.5 million of other expense reductions.
Content expense increased $1.6 million in 2015 driven by a $5.0 million increase in fees incurred to import third-party pari-mutuel content for our Racing and TwinSpires segments. Partially offsetting this increase was a $3.4 million decline in Calder content expense due to the cessation of pari-mutuel racing and favorable terms obtained under the Calder agreement with TSG.
Selling, general and administrative expense increased $14.8 million in 2015 driven by $14.4 million of additional expense from the full year impact of Big Fish Games, $2.0 million of increased annual bonus compensation expense due to our financial performance and $1.0 million of other expense. Partially offsetting these increases were $1.4 million decline in Calder expense due to the cessation of pari-mutuel racing and a $1.2 million decline in corporate contributions and legal expense related to prior year matters which did not recur.
Research and development expense increased $39.4 million in 2015 driven by studio and engineering functions salary and benefit related expense from the full year impact of Big Fish Games.
Acquisition expense, net increased $11.5 million in 2015 as a result of the non-cash fair value adjustments related to the liabilities for the Big Fish Games earnout and deferred payments to the founders.
Calder exit costs increased $11.6 million in 2015 due to $12.7 million of non-cash impairment charges to reduce the net book value of Calder's grandstand and ancillary facilities to zero, partially offset by a decrease in demolition and exit costs at Calder of $1.1 million.
Other operating expense increased $0.1 million in 2015. Other operating expense includes utilities, maintenance, food and beverage costs, property taxes and insurance and other operating expense. The increase was driven by $14.4 million of additional expense from the full year impact of Big Fish Games and $0.2 million of other expense. Partially offsetting these increases were declines of $3.4 million at Calder due to the cessation of pari-mutuel racing, $3.2 million related to 2014 Luckity asset impairment charges that did not recur in 2015, $3.1 million in casino operational efficiencies, $2.3 million in TwinSpires contract service expense, $1.7 million in corporate deferred compensation expense related to prior periods and $0.8 million in Racing and United Tote bad debt recoveries.

46




Corporate Allocated Expense
On January 1, 2016, we prospectively implemented a change in accounting estimate for corporate expense allocated to other operating segments to use an activity based allocation rather than a revenue based allocation. Excluding corporate stock-based compensation, the table below presents Corporate allocated expense included in the Adjusted EBITDA of each of the operating segments:
 
Years Ended December 31,
 
'16 vs. '15 Change
 
'15 vs. '14 Change
(in millions)
2016
 
2015
 
2014
 
 
Racing
$
(6.0
)
 
$
(6.6
)
 
$
(6.8
)
 
$
0.6

 
$
0.2

Casinos
(6.9
)
 
(8.4
)
 
(8.1
)
 
1.5

 
(0.3
)
TwinSpires
(5.4
)
 
(5.0
)
 
(4.8
)
 
(0.4
)
 
(0.2
)
Big Fish Games
(2.8
)
 
(3.0
)
 

 
0.2

 
(3.0
)
Other Investments
(1.6
)
 
(0.5
)
 
(0.5
)
 
(1.1
)
 

Corporate allocated expense
22.7

 
23.5

 
20.2

 
(0.8
)
 
3.3

Total Corporate allocated expense
$

 
$

 
$

 
$

 
$

Adjusted EBITDA
We believe that the use of Adjusted EBITDA as a key performance measure of the results of operations enables management and investors to evaluate and compare from period to period our operating performance in a meaningful and consistent manner. Adjusted EBITDA is a supplemental measure of our performance that is not required by or presented in accordance with U.S. GAAP. Adjusted EBITDA should not be considered as an alternative to, or more meaningful than, net income (as determined in accordance with U.S. GAAP) as a measure of our operating results.
During 2016, we updated our definition of Adjusted EBITDA to exclude changes in Big Fish Games deferred revenue and to exclude depreciation and amortization from our equity investments. We also reclassified expense from our I-Gaming and Bluff Media operations from Other Investments to TwinSpires. The prior year amounts were reclassified to conform to this presentation. We also prospectively implemented a change in accounting estimate for corporate expense allocated to other operating segments to use an activity based allocation rather than a revenue based allocation.
 
Year Ended December 31,
 
'16 vs. '15 Change
 
'15 vs. '14 Change
(in millions)
2016
 
2015
 
2014
 
 
Racing
$
79.7

 
$
71.8

 
$
61.2

 
$
7.9

 
$
10.6

Casinos
125.8

 
114.9

 
107.2

 
10.9

 
7.7

TwinSpires
55.2

 
48.6

 
39.8

 
6.6

 
8.8

Big Fish Games
79.1

 
68.5

 
(0.7
)
 
10.6

 
69.2

Other Investments
2.7

 
2.9

 
1.6

 
(0.2
)
 
1.3

Corporate
(8.0
)
 
(4.2
)
 
(5.0
)
 
(3.8
)
 
0.8

Adjusted EBITDA
$
334.5

 
$
302.5

 
$
204.1

 
$
32.0

 
$
98.4

Year Ended December 31, 2016, Compared to the Year Ended December 31, 2015
Racing Adjusted EBITDA increased $7.9 million due to a $5.2 million increase at Churchill Downs in profitability from the Kentucky Derby and Oaks week driven by increased ticket sales revenue, increased media revenue and record attendance, a $1.8 million increase at Calder from reduced property taxes and insurance savings from the cessation of pari-mutuel operations, a $0.8 million increase at Arlington on higher pari-mutuel revenue associated with 37 additional host days during 2016, a $0.8 million increase at Churchill Downs from non-Kentucky Derby and Oaks week handle increases during the racing meets and a $0.6 million increase from a decrease in corporate allocated expense. Partially offsetting these improvements was a $1.3 million decrease at Fair Grounds from a decline in revenue associated with five fewer live race days in 2016 and unfavorable development of general liability insurance claims.
Casinos Adjusted EBITDA increased $10.9 million driven by a $5.1 million increase at Saratoga from a full year of management fee revenue and equity income, a $3.3 million increase at MVG from higher equity income driven primarily by market share growth and higher net revenue from successful promotional activities, a $2.7 million increase at Oxford from a strong regional gaming market and higher market share combined with operational expense efficiencies, a $1.7

47




million increase at Calder from the implementation of successful marketing and promotional campaigns and a $1.4 million decrease in corporate expense allocated to the Casinos segment. Partially offsetting these improvements was a $2.0 million decrease at our Mississippi properties due to overall market revenue declines and aggressive local promotional activity and a $1.3 million decrease at Fair Grounds Slots and VSI as strong competition from the Mississippi Gulf Coast gaming market negatively impacted the New Orleans gaming market.
TwinSpires Adjusted EBITDA increased $6.6 million driven by a $7.3 million favorable impact of increased wagering, net of content costs, associated with handle growth of 13.7% and a 23.3% increase in active players, a $1.0 million increase at Velocity driven by handle growth of 7.2% and a $0.4 million increase in other TwinSpires income. These increases were partially offset by a $0.6 million increase in net taxes and purses, which includes the benefit of a $1.7 million Pennsylvania tax refund, and a $1.5 million increase in marketing and advertising primarily associated with the addition and retention of customers acquired during Kentucky Derby and Oaks week.
Big Fish Games Adjusted EBITDA increased $10.6 million driven by a $72.5 million increase in revenue primarily from our casual and mid-core free-to-play growth, partially offset by a $36.3 million increase in platform and developer fees, a $20.2 million increase in user acquisition fees and a $5.4 million increase in other expenses.
Corporate Adjusted EBITDA decreased $3.8 million driven by a $1.3 million benefit in 2015 related to deferred compensation expense which did not recur in 2016, a $0.9 million increase in salary expense, a $0.8 million decrease in corporate allocated expense, and a $0.8 million increase in professional expense.
Year Ended December 31, 2015, Compared to the Year Ended December 31, 2014
Racing Adjusted EBITDA increased $10.6 million in 2015 due to $6.0 million of increased profitability from the Kentucky Oaks and Kentucky Derby week, $3.8 million primarily due to the cessation of Calder pari-mutuel operations, $1.4 million at Churchill Downs outside of Kentucky Oaks and Kentucky Derby week results and $0.3 million at Fair Grounds. Partially offsetting these increases was a $0.9 million decrease at Arlington resulting from lower live and simulcast racing revenue as a result of lower purse sized due to the depletion of the Horse Racing Equity Trust Fund ("HRE Trust Fund") monies in 2014.
Casinos Adjusted EBITDA increased $7.7 million in 2015 driven by a $2.7 million increase at Oxford as a result of strong revenue trends, a $2.5 million increase at Riverwalk as a result of disciplined labor and other variable expense reductions, a $1.7 million increase at MVG from growth that was partially offset by new competition, a $1.2 million increase from VSI market share growth, a $0.6 million increase from Calder primarily from freeplay reductions and a $0.7 million increase from Saratoga from management fee income and equity income. Partially offsetting these increases was a $1.7 million decrease at Fair Grounds Slots primarily driven by the impact from the introduction of a parish-wide smoking ban on April 22, 2015.
TwinSpires Adjusted EBITDA increased $6.3 million in 2015 driven by $6.0 million primarily from handle growth of 7.5% which outpaced industry performance by 6.3 percentage points as customers continue to migrate to online wagering and $1.3 million from the discontinuation of Luckity, our online real-money bingo operations. These increases were partially offset by $1.0 million in higher marketing expense related to the 2015 Triple Crown Season and Breeders’ Cup, as well as higher New York taxes due to the cancellation of a service agreement.
Big Fish Games Adjusted EBITDA increased $69.2 million in 2015 due to the full year impact of the Big Fish Games acquisition which was completed on December 16, 2014. Operating expense reflects a full year of user acquisition costs, advertising and marketing, salaries and benefits and developer and platform fees.
Other Investments Adjusted EBITDA increased $3.8 million in 2015 due to a $1.9 million reduction of Internet gaming development expense, $1.3 million from United Tote cost control efforts and bad debt expense recoveries and $0.6 million from the elimination of losses from the cessation of the print edition of BLUFF Magazine during January 2015.
Corporate Adjusted EBITDA increased $0.8 million in 2015 due to a $1.3 million decrease in deferred compensation expense related to prior periods and $3.3 million in corporate expense allocated to the other operating segments. Partially offsetting these increases were $3.4 million in salaries, benefits and bonus compensation and $0.4 million in increased recruiting and professional fees.

48




Reconciliation of Comprehensive Income to Adjusted EBITDA
 
Years Ended December 31,
 
'16 vs. '15 Change
 
'15 vs. '14 Change
(in millions)
2016
 
2015
 
2014
 
 
Comprehensive income
$
107.5

 
$
64.7

 
$
46.3

 
$
42.8

 
$
18.4

Foreign currency translation, net of tax
(0.2
)
 
0.5

 
0.1

 
(0.7
)
 
0.4

Net change in pension benefits, net of tax
0.8

 

 

 
0.8

 

Net income
108.1

 
65.2

 
46.4

 
42.9

 
18.8

Additions:
 
 
 
 
 
 


 


Depreciation and amortization
108.6

 
109.7

 
68.3

 
(1.1
)
 
41.4

Interest expense
43.7

 
28.6

 
20.8

 
15.1

 
7.8

Income tax provision
60.0

 
46.9

 
30.1

 
13.1

 
16.8

EBITDA
320.4

 
250.4

 
165.6

 
70.0

 
84.8

 
 
 
 
 
 
 


 


Adjustments to EBITDA:
 
 
 
 
 
 


 


Selling, general and administrative:
 
 
 
 
 
 


 


Stock-based compensation expense
18.9

 
13.8

 
11.9

 
5.1

 
1.9

Other charges
2.5

 

 
(0.4
)
 
2.5

 
0.4

TwinSpires operating expense

 

 
3.2

 

 
(3.2
)
Other income (expense):
 
 
 
 
 
 


 


Interest, depreciation and amortization expense related to equity investments
10.0

 
8.5

 
8.7

 
1.5

 
(0.2
)
Other charges and recoveries, net
0.5

 
(5.8
)
 
2.6

 
6.3

 
(8.4
)
Acquisition expenses, net
3.4

 
21.7

 
10.2

 
(18.3
)
 
11.5

Gain on Calder land sale
(23.7
)
 

 

 
(23.7
)
 

Calder exit costs
2.5

 
13.9

 
2.3

 
(11.4
)
 
11.6

Total adjustments to EBITDA
14.1

 
52.1

 
38.5

 
(38.0
)
 
13.6

Adjusted EBITDA
$
334.5

 
$
302.5