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Article by DailyStocks_admin    (11-13-12 01:18 AM)

Description

Filed with the SEC from Nov 01 to Nov 07:
Churchill Downs (CHDN)
Gamco Investors (GBL) disclosed that it now owns 1,167,722 shares (6.7%) after it bought 85,813 shares from Sept. 4 through Oct. 31 at prices ranging from $55.12 to $64.76. Gamco also disclosed selling 1,000 shares from Sept. 14 through Oct. 10 in a range from $56.00 to $62.05.
BUSINESS OVERVIEW

Introduction

Churchill Downs Incorporated (the “Company”) is a diversified provider of pari-mutuel horseracing, casino gaming, entertainment, and is the country’s premier source of online account wagering on horseracing events. We offer gaming products through our casino in Mississippi, our slot and video poker operations in Louisiana and our slot operations in Florida. We were organized as a Kentucky corporation in 1928. Our principal executive offices are located at 700 Central Avenue, Louisville, Kentucky, 40208.

Churchill Downs

The Churchill Downs racetrack site and improvements (the “Churchill facility”) are located in Louisville, Kentucky. Churchill Downs has conducted thoroughbred racing continuously since 1875 and is internationally known as the home of the Kentucky Derby. The Churchill facility consists of approximately 147 acres of land with a one-mile dirt track, a seven-eighths (7/8) mile turf track, permanent grandstands, luxury suites and a stabling area. The Churchill facility accommodates approximately 52,000 persons in our clubhouse, grandstand, Jockey Club Suites and Finish Line Suites. The facility also includes a simulcast wagering facility designed to accommodate 1,500 persons, a general admissions area, and food and beverage facilities ranging from concessions to full-service restaurants. The Churchill facility also has a saddling paddock, accommodations for groups and special events, parking areas for the public and our racetrack office facilities. The stable area has barns sufficient to accommodate approximately 1,400 horses, a 114-room dormitory and other facilities for backstretch personnel. Additionally, during 2010, the Churchill facility added permanent lighting in order to accommodate night racing events.

To supplement the facilities at Churchill Downs, we provide additional stabling facilities sufficient to accommodate 500 horses and a three-quarter (3/4) mile dirt track, which is used for training thoroughbreds, at a training facility also located in Louisville. Referred to as Trackside Louisville, this facility provides a base of operation for many horsemen between the Spring and Fall meets and enables us to attract new horsemen to race at Churchill Downs. Trackside Louisville is not open to stabling during the winter months.

As part of financing improvements to the Churchill facility, during 2002, we transferred title of the Churchill facility to the City of Louisville, Kentucky and leased back the facility. Subject to the terms of the lease, we can re-acquire the facility at any time for $1.00.

Calder

The Calder racetrack and improvements (the “Calder facility”) are located in Miami-Dade County, Florida. The Calder facility is adjacent to Sun Life Stadium, home of the Miami Dolphins, and consists of approximately 231 acres of land with a one-mile dirt track, a seven-eighths (7/8) mile turf track, a training area with a five-eighths (5/8) mile training track, permanent grandstands and a stabling area. The Calder facility includes clubhouse and grandstand seating for approximately 15,000 persons, a general admissions area and food and beverage facilities ranging from concessions to a buffet dining area. The stable area consists of a receiving barn, feed rooms, tack rooms, detention barns and living quarters and can accommodate approximately 1,800 horses. The Calder facility also features a saddling paddock, parking areas for the public and office facilities.

Fair Grounds

The Fair Grounds racetrack facility, located in New Orleans, Louisiana, consists of approximately 145 acres of land, a one mile dirt track, a seven-eighths (7/8) mile turf track, permanent grandstands and a stabling area. The facility includes clubhouse and grandstand seating for approximately 5,000 persons, a general admissions area and food and beverage facilities ranging from concessions to clubhouse dining. The stable area consists of a receiving barn, feed rooms, tack rooms, detention barns and living quarters that can accommodate 132 persons and approximately 2,000 horses. The Fair Grounds facility also features a saddling paddock, parking areas and office facilities.

Off-Track Betting Facilities

Twelve of our OTBs are collectively branded “Trackside” to create a common identity for our OTB operations. Trackside Louisville, which is open for simulcast wagering only on big event days, such as the Kentucky Derby and the Kentucky Oaks, and during days the Churchill facility is being prepared for special events, is an extension of Churchill Downs and is located approximately five miles from the Churchill facility. This 100,000-square-foot property, on approximately 88 acres of land, is a thoroughbred training and stabling annex that has audio visual capabilities for pari-mutuel wagering, seating for approximately 3,000 persons, parking, and related facilities for simulcasting races.

Arlington Park operates eleven Trackside OTBs that accept wagers on races at Arlington Park as well as on races simulcast from other locations. One OTB is located on the Arlington Park property and another is located in East Moline, Illinois on approximately 122 acres. Arlington Park also leases two OTBs located in Waukegan, Illinois consisting of approximately 25,000 square feet, and Chicago, Illinois consisting of approximately 18,000 square feet, which was relocated from its previous location in January 2012. Arlington Park operates seven OTBs within existing non-owned Illinois restaurants under license agreements, including the Villa Park OTB, a new location which opened in July 2011. These seven OTBs are located in Villa Park, Rockford, South Elgin, McHenry, South Beloit, Lockport and Hodgkins and opened in July 2011, December 2009, December 2002, June 2003, February 2004, February 2007 and December 2007, respectively.

Fair Grounds operates eleven OTBs that accept wagers on races at Fair Grounds as well as on races simulcast from other locations. One OTB is located on the Fair Grounds property. Another is located in Kenner, Louisiana consisting of approximately 4.3 acres. Fair Grounds also leases nine OTBs located in these southeast Louisiana communities: Chalmette, which opened in December 2009, consisting of approximately 8,000 square feet of space; Covington, which consists of approximately 7,000 square feet of space; Elmwood, which consists of approximately 15,000 square feet of space; Gretna, which consists of approximately 20,000 square feet of space; Houma, which consists of approximately 10,000 square feet of space; LaPlace, which consists of approximately 7,000 square feet of space; Metairie, which consists of approximately 9,000 square feet of space; Boutte, which consists of approximately 10,000 square feet of space and Thibodaux, which consists of approximately 5,000 square feet of space. Video poker is offered at Chalmette, Kenner, Elmwood, Gretna, Houma, LaPlace, Boutte, Metairie and Thibodaux.

Kentucky Off-Track Betting, LLC

We are a 25% owner of Kentucky Off-Track Betting, LLC (“KOTB”). KOTB’s purpose is to own and operate facilities for the simulcasting of races and the acceptance of wagers on such races at Kentucky locations other than a racetrack. These OTBs may be located no closer than 75 miles from an existing racetrack without the racetrack’s consent and in no event closer than 50 miles from an existing racetrack. Each OTB must first be approved by the Kentucky Horse Racing Commission (“KHRC”) and the local government where the facility is to be located. KOTB currently owns or leases and operates OTBs in Corbin, Maysville and Jamestown, Kentucky that conduct simulcast wagering year-round.

OTBs developed by KOTB provide additional markets for the intrastate simulcasting of and wagering on Churchill Downs’ live races and interstate simulcasting of and wagering on out-of-state signals. KOTB did not contribute significantly to our operations in 2011 and is not anticipated to have a substantial impact on our operations in the future. Our investment in KOTB is not material to our financial position or results of operations.

Licensing and Suitability Determinations

Gaming laws require us, each of our subsidiaries engaged in gaming operations, certain of our directors, officers and employees, and in some cases, certain of our shareholders, to obtain licenses from gaming 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 gaming 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, gaming 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 gaming 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 gaming operator. Licenses under gaming laws are generally not transferable without approval. Licenses in most of the jurisdictions in which we conduct gaming operations are granted for limited durations and require renewal from time to time. There can be no assurance that any of our licenses will be renewed. The failure to renew any of our licenses could have a material adverse effect on our gaming operations.

In addition to our subsidiaries engaged in gaming operations, gaming 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 gaming licensee. Our officers, directors and certain key employees must file applications with the gaming authorities and may be required to be licensed, qualify or be found suitable in many jurisdictions. Gaming authorities may deny an application for licensing for any cause which they deem reasonable. Qualification and suitability determinations require submission of detailed personal and financial information followed by a thorough investigation. The applicant must pay all the costs of the investigation. Changes in licensed positions must be reported to gaming authorities and in addition to their authority to deny an application for licensure, qualification or a finding of suitability, gaming authorities have jurisdiction to disapprove a change in a corporate position.

If one or more gaming 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, gaming 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 gaming authorities, and gaming authorities may require such holders to apply for qualification or a finding of suitability. Most gaming 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 gaming affiliates, or the taking of any other action which gaming 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 gaming 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 gaming 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 person to relinquish his voting securities including, if necessary, the immediate purchase of said voting securities for cash at fair market value.

Violations of Gaming Laws

If we or our subsidiaries violate applicable gaming laws, our gaming licenses could be limited, conditioned, suspended or revoked by gaming authorities, and we and any other persons involved could be subject to substantial fines. Further, a supervisor or conservator can be appointed by gaming authorities to operate our gaming properties, or in some jurisdictions, take title to our gaming assets in the jurisdiction, and under certain circumstances, earnings generated during such appointment could be forfeited to the applicable state or states. Furthermore, violations of laws in one jurisdiction could result in disciplinary action in other jurisdictions. As a result, violations by us of applicable gaming laws could have a material adverse effect on our gaming operations.

Some gaming jurisdictions prohibit certain types of political activity by a gaming licensee, its officers, directors and key employees. A violation of such a prohibition may subject the offender to criminal and/or disciplinary action.

Reporting and Record-keeping Requirements

We are required periodically to submit detailed financial and operating reports and furnish any other information about us and our subsidiaries which gaming authorities may require. Under federal law, we are required to record and submit detailed reports of currency transactions involving greater than $10,000 at our casinos and racetracks, as well as any suspicious activity that may occur at such facilities. Failure to comply with these requirements could result in fines or cessation of operations. We are required to maintain a current stock ledger which may be examined by gaming 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 gaming 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 gaming laws.

Review and Approval of Transactions

Substantially all material loans, leases, sales of securities and similar financing transactions by us and our subsidiaries must be reported to and in some cases approved by gaming authorities. Neither we nor any of our subsidiaries may make a public offering of securities without the prior approval of certain gaming 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 gaming authorities. Entities seeking to acquire control of us or one of our subsidiaries must satisfy gaming authorities with respect to a variety of stringent standards prior to assuming control. Gaming authorities may also require controlling stockholders, officers, directors and other persons having a material relationship or involvement with the entity proposing to acquire control, to be investigated and licensed as part of the approval process relating to the transaction.

License Fees and Gaming Taxes

We pay substantial license fees and taxes in many jurisdictions, including some of the counties and cities in which our operations are conducted, in connection with our casino gaming operations, computed in various ways depending on the type of gaming 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 gaming revenues received; the number of gaming 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, gaming tax rates are graduated such that they increase as gross gaming revenues increase. Furthermore, tax rates are subject to change, sometimes with little notice, and such changes could have a material adverse effect on our gaming operations. In addition to taxes specifically unique to gaming, we are required to pay all other applicable taxes.

Operational Requirements

In most jurisdictions, we are subject to certain requirements and restrictions on how we must conduct our gaming operations. In certain states, we are required to give preference to local suppliers and include minority and women-owned businesses as well as organized labor in construction projects to the maximum extent practicable as well as in general vendor business activity. Similarly, we may be required to give employment preference to minorities, women and in-state residents in certain jurisdictions. In addition, our ability to conduct certain types of games, introduce new games or move existing games within our facilities may be restricted or subject to regulatory review and approval. Some of our operations are subject to restrictions on the number of gaming positions we may have and the maximum wagers allowed to be placed by our customers.

Horseracing and Pari-Mutuel Wagering Regulations

Horseracing is a highly regulated industry. In the U.S., individual states control the operations of racetracks located within their respective jurisdictions with the intent of, among other things, protecting the public from unfair and illegal gambling practices, generating tax revenue, licensing racetracks and operators and preventing organized crime from being involved in the industry. Although the specific form may vary, states that regulate horseracing generally do so through a horseracing commission or other gambling regulatory authority. In general, regulatory authorities perform background checks on all racetrack owners prior to 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 and/or carry on business, including, but not limited to, the Florida Department of Business and Professional Regulation, Division of Pari-Mutuel Wagering (“DPW”), the Illinois Racing Board (“IRB”), the Kentucky Horse Racing Commission (“KHRC”), the Louisiana State Racing Commission (“LSRC”) and the Oregon Racing Commission (“ORC”).

In the United States, interstate pari-mutuel wagering on horseracing is subject to the federal Interstate Horseracing Act of 1978 (“IHA”) and its amendment in 2000. As a result of this statute, racetracks can commingle wagers from different racetracks and wagering facilities and broadcast horseracing events to other licensed establishments.

Kentucky’s racetracks, including Churchill Downs, are subject to the licensing and regulation of the KHRC. The KHRC is responsible for overseeing horseracing and regulating the state equine industry. Licenses to conduct live thoroughbred racing meets and to participate in simulcasting 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. Generally, there is no substantial change from year to year in the racing dates awarded to each racetrack.

In Florida, licenses to conduct live thoroughbred racing and to participate in simulcast wagering are approved by the DPW. The DPW is responsible for overseeing the network of state offices located at every pari-mutuel wagering facility, as well as issuing the permits necessary to operate a pari-mutuel wagering facility. The DPW also issues annual licenses for thoroughbred, standardbred and quarterhorse races but does not approve the specific live race days.

Calder may face direct competition from other Florida racetracks, including Miami-area racetracks, and host more or fewer live racing dates in the future. In recent years, Calder has elected to conduct fewer days of live racing in order to increase purses and maximize the quality of the racing product. During December, 2011, Calder filed its race dates request for the 2012-2013 racing season to the Florida DPW. Calder’s 2012-2013 request calls for live racing from July 1, 2012 through December 2, 2012, and from April 1, 2013 through June 30, 2013.

In Illinois, licenses to conduct live thoroughbred racing and to participate in simulcast wagering are approved by the IRB. Generally, there is no substantial change from year to year in the number of racing dates awarded to each racetrack.

In Louisiana, licenses to conduct live thoroughbred racing and to participate in simulcast wagering are approved by the LSRC. The LSRC is responsible for overseeing the awarding of licenses for the conduct of live racing meets, the conduct of thoroughbred horseracing, the types of wagering which may be offered by pari-mutuel facilities and the disposition of revenue generated from wagering. Off-track wagering is also regulated by the LSRC. Louisiana law requires live racing at a licensed racetrack for at least 80 days over a 20 week period each year to maintain the license and to conduct gaming.

Additionally, with the addition of slot machines at Fair Grounds, Louisiana law requires live quarter horseracing to be conducted at the racetrack. We conducted twelve days of quarter horseracing in 2011 and plan to offer twelve days of quarter horseracing during 2012.

CEO BACKGROUND

Leonard S. Coleman, Jr.

63

Director since 2001
Mr. Coleman has served in multiple senior leadership positions in the major professional sports industry, including: Senior Advisor, Major League Baseball from 1999 to 2005; President, National League of Professional Baseball Clubs from 1994 to 1999. Among other exceptional personal and professional attributes, Mr. Coleman provides a unique perspective and is well suited to serve on the Board of the Company because of his experience as a senior executive in the major professional sports industry and as a director of large publicly traded companies in a variety of industries. Mr. Coleman currently holds the following leadership positions with other entities: Director, The Omnicom Group; Director, Electronic Arts, Inc.; Director, Avis-Budget Group, Inc.; Director, Director, H. J. Heinz Co.; and Director, Aramark Corporation; Chairman, The Jackie Robinson Foundation; Director, Spoleto Festival, Metropolitan Opera, The Schuman Fund and Urban America; Former Chairman, ARENACO, Inc. (subsidiary of New York Yankees/New Jersey Nets).


Craig J. Duchossois

67

Director since 2000
Mr. Duchossois serves as the Chief Executive Officer and a Director of The Duchossois Group, Inc., (a private holding company with diversified business interests comprised of companies with leading brands in the residential security, lighting and convenience products markets and the commercial control, automation and digital media markets). While Mr. Duchossois was originally nominated to serve as a Director of the Company pursuant to the stockholder’s agreement between the Company and Duchossois Industries, Inc. (as described above), the Company has been and will continue to be well served by Mr. Duchossois’ experience and proven capabilities in the international marketplace and technology industries in overseeing a diverse group of companies that have over 6,000 employees worldwide with operations located in over 30 countries, as well as his financial and business acumen. Mr. Duchossois currently holds the following leadership positions with other entities: Chairman, The Chamberlain Group, Inc. (access control devices); Director, AMX LLC; Director, Milestone AV Technologies LLC (audio-visual mounting equipment and display solutions); a Managing Member, HeathCo LLC (motion-activated lighting, door chimes and wireless lighting controls); Chief Executive Officer, TCMC, Inc. (investments); not-for-profit board memberships include Culver Education Foundation, Illinois Institute of Technology, University of Chicago, Kellogg Graduate School of Management, World Business Chicago, the University of Chicago Hospitals, Executive’s Club of Chicago, Economic Club, Chicago Council on Global Affairs and the Marine Corps Scholarship Foundation. He is a member of the Chief Executive Officer’s Organization, World Presidents Organization, and the Civic Committee of the Commercial Club of Chicago. Mr. Duchossois also serves as an advisory board member for Frontenac Company and The Edgewater Funds. He is also vice-chairman for CEO’s Against Cancer and a past-Chairman of the Board of Visitors for the United States Naval Academy.

Robert L. Evans

59

Director since 2006
Mr. Evans is the Chairman of the Board and Chief Executive Officer of the Company. Please see Mr. Evans’ positions with the Company, terms of office and other biographical information on page 6. Mr. Evans’ role as the Chairman and Chief Executive Officer of the Company as well as his proven entrepreneurial experience and abilities, his experience in senior executive positions at some of North America’s leading manufacturing (Mr. Evans served in a variety of management positions for Caterpillar Inc.), business consulting (former Managing Partner of the Americas Supply Chain Practice for the $17 billion Accenture Ltd., formerly Andersen Consulting), technology (former President and Chief Operating Officer of Aspect Development Inc.) and private equity companies (Co-Founder and former Managing Director of Symphony Technology Group, a private equity firm that provides investment capital and strategic direction to software and services companies), and his experience in the thoroughbred horse racing industry qualify Mr. Evans to serve as a Director of the Company. Mr. Evans currently holds the following leadership positions with other entities: President, Tenlane Farm, LLC (a thoroughbred breeding and racing operation); Director, IronPlanet (Audit Committee). Mr. Evans is a former director of ATC Technology Corp.


G. Watts Humphrey, Jr.

67

Director since 1995
Mr. Humphrey is the President, GWH Holdings, Inc. (private investment company); Chairman, IPEG (international plastics machinery equipment company) and Centria (manufacturer and erector of metal building systems); and Owner, Shawnee Farm (thoroughbred breeding and racing operation). Among other exceptional personal and professional attributes, Mr. Humphrey has extensive experience in overseeing a diverse group of companies as well as in significant leadership roles throughout the thoroughbred horseracing industry that qualify Mr. Humphrey to serve as a member of the Board of Directors. Mr. Humphrey currently holds the following leadership positions with other entities: Member of The Jockey Club; Vice-Chairman, Blood-Horse Publications; Director, Keeneland Association; Member of the Board of Trustees, Breeders’ Cup, Ltd.; Vice-Chairman, Shaker Village of Pleasant Hill; Director, Smithfield Trust Company; Director, Wausau Paper; Member of the Board of Trustees, Centre College. Mr. Humphrey previously served as Chairman of the Federal Reserve Bank—Fourth District.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

We are a diversified provider of pari-mutuel horseracing, casino gaming, entertainment, and is the country’s premier source of online account wagering on horseracing events. We offer gaming products through our casino in Mississippi, our slot and video poker operations in Louisiana and our slot operations in Florida.

Recent Developments

Ohio Joint Venture

During March 2012, we announced an agreement to enter into a 50% joint venture with Delaware North Companies Gaming & Entertainment Inc. (“DNC”) to develop a new harness racetrack and video lottery terminal (“VLT”) gaming facility in Lebanon, Ohio. The project will involve the relocation of the current operations of Lebanon Raceway to a new location to be selected along the Interstate 75 corridor between Cincinnati and Dayton.

Through the joint venture agreement, we and DNC have formed a new company, Miami Valley Gaming & Racing LLC (“MVG”), which will manage both our and DNC’s interests in the development and operation of the racetrack and VLT gaming facility. MVG has entered into an asset purchase agreement through which it will acquire the harness racing licenses and certain assets held by Lebanon Trotting Club Inc. and Miami Valley Trotting Inc., the two entities conducting harness racing at the existing Lebanon Raceway facility at the Warren County Fairgrounds in Lebanon, Ohio. MVG will acquire these assets for an aggregate purchase price of $60 million, of which $10 million will be paid in cash, with the remaining $50 million to be funded thorough a promissory note delivered at closing. An additional $10 million could be paid to the sellers if certain conditions are met with respect to the performance of the VLT facility over time.

We and DNC will contribute, in the aggregate, up to $90 million in equity to fund the asset purchase agreement for the existing racing licenses and racetrack assets, the initial VLT license fees and acquisition costs for the land eventually selected for development. Completion of the asset purchase transaction and development of the new racetrack and VLT gaming facility are subject to regulatory approvals and other customary closing conditions, including the resolution of any outstanding legal challenges threatening the legality of VLT gaming. In the event the transaction is not completed, the operating agreement will be terminated and the joint venture will be liquidated.

Bluff Media Acquisition

During February 2012, we announced the acquisition of the assets of Bluff Media, a multimedia poker content brand and publishing company. The acquisition price is not material to our financial position as of December 31, 2011. Bluff Media’s assets include the poker periodical, BLUFF Magazine ; BLUFF Magazine’s online counterpart, BluffMagazine.com; ThePokerDB, a comprehensive online database and resource that tracks and ranks the performance of poker players and tournaments; and various other news and content forums. Bluff Media also publishes Fight! Magazine , a premier mixed martial arts magazine and its online counterpart, FightMagazine.com. In addition to our intention to further expand and build upon Bluff Media’s current content and business model, we believe this acquisition potentially provides us with new business avenues to pursue in the event there is a liberalization of state or federal laws with respect to Internet poker in the United States. The assets and liabilities assumed from the acquisition will not have a material impact on our consolidated financial statements or related disclosures.

Horse Racing Equity Trust Fund

Beginning in 2009, we have received payments from the Horse Racing Equity Trust Fund (the “HRE Trust Fund”) related to subsidies paid by Illinois riverboat casinos in accordance with Public Acts 94-804 and 95-1008 (the “Public Acts”). The HRE Trust Fund was established to fund operating and capital improvements at Illinois racetracks via a 3% “surcharge” on revenues of Illinois riverboat casinos that meet a predetermined revenue threshold. The funds were to be distributed with approximately 58% of the total to be used for horsemen’s purses and the remaining monies to be distributed to Illinois racetracks. The monies received from the Public Acts were placed into an Arlington Park escrow account due to a temporary restraining order (“TRO”) imposed by the United States District Court for the Northern District of Illinois, Eastern Division, pending the resolution of a lawsuit brought by certain Illinois casinos that were required to pay funds to the HRE Trust Fund (“Casinos”), and the monies were recognized as restricted cash and a deferred riverboat subsidy liability on the Company’s Consolidated Balance Sheet. On July 8, 2011, the Seventh Circuit Court of Appeals issued a thirty-day stay of dissolution of the TRO to allow the Casinos to request a further stay of dissolution of the TRO pending their petition for certiorari to the United States Supreme Court. On August 5, 2011, the United States Supreme Court denied an application by the Casinos to further stay the dissolution of the TRO.

On August 9, 2011, the stay of dissolution expired and the TRO dissolved, which terminated the restrictions on our ability to access the funds from the HRE Trust Fund held in the escrow account. As of December 31, 2011, we have received $45.4 million in proceeds, of which $26.1 million has been designated for Arlington Park purses. Arlington Park intends to use the remaining $19.3 million of the proceeds to improve, market, and maintain or otherwise operate its racing facility in order to conduct live racing, which we have recognized as miscellaneous other income in our Consolidated Statements of Net Earnings and Comprehensive Earnings for the year ended December 31, 2011.

Hoosier Park Consideration

In accordance with the sale of our ownership interest in Hoosier Park, L.P. (“Hoosier Park”) to Centaur Racing, LLC (“Centaur”) during 2007, we received a promissory note (the “Note”) in the amount of $4.0 million plus interest. The Partnership Interest Purchase Agreement documenting such sale to Centaur also includes a contingent consideration provision whereby we are entitled to payments of up to $15 million on the date which is eighteen months after the date that slot machines are operational at Hoosier Park. During June 2008, Hoosier Park commenced its slot operations, fulfilling the terms of the contingency provision. However, due to uncertainties regarding collectability, we did not recognize the contingent consideration at the date of sale.

On March 6, 2010, Centaur and certain of its affiliates filed Chapter 11 bankruptcy petitions in the United States District Court for the District of Delaware. On February 1, 2011, we entered into a settlement agreement with Centaur and its affiliates whereby, subject to the conditions to the implementation of Centaur’s reorganization plan being met, we would receive a cash payment of $8.5 million. On February 18, 2011, the U.S. Bankruptcy Court in Delaware approved Centaur’s reorganization plan and our settlement agreement with Centaur. On October 1, 2011, we received $5.1 million in repayment of the amount owed to the Company pursuant to the Note. In addition, we also received $3.4 million as the final settlement of the contingent consideration provision of the Partnership Interest Purchase Agreement, which we recognized as a gain in discontinued operations during the year ended December 31, 2011.

Income Taxes

During 2003, we entered into a Tax Increment Financing Agreement (“TIF”) with the Commonwealth of Kentucky. Pursuant to this agreement, we are entitled to receive reimbursement of 80% of the increase in Kentucky income and sales tax driven by the 2005 renovation of the Churchill facility. During the year ended December 31, 2011, we resolved uncertainties related to the computation of the tax increase and recognized a $3.1 million reduction in operating expenses and a $1.3 million reduction in income tax expense, net of federal taxes related to the years 2005 through 2010 and the year ended December 31, 2011.

During 2011, we received a refund of $8.5 million related to the overpayment of our 2010 federal income taxes and a refund of $1.9 million related to an amended prior year federal income tax return that served to adjust state lobbying expense deductions.

Convertible Note Payable Conversion

During 2004, we acquired 452,603 shares of our common stock from a shareholder in exchange for a convertible promissory note in the principal amount of $16.7 million which could be immediately convertible at any time at the option of the shareholder into shares of our common stock. During the year ended December 31, 2011, the shareholder exercised his conversion right, and the convertible note payable with a related party was paid through the issuance of 452,603 shares of our common stock. We recognized a gain on conversion of $2.7 million in miscellaneous other income and interest expense of $1.4 million as a result of the conversion and the elimination of the short forward contract liability and long put option asset. The conversion of the note payable resulted in a favorable impact on net earnings of approximately $0.8 million during the year ended December 31, 2011.

Kentucky Tornado

On June 22, 2011, a tornado caused damage to portions of Louisville, Kentucky including Churchill Downs, which sustained damage to its stable area, as well as several other buildings on the backside of the racetrack. The Company cancelled one day of its live racing meet as a result of the incident. The Company carries property and casualty insurance as well as business interruption insurance subject to a $0.5 million deductible. During March 2012, we finalized our insurance claim. For the year ended December 31, 2011, we received $1.0 million and recorded insurance recoveries in excess of losses of $0.6 million as a reduction of selling, general and administrative expenses.

Mississippi River Flooding

On May 7, 2011, the Board of Mississippi Levee Commissioners ordered the closure of the Mainline Mississippi River Levee as a result of the Mississippi River flooding, and the Company temporarily ceased operations at Harlow’s Casino Resort & Hotel (“Harlow’s”) on May 6, 2011. On May 12, 2011, the property sustained damage to its 2,600-seat entertainment center and a portion of its dining facilities. On June 1, 2011, Harlow’s resumed casino operations with temporary dining facilities. During December 2011, we announced a renovation and improvement project which is expected to be completed by early 2013, including a new buffet area, steakhouse, business center, spa facility, fitness center, pool and a multi-purpose event center.

The Company carries flood, property and casualty insurance as well as business interruption insurance subject to a $1.3 million deductible for damages. As of December 31, 2011, we have recorded a reduction of property and equipment of $8.5 million and incurred $1.4 million in repair expenditures, with an offsetting insurance recovery receivable for the estimated damage associated with the flood. We are currently working with our insurance carriers to finalize our claim, and, during the year ended December 31, 2011, we received $3.5 million in partial settlement of our claim. We received an additional $5.0 million during January 2012.

Mississippi Wind Damage

On February 24, 2011, severe storms caused damage to portions of Mississippi, including Greenville, Mississippi, the location of Harlow’s. The property sustained damage to a portion of the hotel, including its roof, furniture and fixtures in approximately 61 hotel rooms and fixtures in other areas of the hotel. The hotel was closed to customers for renovations during the first quarter of 2011 and reopened during June 2011. The Company carries property and casualty insurance as well as business interruption insurance subject to a $0.1 million deductible for damages. We recorded a reduction of property and equipment of $1.4 million and incurred $1.1 million in repair expenditures with an offsetting insurance recovery receivable for the estimated wind damage. We filed a preliminary claim with our insurance carriers for $1.0 million in damages, which we received during 2011. Approximately $0.4 million of insurance recoveries received were recorded as a reduction of selling, general and administrative expenses against losses related to the interruption of business caused by the wind damage during the year ended December 31, 2011. We received an additional $2.7 million from our insurance carriers during February 2012. We will recognize insurance recoveries in excess of losses of $0.9 million as a reduction of selling, general and administrative expenses during the three months ending March 31, 2012.

Legislative and Regulatory Changes

Please refer to subheading “K. Legislative Changes” in Item 1. “Business” of this Annual Report on Form 10-K for information regarding legislative and regulatory changes.

Critical Accounting Policies and Estimates

Our Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States. Accordingly, we are required to make estimates, judgments and assumptions that we believe are reasonable based on our historical experience, contract terms, observance of known trends in our company and the industry as a whole and information available from other outside sources. Our estimates affect the reported amounts of assets and liabilities and related disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those initial estimates.

Our most significant estimates relate to the valuation of property and equipment, receivables, goodwill and other intangible assets, which may be significantly affected by changes in the regulatory environment in which we operate, and to the aggregate costs for self-insured liability and workers’ compensation claims. Additionally, estimates are used for determining income tax liabilities.

We review the carrying values of goodwill at least annually during the first quarter of each year or whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. In assessing whether goodwill is impaired, the fair value of the related reporting unit is compared to its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test consists of comparing the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized equal to such excess. The implied fair value of goodwill is determined in the same manner as when determining the amount of goodwill recognized in a business combination.

We consider our slots gaming rights and trademark intangible assets as indefinite-lived intangible assets that do not require amortization based on our future expectations to operate our gaming facilities indefinitely, as well as our historical experience in renewing these intangible assets at minimal cost with various state gaming commissions. Rather, these intangible assets are tested annually, or more frequently, if indicators of impairment exist, for impairment by comparing the fair value of the recorded assets to their carrying amount. If the carrying amount of the slots gaming rights and trademark intangible assets exceed their fair value, an impairment loss is recognized.

We assign estimated useful lives to our definite-lived intangible assets based on the period of time the asset is expected to contribute directly or indirectly to future cash flows. We consider certain factors when assigning useful lives such as legal, regulatory, competition and other economic factors. Intangible assets with definite lives are amortized using the straight-line method.

While we believe that our estimates of future revenues and cash flows are reasonable, different assumptions could materially affect our assessment of useful lives and fair values. Changes in assumptions may cause modifications to our estimates for amortization or impairment, thereby impacting our results of operations. If the estimated lives of our definite-lived intangible assets were to decrease based on the factors mentioned above, amortization expense could increase significantly.

During 2012, we intend to adopt FASB ASU 2011-08, Intangibles-Goodwill and Other: Testing Goodwill for Impairment , which permits an entity to qualitatively assess whether the fair value of a reporting unit is less than its carrying value. We do not expect this adoption to have a material impact on our consolidated financial statements.

Our business can be impacted positively and negatively by legislative and regulatory changes, by economic conditions and by gaming competition. A significant negative impact from these activities could result in a significant impairment of our property and equipment and/or our goodwill and indefinite-lived intangible assets in accordance with generally accepted accounting principles.

Additional information regarding how our business can be impacted by competition and legislative changes is included in subheading “J. Competition” and subheading “K. Legislative Changes”, respectively, in Item 1. “Business” of this Annual Report on Form 10-K.

In connection with losses incurred from natural disasters, insurance proceeds are collected on existing business interruption and property and casualty insurance policies. When losses are sustained in one period and the amounts to be recovered are collected in a subsequent period, management uses estimates and judgment to determine the amounts that are probable of recovery under such policies. Estimated losses, net of anticipated insurance recoveries, are recognized in the period the natural disaster occurs and the amount of the loss is determinable. Insurance recoveries in excess of estimated losses are recognized when realizable.

We also use estimates and judgments for financial reporting to determine our current tax liability, as well as those taxes deferred until future periods. Net deferred and accrued income taxes represent significant assets and liabilities of the Company. In accordance with the liability method of accounting for income taxes, we recognize the amount of taxes payable or refundable for the current year and deferred tax assets and liabilities for the future tax consequences of events that have been recognized in our consolidated financial statements or tax returns.

Adjustments to deferred taxes are determined based upon changes in differences between the book basis and tax basis of our assets and liabilities, measured by enacted tax rates we estimate will be applicable when these differences are expected to reverse. Changes in current tax laws, enacted tax rates or the estimated level of taxable income or non-deductible expenses could change the valuation of deferred tax assets and liabilities and affect the overall effective tax rate and tax provision.

We maintain an allowance for doubtful accounts receivable that we have deemed to have a high risk of uncollectibility. We analyze historical collection trends and customer creditworthiness when evaluating the adequacy of our allowance for doubtful accounts receivable. Any changes in our assumptions or estimates could impact our bad debt expense and results of operations.

In 2011, our business insurance renewals included substantially the same coverage and retentions as in previous years. We estimate insurance liabilities for workers’ compensation and general liability losses based on our historical loss experience, certain actuarial assumptions of loss development factors and current industry trends. Any changes in our assumptions, actuarial assumptions or loss experience could impact our total insurance cost and overall results of operations.

Our significant accounting policies are more fully described in Note 1 to the Consolidated Financial Statements included in Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

Consolidated Net Revenues

Our net revenues and earnings are significantly influenced by our racing calendar. Therefore, revenues and operating results for any interim quarter are not generally indicative of the revenues and operating results for the year, and may not be comparable with results for the corresponding period of the previous year. We historically have had fewer live racing days during the first quarter of each year, and the majority of our live racing revenue occurs during the second quarter, with the running of the Kentucky Derby and Kentucky Oaks. Information regarding racing dates at our facilities for 2012 and 2011 is included in Subheading “C. Live Racing” in Item 1. “Business” of this Annual Report on Form 10-K.

In the prior year classification of our Consolidated Statement of Net Earnings and Comprehensive Earnings, we included admissions, sponsorships and licensing rights, food and beverage sales and similar items in other operating net revenues. During 2011, we expanded the classification of our Consolidated Statements of Net Earnings and Comprehensive Earnings to include net revenues and operating expenses associated with our Racing Operations, Gaming, Online Business and Other Investments operating segments. These reclassifications, which had no impact on operating income, results of operations, or cash flows, are defined as follows:

Racing: net revenues and corresponding operating expenses associated with commissions earned on wagering at the Company’s racetracks, off-track betting facilities (“OTBs”) and simulcast fees earned from other wagering sites. In addition, amounts include ancillary revenues and expenses generated by the pari-mutuel facilities including admissions, sponsorships and licensing rights, food and beverage sales and fees for the alternative uses of its facilities.

Gaming: net revenues and corresponding operating expenses generated from slot machines, table games and video poker. In addition, it includes ancillary revenues and expenses generated by food and beverage sales, hotel operations revenue and miscellaneous other revenue.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview
We are a diversified provider of pari-mutuel horseracing, casino gaming, entertainment and the country’s premier source of online account wagering on horseracing events.

Recent Developments
Riverwalk Casino and Hotel Acquisition
On October 23, 2012, we completed our acquisition of Riverwalk in Vicksburg, Mississippi for cash consideration of approximately $141.0 million. The transaction includes the acquisition of a 25,000-square-foot casino, an 80-room hotel, a 5,600-square-foot event center and dining facilities on approximately 22 acres of land. The acquisition continues our diversification and growth strategies to invest in assets with an expected yield on investment to enhance shareholder value. We financed the acquisition with borrowings under our amended and restated credit facility.

Illinois Income Taxes
During October 2012, we funded a $2.9 million income tax payment to the State of Illinois related to a dispute over state income tax apportionment methodology which will be recorded as an other asset that we believe will be recoverable in a future period. We filed our state income tax returns related to the years 2002 through 2005 following the methodology prescribed by Illinois statute, however the State of Illinois has taken a contrary tax position. We anticipate filing a formal protest with the State of Illinois during the fourth quarter of 2012. We do not expect this issue to have a material, adverse effect on our business, financial condition or results of operations.

Florida Gaming Recoveries
During February 2012, we received $0.8 million in proceeds upon the opening of Casino Miami Jai-Alai, a slots and jai-alai facility in Miami, Florida. These proceeds partially reimbursed Calder for expenditures made during 2005 related to the slot machine referendum held in Miami-Dade County. Due to uncertainties regarding collectability, we did not recognize a reduction of expense upon the execution of the agreement during 2005, because reimbursement was not payable until the opening of Casino Miami Jai-Alai. During the nine months ended September 30, 2012, we recognized $0.8 million as a reduction to selling, general and administrative expenses from the recovery. In addition, we recognized $0.2 million as a net reduction to our operating expenses from a recovery of pari-mutuel accounts receivable from the owners of Casino Miami Jai-Alai, which had been previously reserved due to uncertainties regarding collectability.

Bluff Media Acquisition
During February 2012, we announced the acquisition of the assets of Bluff Media (“Bluff”), a multimedia poker content brand and publishing company. Bluff’s assets include the poker periodical, BLUFF Magazine ; BLUFF Magazine’s online counterpart, BluffMagazine.com; ThePokerDB, a comprehensive online database and resource that tracks and ranks the performance of poker players and tournaments; and various other news and content forums. Bluff also publishes Fight! Magazine , a premier mixed martial arts magazine and its online counterpart, FightMagazine.com. In addition to our intention to further expand and build upon Bluff’s current content and business model, we believe this acquisition potentially provides us with new business avenues to pursue in the event there is a liberalization of state or federal laws with respect to Internet poker in the United States.

We completed our acquisition of Bluff for cash consideration of $6.7 million and contingent consideration estimated at $2.3 million based upon the enactment of federal or state enabling legislation which permits Internet poker gaming.

Kentucky Hailstorm
On April 28, 2012, a hailstorm caused damage to portions of Louisville, Kentucky including Churchill Downs Racetrack ("Churchill Downs") and its separate training facility known as Trackside Louisville. Both locations sustained damage to their stable areas as well as damages to administrative offices and several other structures. The Company carries property and casualty insurance, subject to a $0.5 million deductible. We filed a preliminary claim for damages with our insurance carrier which remains under review to determine to what extent insurance proceeds will offset any impairment losses. During the three months ended September 30, 2012, we received $0.6 million in insurance proceeds as a partial payment for damages which has been recorded as a reduction of property and equipment in our Condensed Consolidated Balance Sheet. As of September 30, 2012, we have not recorded an impairment of our assets and do not believe that any future impairment will be material or have an adverse impact on our business, financial condition or results of operations.

Kentucky Derby and Kentucky Oaks Qualifying Process
During June 2012, we announced a revision to the process by which thoroughbred racehorses qualify for the Kentucky Derby and Kentucky Oaks. Effective for the 2013 Kentucky Derby, we will cease to use graded stakes earnings to determine qualifiers, and we will institute a point system. The Kentucky Derby will feature a preparatory season consisting of nineteen races for two-year old and early three-year old horses, and a championship series consisting of seventeen races for three-year old horses. Points will be awarded to the top four finishers in each race, and the highest cumulative point winners will be eligible to start in the Kentucky Derby. The Kentucky Oaks will feature a similar preparatory season with twenty races and a championship series of fifteen races. The events which constitute the qualifying horse races and their assigned point value will be reviewed annually.

Mississippi River Flooding
As a result of the Mississippi River flooding during 2011, we temporarily ceased operations at Harlow’s on May 6, 2011, and the Board of Mississippi Levee Commissioners ordered the closure of the Mainline Mississippi River Levee on May 7, 2011. On May 12, 2011, the property sustained damage to its 2,600-seat entertainment center and a portion of its dining facilities. On June 1, 2011, Harlow’s resumed casino operations with temporary dining facilities. During December 2011, we announced a renovation and improvement project, which is expected to be completed by early 2013 and will include a new buffet area, steakhouse, business center, spa facility, fitness center, pool and a multi-purpose event center.

We carry flood, property and casualty insurance as well as business interruption insurance subject to a $1.3 million deductible for damages. As of September 30, 2012, we have recorded a reduction of property and equipment of $8.5 million and incurred $2.0 million in repair expenditures. During the year ended December 31, 2011, we received $3.5 million in partial settlement of our claim. We finalized our claim with our carriers and received $12.0 million during the nine months ended September 30, 2012 . We recognized insurance recoveries, net of losses of $5.0 million during the nine months ended September 30, 2012. The insurance claims for this event have been finalized with our insurance carriers, and we do not expect to receive additional funds or recognize additional income from the claim.

Mississippi Wind Damage
On February 24, 2011, severe storms caused damage to portions of Mississippi, including Greenville, Mississippi, the location of Harlow’s. The Harlow’s property sustained damage to a portion of the hotel, including its roof, furniture and fixtures in approximately 61 hotel rooms and fixtures in other areas of the hotel. The hotel was closed to customers for renovations following the storm damage and reopened during June 2011. We carry property and casualty insurance as well as business interruption insurance subject to a $0.1 million deductible for damages. As of September 30, 2012, we have recorded a reduction of property and equipment of $1.4 million and incurred $0.4 million in repair expenditures. We filed a preliminary claim with our insurance carriers for $1.0 million in damages, which we received during the second quarter of 2011. Approximately $0.4 million of insurance recoveries received were recorded as a reduction of selling, general and administrative expenses against losses related to the interruption of business caused by the wind damage during the year ended December 31, 2011. We received an additional $3.4 million from our insurance carriers during the nine months ended September 30, 2012. We recognized insurance recoveries, net of losses, of $1.5 million during the nine months ending September 30, 2012. The insurance claims for this event have been finalized with our insurance carriers, and we do not expect to receive additional funds or recognize additional income from the claim.

Legislative and Regulatory Changes
Federal
Wire Act of 1961 – Federal Clarification
On December 23, 2011, the U.S. Department of Justice clarified its position on the Wire Act of 1961 (the “Wire Act”), which had historically been interpreted to outlaw all forms of gambling across states lines. The department’s Office of Legal Counsel determined, in a written memorandum, that the Wire Act applied only to a sporting event or contest but did not apply to other forms of Internet gambling, including online betting unrelated to sporting events. The Justice Department opinion could be interpreted to allow Internet gaming on an intrastate basis. Since the issuance of this opinion, there have been actions taken by various state legislatures to either further enable or further limit Internet gaming opportunities for their residents and businesses, and we anticipate that other states may follow. At this point, we do not know to what extent intrastate Internet gaming could affect our business, financial condition and results of operations.

Senate Hearing on Medication and Performance-Enhancing Drugs in Horses
In July 2012, the Senate Commerce Committee held a hearing on the use of anti-bleeding medications, painkillers and performance enhancing drugs in racehorses. The Interstate Horseracing Improvement Act was introduced, which is designed to regulate and standardize medication usage within the industry. It is unclear to what extent such federal regulations could impact our business, financial condition and results of operations.

Other Federal Legislation
During 2011, two major pieces of Internet gaming legislation were introduced in the United States Congress. The first bill, the Internet Gambling Regulation, Consumer Protection and Enforcement Act (“HR 1174”), would grant the Secretary of the Treasury regulatory and enforcement jurisdiction over Internet gaming. Though wagering on sports is excluded, it would expand Internet gaming beyond poker. The second bill, the Internet Gambling Prohibition, Poker Consumer Protection, and Strengthening UIGEA Act of 2011 (“HR 2366”), mirrors many of the safeguard provisions proffered in HR 1174, however it limits Internet gaming to poker only. Both bills have been referred to the House Subcommittee on Crime, Terrorism and Homeland Security. It is unclear to what extent such federal regulations could impactour business, financial condition and results of operations.

Florida
Hialeah Race Course
During 2010, the Florida legislature passed Senate Bill 622 (“SB 622”), which contained a new Tribal Compact and which made Chapter 2009-170, Laws of Florida, effective on July 1, 2010. Portions of Chapter 2009-170, Laws of Florida purport to permit the operation of slot machines at quarter horse facilities in Miami-Dade County. In particular, Section 19 of Chapter 2009-170, Laws of Florida, purports to permit Hialeah Race Course (“Hialeah”), located approximately twelve miles from Calder, to open as a quarter horse facility and operate slot machines after two consecutive years of quarter horseracing. On June 18, 2010, in a lawsuit styled Calder Race Course, Inc., vs. Florida Department of Business and Professional Regulation and South Florida Racing Association, LLC (Case No. 2010-CA-2132), Calder challenged the provisions of Section 19 of Chapter 2009-170, Laws of Florida, alleging that Section 19 violates Article X, Section 23 of the Florida Constitution when it expands the limits set in the constitution for slot machine licenses. The Leon County Circuit Court held the statute to be valid, and an appeal to the Florida First District Court of Appeal was unsuccessful. On November 9, 2011, we petitioned the Florida Supreme Court to grant discretionary review of the First Appellate Court’s decision. On April 27, 2012, the Florida Supreme Court declined to consider a review of our petition, upholding the decision of the lower court. Hialeah subsequently announced its intention to add 900 slot machines to its facility during 2013. At this point, we do not know to what extent the operation of a slot machine facility at Hialeah could have on our business, financial condition and results of operations.

On February 14, 2011, Hialeah filed a lawsuit styled Hialeah Racing Association, South Florida Racing Association, LLC and Bal Bay Realty, LTD vs. West Flagler Associates, LTD, Calder Race Course, Inc. and Tropical Park, Inc. (Case No. 11-04617 CA24) in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida. The plaintiffs alleged that the defendants, including Calder and Tropical Park, engaged in unfair methods of competition and committed unfair acts and practices by, among other things, engaging in concerted actions designed to prevent the enactment of legislation to regulate thoroughbred racing dates, coordinating the selection of racing dates among Calder, Tropical Park and Gulfstream Park, soliciting the revocation of Hialeah’s racing permit which prevented Hialeah from operating, participating in the drafting of a Florida constitutional amendment on slot machines to ensure that Hialeah was excluded from obtaining the opportunity to conduct gaming under such a constitutional amendment and instituting litigation challenging the validity of certain legislation in an effort to prevent the operation of slot machines at Hialeah. The plaintiffs alleged an unspecified amount in damages. On June 7, 2012, the lawsuit was voluntarily dismissed with prejudice.

Kentucky
Race-day Medication Ban
On June 13, 2012, the Kentucky Horse Racing Commission (“KHRC”) approved a change in state regulations that bans the use of an anti-bleeding medication on race-days for graded and listed stakes horse races. The revised regulation must survive a legislative review process, in addition to potential legal challenges before being enacted into law. Should the regulation be enacted into law, it would be phased in over a three-year period, beginning in 2014. If approved, Kentucky would be the only U.S. state to have enacted such restrictions. At this point, we do not know the effect this legislation could have on our business, financial condition and results of operations.

Historical Racing Machines
On July 20, 2010, the KHRC approved a change in state regulations that would allow racetracks to offer pari-mutuel wagering via Historical Racing Machines (“HRMs”), which base their payouts on the results of previously-run races at racetracks across North America. Portions of previously-run races can be viewed, and winning combinations are presented via video terminals through which the player may place wagers in the pari-mutuel betting pools available via the HRMs. Previously, only Oaklawn Park Racetrack, in Arkansas, offered the HRMs. On September 1, 2011, Kentucky Downs Racetrack opened an HRM facility with approximately 200 HRMs, and during February 2012, the KHRC approved the installation of 75 additional HRMs at such facility. On August 31, 2012, Ellis Park Racetrack opened an HRM facility with 177 HRMs.

Despite the approval of the KHRC, there are questions with regard to the economic viability of the HRMs in a competitive gaming market such as Louisville, as well as the legality of the new regulations that were enacted to allow HRMs. We do not expect to make any decisions on whether to pursue HRMs until both of these questions are answered. A declaratory judgment action was filed in Franklin Circuit Court on behalf of the Commonwealth of Kentucky and all Kentucky racetracks to ensure proper legal authority to conduct pari-mutuel wagering via HRMs. The Franklin Circuit Court entered a declaratory judgment upholding the regulations in their entirety. The intervening adverse party filed a notice of appeal, and the KHRC and the racetracks filed a motion to transfer that appeal directly to the Supreme Court of Kentucky. On April 21, 2011, the Supreme Court of Kentucky denied the request to hear the case before the appeal is heard by the Kentucky Court of Appeals. On September 1, 2011, the intervening adverse party filed an injunction for the Kentucky Court of Appeals to grant emergency relief that would prevent Kentucky Downs Racetrack from operating its HRMs. The intervening adverse party’s motions were denied by the Kentucky Court of Appeals. On June 15, 2012, the Kentucky Court of Appeals vacated the lower court's decision and remanded the declaratory judgment action back to the Franklin County Circuit Court. On July 16, 2012, the Kentucky racetracks, the KHRC and the Kentucky Department of Revenue filed motions for discretionary review with the Supreme Court of Kentucky asking the court to overturn the Kentucky Court of Appeals' decision and address the merits of the case.

ADW Regulations
Legislation was introduced on February 8, 2011, to clarify state regulatory authority over ADW companies. The legislation provides jurisdiction over wagering made within the Commonwealth of Kentucky and requires a license to take ADW wagers from Kentucky residents, which TwinSpires obtained in March 2012. During January 2012, the Kentucky House of Representatives introduced House Bill 229, which would impose an excise tax of 0.5% of proceeds on all advance deposit wagering placed by Kentucky residents. The state’s general fund would receive 15% of the excise tax, with the remaining 85% to be shared equally between the state’s racetracks and horsemen. This legislation was passed by the Kentucky House of Representatives during 2011 but failed to move forward in the Kentucky Senate during the 2012 legislative session. Should similar legislation be proposed in future legislative sessions, it could have a negative impact on our Online Business operations.

Illinois
Expanded Gaming Legislation
On May 31, 2012, Senate Bill 1849 was passed by the Illinois General Assembly, which authorizes five additional casinos to be constructed in Illinois, as well as provides for slots machines to be installed at racetracks. Specifically, the legislation authorizes Arlington to operate up to 1,200 slot or video poker machines and authorizes Quad City Downs, owned by Arlington , to operate up to 900 slot or video poker machines. Existing casinos are eligible to increase the number of gaming machines from the current limit of 1,200 machines to 1,600 machines. Five new land-based casinos are authorized, one of which can be located in Chicago with 4,000 gaming machines. Senate Bill 1849 was vetoed by Governor Quinn on August 28, 2012. Legislative leaders have expressed an interest in overriding the Governor's veto during the November veto session or prior to the start of the 2013 legislative session. At this point, we do not know if future legislation will be enacted, and if enacted, how it would affect our business, financial condition and results of operations.

Advance Deposit Wagering Legislation
House Bill 3779 relating to ADW regulation was signed into law by Governor Quinn on August 24, 2012. The bill extends ADW authorization to January 2013, provisionally replacing Senate Bill 1298. House Bill 3779 provides additional requirements, not in effect under Senate Bill 1298, that beginning on August 26, 2012, each ADW license-holder shall impose a surcharge of up to 0.18% on winning wagers and winnings from wagers placed through advance deposit wagering. The funds received as the result of the surcharge are to be deposited into standardbred purse accounts. Changes in the ADW law or the sunset of the law authorizing ADW in Illinois could adversely affect our ADW business in Illinois.

Online Gaming
During the 2012 legislative session, the Illinois Senate amended House Bill 4148 with language that, if enacted, would create a new division of the state lottery to oversee and operate online games, including poker, for registered players within Illinois. The division would also be given authority to enter into interstate and multinational online gaming compacts. As currently written, the lottery would create a single platform on which Internet Gaming would be conducted in Illinois. At a later date, the state could allow private companies licensed to conduct gaming in Illinois to essentially serve as affiliates. It is not clear under what terms the state would allow the private companies to participate. The legislative session adjourned without action on House Bill 4148. At this point, we do not know if legislation will be enacted, and if enacted, to what extent it would impact our business, financial condition and results of operation.

Horse Racing Equity Trust Fund
During 2006, the Illinois General Assembly enacted Public Act 94-804, which created the Horse Racing Equity Trust Fund (“HRE Trust Fund”). During November 2008, the Illinois General Assembly passed Public Act 95-1008 to extend Public Act 94-804 for a period of three years beginning December 12, 2008. The HRE Trust Fund was funded by a 3% “surcharge” on revenues of Illinois riverboat casinos that met a certain revenue threshold. The riverboats paid all monies required under Public Acts 94-804 and 95-1008 into a special protest fund account which prevented the monies from being transferred to the HRE Trust Fund. The funds were moved to the HRE Trust Fund and distributed to the racetracks, including Arlington, in December 2009. See Part II, Item 1. “Legal Proceedings” of this Quarterly Report on Form 10-Q for further discussion of pending litigation with respect to the Horse Racing Equity Trust Fund.

Horse Racing Equity Fund – Tenth Riverboat License
Under legislation enacted in 1999, the Illinois Horse Racing Equity Fund is scheduled to receive amounts up to 15% of the adjusted gross receipts earned on an annual basis from state tax generated by the tenth riverboat casino license granted in Illinois. The funds will be distributed to racetracks in Illinois and may be utilized for purses as well as racetrack discretionary spending. In addition, the holders of the original nine riverboat licenses who paid monies into the HRE Trust Fund will no longer be required to pay monies into that fund. During December 2008, the Illinois Gaming Board awarded the tenth license to Midwest Gaming LLC to operate a casino in Des Plaines, Illinois. This casino opened during July 2011. The Illinois racing industry will be entitled to receive an amount equal to 15% of the adjusted gross receipts of this casino from the gaming taxes generated by that casino. However, these funds must be appropriated by the state, and the current fiscal year budget contains no such appropriation.

CONF CALL

Liz Harris - VP

Thanks, Saeed. Good morning and welcome to this Churchill Downs Incorporated conference call to review the company’s results for the third quarter of 2010. The results were released yesterday afternoon in a news release that has been covered by the financial media.

A copy of the release announcing the results as well as any other financial and statistical information about the period to be presented in this conference call, including any information required by Regulation G, is available at the section of the company’s website titled Investors located at churchilldownsincorporate d.com. Let me also note that a news release was issued advising of the accessibility of this conference call on a listen-only basis via phone and over the Internet.

As we begin, let me express that some statements made during this call will be forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, expectations or beliefs about future events or results, or otherwise are not statements of historical fact.

The actual performance of this company may differ materially from what is projected in the forward-looking statements. Investors should refer to statements included in reports filed by the company with the Securities and Exchange Commission for a discussion of additional information concerning factors that could cause our actual results of operation to differ materially from the forward-looking statements made in this call.

The information being provided today is of this date only and Churchill Downs Incorporated expressly disclaims any obligation to release publicly any updates or revisions to these forward-looking statements to reflect any changes in expectations. Members of our executive team are here and will be available to answer questions after some formal remarks.

We will begin now with our President and Chief Executive Officer, Bob Evans. Bob?
Bob Evans - President and CEO

Thanks, Liz. Good morning, everyone. We appreciate you joining us today. I'll make a few general comments about Q3 and then turn it over to our CFO, Bill Mudd. After that, we will be happy to take your questions. This was an important quarter for us in two ways. First, our results will demonstrate the earnings power of the diversification strategy that we have been pursuing for the last couple of years. And second, there are some important new developments that should increase our potential future growth and financial performance in 2011.

Let’s start our review of the quarter by putting it in some historical context. If we look back to Q3 2007, Q3 2008, and Q3 2009, we see net revenues of $104 million, $100 million and $101 million, all in all pretty consistent. This past quarter, net revenues from continuing operations were $136 million, about 35% higher than where we have been the last few years.

Looking at EBITDA from continuing operations, we see $10 million in Q3 2007, $11 million in Q3 2008, and $10 million in Q3 2009. Again, pretty consistent. In the just completed quarter, EBITDA from continuing operations was $17 million, up about 75%. We saw the significant increase in both net revenues and EBITDA from continuing operations because growth in our newer online and gaming businesses more than offset declines in our traditional racing operations. This is not a new trend, but the degree of impact at having on our overall results became clearly evident this quarter.

Let me turn now to our second point, six recent new developments that should increase our potential future growth and financial performance in 2011. Let’s start with Harlow’s. Financed on September 13th, our intent to acquire Harlow’s Casino Resort & Hotel in Greenville, Mississippi for approximately $138 million. We are moving along in the licensing process, and as we said in September, we hope to close this transaction sometime between mid-December this year and mid-March of next year.

Youbet. On October 4th, we announced in our 8-K filing the upcoming termination of 64 employees in our online business, most of which will occur by the end of January 2011 with the remainder by the end of next year. This reduction in staff is part of our Youbet.com integration plan. We originally projected $10 million in annualized cost savings from personnel and other cost synergies. However, in our Q2 earnings call on August 5th, we increased that number to $12 million.

Churchill Downs Entertainment. On October 6th, we announced that we were suspending our HullabaLOU Music Festival for 2011 and that we were dissolving our Churchill Downs Entertainment Group, which is now accounted for as discontinued operations. We incurred an EBITDA loss of $7 million in Q3 related to Churchill Downs Entertainment and $8.6 million EBITDA loss in the first nine months of 2010. Those losses will not be repeated next year.

NBC. On October 7th, we announced that we have extended our Kentucky Derby and Kentucky Oaks television deal with NBC for five more years. We believe that how we and NBC have presented the Derby and Oaks on television has been important to the improved economic performance of these events. You’ll recall that this year, we set the all-time record for Derby television viewership 16.5 million viewers, and we increased Derby week EBITDA by $3.4 million to an all-time high. So we are glad to have this deal with NBC in place through 2015.

Our credit facility. As you will find in this quarter’s 10-Q filing, we have entered into an amendment to our credit facility to expand the maximum aggregate amount from $275 million to $375 million. At the same time, we realized a 37.5 basis point reduction in the price of outstanding borrowings and a 5 basis point reduction in commitment fees across all leverage pricing levels. This should give us adequate liquidity to finance previously announced investments and acquisitions as well as to enable us to consider investments and acquisitions going forward.

And finally, sponsorships. We continue to work on renewals to various sponsorship arrangements. We hope to have some announcements on that in the next several months. I also want to update you on three other matters that aren’t related to our current operations, but about which I expect you will ask. We will start with HRMs, or historical racing machines.

As we’ve reported in our Q2 earnings call on August 5th, the Kentucky Horse Racing Commission has approved change in state regulations that would allow Kentucky’s race tracks to offer pari-mutuel historical racing machines or HRMs. We didn’t make up the name. While the customer interface resembled that of a slot machine, the games’ outcomes are determined by pari-mutuel wagers placed on past record of horse races.

Declaratory judgment was filed on behalf of the common wealth of Kentucky and the race tracks to ensure proper legal authority. This matter has not yet been resolved. However, as we explained in Q2, even if the legality of HRMs is determined, we still have conservable concerns about the competitiveness of these machines in locations like Louisville where full-fledged casinos exist in the market. We will continue to evaluate HRMs, as the declaratory judgment process unfolds.

Restricted cash. So far this year, we have received $14.6 million from the Illinois Horse Racing Equity Trust Fund. This brings the total amount received under the original 2006 Act and the 2008 extension of that Act to $38.6 million, of which $16.5 million would go to Arlington Park and $22.1 million would go to the Arlington Park purse account. We are holding these amounts in escrow as the Illinois Riverboats continue to challenge the constitutionality of the Act. These amounts appear as restricted cash on our balance sheet.

And finally, Internet gaming. There have been various pieces of legislation developed and/or introduced at the state and federal level that would legalize certain forms of Internet gaming. For example, California legislation would enable exchange wagering on thoroughbred racing. New Jersey is also considering legalizing exchange wagering and possibly intra-state online gaming.

And at the federal level, there is some discussion regarding legislation that would legalize tax and regulate online poker and possibly other online games. Our political affairs organization and our business development group are fully engaged in these issues, and we are looking for ways by which we could profitably participate in such online gaming, if legalized.

Now let me turn this over to our CFO, Bill Mudd, who will provide you with some additional detail on the quarter, and after that, we’ll try to answer your questions. Bill?
Bill Mudd - EVP and CFO

Thank you, Bob. And good morning, everyone. As usual, I will review the information set forth in the tables of the press release. Please note that the discontinued operations section of our financial statements and tables now include the operating results of Churchill Downs Entertainment in addition to Ellis Park and Hollywood Park. As such, the discontinued operations net loss of $4.4 million for the quarter is primarily driven by Churchill Downs Entertainment’s HullabaLOU Music Festival.

My further comments will focus on performance from continuing operations for the three months ended September 30th. Let’s begin by reviewing the segment information, which is contained in the schedule titled Supplemental Information by Operating Unit for the three months ended September 30th in the release.

For the quarter, we had $135.7 million in net revenues from external customers, an increase of 35% or $34.8 million over the prior year. Racing operations external customer revenues declined $5.9 million or 9% for the period. $4.5 of this decline came from Arlington Park, which raised eight fewer days, a 13% decline versus the same period of 2009. Our Calder facility ran 53 days in the quarter, an increase of one day versus the prior year, and saw a decline of $1.1 million or 5%.

We believe export wagering at both race tracks was negatively affected by the Monmouth elite mate, which attracted four fields and commanded a higher share of the export market. Considering the impact of Monmouth Park and the US handle on thoroughbred racing declining 6% in the period according to Equibase, we are rather pleased with these results.

Our online business benefited from the first full quarter of Youbet ADW operations, resulting in an external customer revenue growth of $21.4 million. Our TwinSpires ADW business also continued to grow with handle up 12% over prior year, experiencing wagering increases in 32 out of 39 states where we operate. New account signups increased 34% over the prior year, and average daily deposits increased 20% in the period.

Our gaming business also more than doubled net revenues from external customers, realizing an increase of $14.2 million for the quarter. This improvement is primarily driven by our new Calder Casino with $13.2 million in third quarter net revenues. Gross win per unit for the quarter was $161, down slightly from our $178 in the second quarter. This wasn’t particularly surprising to us as the third quarter has historically been the weakest for all of our local competitors. And the quarter-over-quarter decrease in gross revenue is in line with what others in the market experienced in 2008 and 2009.

Our Fair Grounds slot operations net external revenue grew 8% in the quarter, and our video poker operations grew 7%. Needless to say, we are very pleased with our performance across each of these profits. Other investments external revenues increased primarily as a result of the United Tote acquisition earlier this year.

If you drop to the bottom of the page, I’ll highlight some of the EBITDA changes by segment in the quarter. In total, EBITDA from continuing operations increased $7.3 million or 75% in the quarter. Our racing operations EBITDA declined by $2.2 million. There were three items in the third quarter of 2009, last year, that are part of this decline. First, we recognized $2.4 million real estate tax refund from the state of Illinois. Second, we received a $2.5 million insurance recovery related to employee fast at our Calder facility. These two items in the prior year were partly offset by a $1.5 million supplemental purse contributions at Churchill Downs Racetrack. All three of these items were included and described in the reports for the third quarter of 2009.

Now, if you exclude these three items, racing operations EBITDA increased by $1.2 million in the period. Including this $1.2 million improvement is reduction of the allocated corporate overhead of $2.2 million. The allocated corporate overhead is lower on less legal spending and a dilutive effect of allocating a portion of this overhead to Youbet.com and our new Calder Casino. The remaining $1 million reduction in EBITDA is driven by lower pari-mutuel revenues, as we previously discussed, partly offset by better cost controls and one night of night racing at Churchill Downs Racetrack.

Our online business EBITDA more than doubled to $5.8 million in the quarter. Youbet ADW operations generated $1.6 million of EBITDA, which includes $1.7 million of charges related to employee cost to reorganize Youbet as well as $0.7 million of that allocated corporate overhead we just discussed. The business continues to perform as expected and we are on our plan to capture synergy cost savings of $12 million annually.

Our TwinSpires operation improved EBITDA by $1.4 million in the period, driven primarily by handle growth. Our gaming segment EBITDA also more than doubled to $7.9 million for the quarter. Our Calder Casino generated EBITDA of $2.4 million, which we hope proves to be our seasonally weakest quarter.

Our Fair Grounds Slots facility and video poker businesses each experienced an increase of $0.6 million of EBITDA for the quarter versus prior year on revenue growth and lower marketing spending in our video poker business. Other investments EBITDA increased $1 million as a benefit of the first full quarter of the United Tote operations. Corporate EBITDA improved $1.5 million primarily due to the effect of a favorable settlement with a third party for $1.3 million.

Now let’s look at the condensed consolidated statements of net earnings for the three months ended September 30th. Net revenues grew 35% to $135.7 million in the quarter, as previously described. Operating expenses grew at a slightly higher rate, driven by the non-recurring real estate tax refund and insurance recovery in the prior year. SG&A expenses were up 17% or $2.2 million, driven by the Youbet acquisition and our new Calder Casino.

Third quarter operating income of $3.3 million increased 34% versus last year’s $2.5 million. Interest expense increased to $1.6 million on borrowings used to acquire Youbet.com, build our Calder Casino, and purchase the land at Arlington Park. Miscellaneous income improved primarily from the third-party settlement previously mentioned to $1.3 million.

At the income tax line, we recognized approximately $1 million of benefits in the quarter related to an adjustment of permanent differences taken on past federal income tax returns. As a result, the third quarter of – as a reminder, last year, the third quarter of 2009, included a $2.3 million tax expense related to a proposed IRS audit adjustment related to the sale of Personal Seat Licenses, which was favorably resolved earlier this year. As a result, net earnings from continuing operations for the quarter was $3.7 million or $0.22 per diluted common share compared to a loss of $1.2 million or a loss of $0.09 per diluted common share in the same period of last year.

Now if I could turn your attention to the condensed consolidated balance sheet, I will briefly review a few variances. First, goodwill and other intangible assets increased $68 million and $22.5 million respectively, reflecting assets acquired in connection with the acquisition of Youbet last quarter. All other assets acquired in connection with the acquisition of Youbet totaled approximately $32 million, which is spread over the other line items.

Aside from this increase related to the Youbet acquisition, restricted cash increased $20.4 million and accounts receivable increased by $13.7 million. The increase in restricted cash is primarily related to the additional collection of Illinois Horse Racing Equity Trust Fund monies of $14.6 million. The decrease in accounts receivable is primarily due to the collection of Kentucky Derby and Churchill Downs Spring Meet related receivables.

Lower deferred revenue balance of $14.6 million was caused by the recognition of Derby and other Churchill Downs Spring Meet revenues. That was mostly offset by an increase in deferred Illinois Riverboat subsidy income of $14.6 million. Long-term debt increased $38.4 million, as we have been able to partly offset borrowings used to fund the acquisition of Youbet, finalize the construction of Calder and pay off the Arlington land purchase with cash flows from operations.

That concludes my remarks. And I will now turn it back over to Bob for questions. Bob?
Bob Evans - President and CEO

Thanks, Bill. If I could ask our operator Saeed if there are any questions, we’ll be glad to take them now.

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