NOTE 2 — NEW VENTURES & ACQUISITIONS

California Internet Gaming

During May 2015, the Company's Internet real-money gaming operations, Churchill Downs Interactive Gaming ("I-Gaming"), entered into an agreement with a licensed California card room operator ("Licensed Operator") to provide Internet-based interactive gaming services within California, should enabling legislation be enacted which would permit such activities. The term of the agreement commences after enabling legislation and upon the acceptance of the first customer wager, continuing thereafter for a ten-year period. The venture provides for I-Gaming and the Licensed Operator to jointly provide a platform for operations, to obtain and maintain required licenses and regulatory approvals and to otherwise market and operate the venture, which may include poker and other real-money gaming activities, to California residents. At this time, it is difficult to assess whether this legislation will be enacted into law, and the effect it would have on the Company's business, financial condition and results of operation.

Big Fish Games

On December 16, 2014, the Company completed the acquisition of Big Fish Games. Big Fish Games, which has locations in Seattle, Washington, Oakland, California and Luxembourg, employs approximately 599 employees and develops casual games for PCs and mobile devices worldwide. Big Fish Games operates in three business lines: premium paid, casino and casual free-to-play. The Company acquired Big Fish Games to leverage its casino and casual game experience and assembled workforce, and to position itself in the mobile and online game industry. The Company financed the acquisition with borrowings under its Amended and Restated Credit Agreement (the “Senior Secured Credit Facility”) and the addition of a $200 million Term Loan Facility (“Term Loan”) to the existing Senior Secured Credit Facility.

The purchase price consideration was $838.3 million, composed of $401.7 million in cash, a deferred payment to the founder of Big Fish Games of $85.3 million, payable over three years and recorded at fair value of $78.0 million as of the acquisition date, an estimated payable to the Big Fish Games equity holders related to an income tax refund of $18.1 million and $15.8 million payable in 157,115 shares of the common stock of the Company. In addition, the Company may be required to pay additional variable cash consideration that is contingent upon the achievement of certain performance milestones of Big Fish Games through December 31, 2015 and is limited to a maximum of $350 million based on achievement of certain non-GAAP earnings targets before interest and tax. The estimated fair value of the earnout liability at the acquisition date was $324.7 million. The Company estimated the fair value of the deferred payment and the earnout liability using a discounted cash flows analysis over the period in which the obligation is expected to be settled, and applied a discount rate based on the Company’s cost of debt. The cost of debt as of the closing date was based on the observed market yields of the Company’s Senior Unsecured Notes issued in December of 2013 and was adjusted for the difference in seniority and term of the deferred payment and the earnout liability. See Note 7 for further discussion of the fair value measurement of the deferred payment and the earnout liability.

The fair values recorded were based upon a preliminary valuation. Estimates and assumptions used in such valuation are subject to change, which could be significant, within the measurement period up to one year from the acquisition date. The primary area of the preliminary valuation that was not finalized at June 30, 2015 related to the 2014 provision to return income tax adjustments which the Company expects to complete during the third quarter of 2015.

During the six months ended June 30, 2015, the Company obtained additional information to assist it in determining the values of the liabilities assumed at the acquisition date and changes which occurred during the measurement period. A measurement period adjustment was recorded related to estimated payroll taxes associated with the earnout liability. The Company retroactively adjusted the December 31, 2014 Condensed Consolidated Balance Sheet by increasing deferred income taxes by $0.8 million, increasing goodwill by $1.4 million and increasing accrued expenses by $2.2 million. In addition, the Company made deferred payments of $12.7 million to Big Fish Games former equity holders for the receipt of a federal income tax refund and working capital adjustments related to the acquisition.

The following table summarizes (in thousands) the current fair value of the assets acquired and liabilities assumed, net of cash acquired of $34.7 million, at the date of acquisition.



	Total
Accounts receivable	$	19,274
Income taxes receivable	18,087
Prepaid expenses	9,727
Deferred income taxes	1,708
Other assets	1,780
Property and equipment	14,632
Goodwill	540,331
Other intangible assets	362,863
Total assets acquired	968,402
Accounts payable	9,064
Accrued expenses	19,217
Income taxes payable	210
Deferred revenue	37,250
Deferred income taxes	96,182
Other liabilities	2,821
Total liabilities acquired	164,744
Purchase price, net of cash acquired	$	803,658

During the three and six months ended June 30, 2015, Big Fish Games contributed revenues of $104.5 million and $196.4 million, respectively, and earnings from continuing operations before provision for income taxes and acquisition-related charges of $6.8 million and $1.0 million, respectively.

Pro Forma

The following table illustrates the effect on net revenues and earnings from continuing operations for the three and six months ended June 30, 2014, respectively, as if the Company had acquired Big Fish Games as of the beginning of 2014. The unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that would have occurred had the acquisition of Big Fish Games been consummated at the beginning of 2014 (in thousands):



	Three Months Ended June 30,		Six Months Ended June 30,
	2014		2014
Net revenues	$	381,993	$	623,455
Earnings from continuing operations	$	55,699	$	54,061

Saratoga Harness Racing, Inc. Equity Investment and Management Agreement

On October 28, 2014, the Company signed a definitive purchase agreement to acquire a 25% ownership interest in Saratoga Casino Holdings, LLC ("SCH"), a newly formed entity which will own Saratoga Casino and Raceway in Saratoga Springs, NY; Saratoga Harness Racing, Inc.'s ("SHRI") controlling interest in Saratoga Casino Black Hawk in Black Hawk, Colorado; and SHRI's 50% interest in a joint venture with Delaware North Companies to manage the Gideon Putnam Hotel and Resort in Saratoga Springs.

In addition, the Company signed a five-year management agreement pursuant to which it will manage Saratoga Casino and Raceway and Saratoga Casino Black Hawk. Both the funding of the equity investment and the commencement of the management agreement are subject to regulatory approval and licensing requirements in New York and Colorado.