2017 ANNUAL REPORT 1

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1 ANNUAL REPORT

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3 TABLE OF CONTENTS Message from the CEO Accomplishments....4 Championship Racing....4 Del Mar Delivers...6 Revenue Records....7 Nominations....8 World-Class Racing Competition Facts & Figures New for Breeders Cup Challenge Series...12 Relentless Focus on Integrity and Safety Brand Enhancement & Experience A Celebration of the Sport and Lifestyle of Horse Racing Television Exposure...18 Cheval: A Collection by Breeders Cup Providing A Customer and Participant Experience that Matches...20 the Quality of our Championship Racing Product Financial Performance...22 A. Selected Financial Data B. Management s Discussion and Analysis of Operating Results Appendix A. Breeders Cup Directors & Members...32 B. Breeders Cup Staff C Breeders Cup North American Challenge Series Schedule...35 D Breeders Cup International Challenge Series Schedule E Breeders Cup Challenge Series Television Schedule

4 MESSAGE FROM THE CEO On behalf of our Members and Directors, I am very proud to share the highlights and accomplishments of 2017 a record-setting year for the Breeders Cup. The 34th edition of the Breeders Cup World Championships was held for the first time at the beautiful and picturesque Del Mar racetrack, Where the Turf Meets the Surf, and by all accounts was a resounding success. Most, if not all, of our key performance indicators (KPIs) showed strong growth year-over-year, as outlined further in this report, and Del Mar and other surrounding San Diego communities welcomed our participants and fans with open arms and picture perfect weather. A festive and fun crowd was on hand to witness the history-making performances of some of the highest rated fields ever assembled in Breeders Cup history. Led by 2016 Breeders Cup Classic winner and the world s all-time leading money earner Arrogate, nine returning Champions and 150 other racing superstars from around the globe competed in front of 70,420 fans over a two-day period. The two-day race schedule included 13 Grade I Championship races and an additional nine undercard races. Total purses and awards for the two days, including undercard races, exceeded $29 million. Average starters for the 13 Championship races increased to 12.2 in 2017 from 11.5 in Despite capping tickets sales at 37,500 people each day, Del Mar generated an all-time, two-day on-track wagering record of $25.2 million and the second highest ticket sales revenue number in history at $15.4 million. All sources handle for the event was $170.8 million, the second highest in Breeders Cup history (behind only Churchill Downs in 2010 when there were 14 Breeders Cup races versus 13 in 2017). These results, combined with active management of expenses, led the Breeders Cup to recording its highest-ever net income of $11.8 million and record-setting net operating income of $4.1 million. Breeders Cup s decision to introduce new venues (to date, Keeneland and Del Mar) continues to produce positive results in customer experience, community support and ultimately financial return. Del Mar has clearly earned a spot in the Breeders Cup host-site rotation. Our long-term television partnership with NBC Sports (now the self-described television home of horse racing) continues to expand the Breeders Cup brand throughout the Summer and Fall while simultaneously constructing a storyline leading up to the Breeders Cup World Championships in November. In 2017, NBC provided its most extensive Breeders Cup coverage in history with 25.5 hours of programming across the Challenge Series and Championships. Plans for the 35th running of the Breeders Cup World Championships to be held at Churchill Downs are well under way. The 2018 Breeders Cup will be a record-tying ninth time that the event will be held at Churchill Downs and we are excited by the possibility of seeing the second Triple Crown winner in history compete for the Grand Slam in the Breeders Cup Classic. The Breeders Cup card will expand to 14 races again this year with the addition of the Juvenile Turf Sprint and I can assure you that the Breeders Cup will live up to its reputation as one of the highest caliber international racing events in the world. We also look forward to highlighting our two-year-old races on Future Stars Friday as the Dirt Mile and Longines Distaff move to Saturday to provide a blockbuster finish to the event. As always, we would like to thank our nominators for their continued support. The Breeders Cup would not be possible without their efforts as nomination fees totaled $15.7 million in Through the support of our nominators and the participating constituencies of the Thoroughbred industry, we are well positioned to meet the demands of a competitive future. 2 Sincerely, Craig R. Fravel President and CEO

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6 2017 ACCOMPLISHMENTS Championship Racing The 2017 Breeders Cup World Championships featured history-making performances of some of the highest rated fields ever assembled in Breeders Cup history. Nine returning Champions starring Gun Runner who forced a showdown with America s highest-rated runner, Arrogate and racing superstars from around the globe competed in front of 70,420 fans over a two-day period. An all-star international cast of 187 of the world s best Thoroughbreds, including a record 46 from overseas, were pre-entered for the 2017 Breeders Cup World Championships. Pre-entries were highlighted by Arrogate, Whitney and Suburban winner Gun Runner, Longines Distaff standout Stellar Wind, defending Longines Turf winner Highland Reel (IRE), Juddmonte International winner Ulysses (IRE) and Filly & Mare Turf star Lady Eli. 168 horses were officially entered into the 2017 Breeders Cup World Championships and by the conclusion of day two there were 159 Starters with 141 Grade/Group I wins among them and an aggregate of 327 graded wins prior to the Breeders Cup. A total of 71 individual Group or Grade I winners were represented in the 13 Grade I Championship races and 38 international runners competed in the 2017 Breeders Cup, a new record for international participation and seven more than in 2016 at Santa Anita. At pre-entry, ten of the 13 races had full fields or were oversubscribed. Six races fielded a maximum number of starters and the Breeders Cup races averaged 12.2 starters. 4

7 Gun Runner wins the $6 million Breeders Cup Classic 2017 Breeders Cup at Del Mar Forever Unbridled wins the $2 million Longines Breeders Cup Distaff 5

8 Del Mar Delivers Hosting its first-ever Breeders Cup, Del Mar racetrack and the surrounding communities exceeded expectations across the board. Breeders Cup fans coming in from around the world were greeted with luxury accommodations, fine dining, sandy beaches and two days of world championship racing and entertainment. Breeders Cup worked with Del Mar on capital improvements and temporary structures including Chalet Village, temporary box seats and The Beach. Chalet Village served as the Breakfast Marquee during the week and the Trophy Lounge and high-end group sales areas on Championship weekend while The Beach offered a fun, festive San Diego experience in the infield. An 8,000 square foot tent constructed on the grounds of Powerhouse Park overlooking the Del Mar beach hosted Breeders Cup events all week and provided participants and fans an experience unlike any other. Life-sized replica Breeders Cup Torrie horses painted by local artists were placed around Del Mar, La Jolla and Solana Beach as part of the Breeders Cup Festival while Breeders Cup-themed banners lined the streets. All these efforts brought Breeders Cup fans to San Diego earlier and provided them with a myriad of entertainment options all week long. The result was a record-high economic impact of $96 million according to a study conducted by third-party research firm SMRI. 6

9 Revenue Records 2017 proved to be a record-setting year for Breeders Cup with $11.8 million in net income and $4.1 million in net operating income both of which are the highest in company history. Despite capping attendance at 37,500 to ensure a positive and comfortable guest experience, Breeders Cup at Del Mar was a virtual sellout with $15.4 million in ticket sales, the second highest in Breeders Cup history and a 60% increase over 2016 at Santa Anita. The on-track handle of $25.2 million was an all-time record and generated a 22% increase over the 2016 event at Santa Anita. Total handle of $170.5 million was the second highest in Breeders Cup history, second only to Churchill Downs $173.8 million in 2010 which featured 14 Breeders Cup races versus 13 in Viewership of the NBC and NBCSN telecasts on Friday and Saturday reached more than five million unique viewers, with the primetime broadcast of the Classic drawing an average of 2 million viewers. Digital viewership of the Breeders Cup NBC telecasts and the Player s Show continues to climb and exceeded 464,000 online views in The Breeders Cup Challenge Series: Win and You re In presented by Lane s End Farm and America s Best Racing featured some of the best races from all over the world and drew more than 8 million unique viewers nationally across ten broadcasts on NBC and NBCSN. Through our extended partnership with NBC, the Breeders Cup continues to expand its brand and fan interest in the finest Thoroughbred racing has to offer. TICKET SALES REVENUE HANDLE TOTAL Millions 10 5 $7.9 $8.5 $17.2 $9.6 $15.4 Millions $163.5 $159.4 $156.7 $169.2 $ Santa Anita Santa Anita Keeneland Santa Anita Del Mar Santa Anita Santa Anita Keeneland Santa Anita Del Mar 7

10 NOMINATIONS The very foundation of the Breeders Cup program begins with the nominations of foals and stallions. From its earliest beginnings in 1982 to the current year, the nomination programs provide a valuable source of funding for the Breeders Cup, showcased by the Breeders Cup World Championships. The nomination programs have evolved just as the racing programs have and Breeders Cup is committed to providing excellent racing and benefits for our breeders and nominators. A total of $15.7 million in foal, racehorse and stallion nomination fees were generated in North American Stallion Nomination Program There were 534 nominated stallions in North America that generated nomination fees of approximately $8.3 million in North American stallion nominations must be made annually by a payment equal to the stallion s advertised stud fee. Stallions that are expected to have more than 50 live foals are assessed an additional fee equal to 50% of the stud fees while stallions that are expected to have 100 or more live foals are assessed an additional 100% of their stallion nomination fee. 65% of Breeders Cup nominated stallions stand for $2,500 or more representing over 95% of our domestic stallion revenue. In addition, more than 88% of foal nominations are by stallions nominated for a fee of $5,000 or more. In North America we continue to have 95% of stallions standing for a fee of $5,000 or more nominating with the Breeders Cup. International Stallion Nomination Program Breeders Cup has expanded its nomination programs around the world with the International Stallion Nomination program. Owners of all stallions standing outside North America now have the opportunity to nominate directly to the Breeders Cup and receive automatic eligibility for all their progeny to the Breeders Cup World Championships and the worldwide Breeders Cup Challenge Series. Since 2011, benefits of this program have increased the number of international foals eligible to the Breeders Cup from 1,200 nominated annually to over 20,000 each year. The 2017 international stallion program generated $2.34 million in fees with 281 stallions participating from all over the world. 8

11 2017 Horses of Racing Age Nominations Any racehorse may be nominated at any time and receive eligibility for their entire racing career. Nominations made prior to July 15 receive a discount on the standard racehorse nomination fee. In 2017, Breeders Cup received $782,000 in fees related to Horses of Racing Age nominations. EARLY RACEHORSE NOMINATION DEADLINE: JULY 15 Runner not nominated? Deep discounts of nomination fees if done on or before July 15th! All horses must be nominated to compete in the Breeders Cup World Championships. Call today (859) ! BREEDERS CUP WORLD CHAMPIONSHIPS, NOV 2-3 at CHURCHILL DOWNS members.breederscup.com North American Foal Nomination Program Foals from a nominated stallion are eligible for nomination to the Breeders Cup by payment of a one-time nomination fee of $400 by October 15 of the year of birth or by payment of a late fee of $1,500 by December 15 of the year of birth. This $400 nomination fee reflects a lowered nomination fee from $500 that was set since the program s inception. Only foals that are by fully-nominated North American stallions are eligible to be nominated during their year of birth at the weanling nomination fee level. In 2017, Breeders Cup received 10,200 nominated foals (55% of eligible foal crop reported). Foal nomination revenue totaled $4,172,

12 WORLD-CLASS RACING COMPETITION An all-star international cast of 187 of the world s best Thoroughbreds, including a record 46 from overseas, were pre-entered for the 2017 Breeders Cup World Championships which led to 159 Championship starters over the two-day event, including 71 Group or Grade I winners. The two-day race schedule included 13 Grade I Championship races and an additional nine undercard races. Total purses and awards for the two days, including undercard races, exceeded $29 million. Purses were paid down to the eighth finish position in all BCWC races Facts & Figures 213 Pre-entries with 187 individual horses, 46 Internationally campaigned 168 Entries, 40 Internationally campaigned 159 Starters, 38 Internationally trained 141 Grade/Group I wins among them, 327 graded wins prior to the Breeders Cup Average starters for the 13 Championship races 12.2 in 2017 vs 11.5 in 2016 (Santa Anita) At pre-entry, 10 of the 13 races had full fields or were oversubscribed Nine Returning Champions Three out of the top five highest rated horses in the world, Arrogate (134) and Gun Runner (127) and Ulysses (127) were pre-entered, with Gun Runner finishing first in the Breeders Cup Classic. Seven out of the top ten highest rated horses in the world and 17 of the top 34 participated. Aidan O Brien and Chad Brown tied for the most starters with 13 each A total of $2,350,000 was paid in travel awards for horses shipping into California 10

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14 New for 2018 In 2018, Breeders Cup announced the addition of the $1 Million Breeders Cup Juvenile Turf Sprint to the Championship lineup. This newly created two-year-old race joined the existing four Juvenile Championship races. For the first time at the 2018 Breeders Cup World Championships, all five Juvenile races will be run on Friday, November 2 and the Longines Breeders Cup Distaff and the Breeders Cup Dirt Mile move to the Saturday schedule of races. Breeders Cup also increased the purse of the TwinSpires Breeders Cup Sprint from $1.5 million to $2 million, which will take effect at the 2018 event. This brings the total of purses and awards distributed over the two-day Championships to over $30 million. Breeders Cup continues to pay down to the 8th finish position in all Championship races and provides an equine travel allowance of $40,000 for all international runners and $10,000 for all domestic runners stabled outside of Kentucky. In addition, a $1,500 hotel credit is given to each ownership at one of the official participant hotels and executive car service is provided for the owners of each Breeders Cup runner. Breeders Cup Challenge Series In 2017, the Breeders Cup Challenge Win & You re In Series concluded its eleventh year with 54 Challenge winners preentered and 45 individual starters in the Breeders Cup World Championships. In total the series featured 81 Challenge Series races, of which 62 were Grade/Group I rated. Geographically there were 36 International races, 18 on the East Coast, 15 in the Midwest and 12 on the West Coast. Winners received automatic race selection and free entry fees while foal Nominators of Challenge winners received a $10,000 nominator award for each win, totaling $470,000 paid out in Galileo tops the Challenge sire list with a total of six Challenge winners. In 2018, the Breeders Cup Challenge Series: Win & You re In presented by America s Best Racing will consist of 85 stakes races across six continents occurring in 12 countries. Winners of a Win and You re In Challenge Series race receive (i) an automatic entry into a specific Breeders Cup World Championship race, (ii) paid pre-entry and entry fees, (iii) a travel stipend of $10,000 for non-kentucky based domestic runners and $40,000 for international runners, (iv) a hotel credit and (v) a $10,000 Nominator Award. Now in its 12th year, the Challenge Series features stakes racing qualifiers from top venues in North America, including Arlington Park, Belmont Park, Churchill Downs, Del Mar, Gulfstream Park, Keeneland, Monmouth Park, Saratoga, Santa Anita Park and Woodbine. Venues around the world include Randwick in Australia; Kenilworth in South Africa; Palermo, San Insidro, Club Hipico, Gavea and Monterrico in South America; Ascot, Goodwood, Newmarket and York in Great Britain; Deauville and Paris in France; The Curragh and Leopardstown in Ireland; and Tokyo Racecourse, Hanshin Racecourse and Nakayama Racecourse in Japan. Please see Appendix C for a list of all 2018 Breeders Cup Challenge Series races. 12

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16 INTEGRITY AND SAFETY The Breeders Cup continues to lead by example in the conduct of Thoroughbred racing at the highest levels of safety and integrity. The Breeders Cup is a leading advocate of the Coalition for Horse Racing Integrity, and has devoted resources to support the passage of H.R The Horse Racing Integrity Act. In June 2018, CEO Craig Fravel testified before a sub-committee of the House Energy and Commerce Committee in support of a unified approach to medication regulation. There are currently over 100 House Co-Sponsors of this measure, and we anticipate additional support. In 2017, the Breeders Cup built upon its own out-of-competition testing policy in an effort to have immediate access to testing results of horses that won Breeders Cup Challenge races or were actively targeting the Breeders Cup World Championships. 85% of trainers that entered runners over the two days had pre-race testing performed under the Breeders Cup OOC testing protocols with completely clear tests being returned. Breeders Cup also enacted, for the first time, the Breeders Cup Condition of Entry. As a condition of entry for any Breeders Cup World Championship race, no horse within six months of the event may test positive for any anabolic steroid or any other prohibited substance described under the Association of Racing Commissioners International (ARCI) prohibited substance list. Any horse testing positive for anabolic steroids or other ARCI prohibited substances in a Breeders Cup out-of-competition test sample during the six-months prior to the Championships will be ineligible to participate. No runners in 2017 were found to have violated this rule. 14

17 Breeders Cup reserves the right to refuse the pre-entry or subsequent entry of any horse, in Breeders Cup sole discretion, for any reason, including, but not limited to, situations where any connection (e.g., owner, trainer, jockey) of such horse has engaged or may have engaged in conduct, or become the subject of a regulatory or law enforcement inquiry or action alleging conduct that is unlawful, unethical or which may otherwise compromise the integrity of the Breeders Cup World Championships. In addition, Breeders Cup may, in Breeders Cup s sole discretion, refuse the pre-entry or subsequent entry of any horse that has tested positive for any anabolic steroid or other ARCI prohibited substance in out of competition testing conducted in connection with the Breeders Cup Challenge Series in the year of the Championships or similar testing conducted by Breeders Cup Limited. The 2018 Breeders Cup will feature the most up-to-date medication practices, testing protocols, equine security program, veterinary exams, injury management protocols and racing surface testing: 1. Out-of-competition testing will be performed on all Breeders Cup Challenge winners and potential runners throughout the summer and fall and random follow-up testing on smaller samples will be performed within 24 hours of initial testing. 2. Breeders Cup Condition of Entry - As a condition of entry for any Breeders Cup World Championships race, no horse within six months of the event shall test positive for any anabolic steroid or any other prohibited substance described under the ARCI prohibited substance list. Any horse testing positive for anabolic steroids or other ARCI prohibited substances in a Breeders Cup out-of-competition test sample during the six months prior to the event will be ineligible to participate in the Breeders Cup World Championships. 3. Pre-race testing for TCO2 will be performed on all runners. 4. All runners must be on the grounds and checked in by equine security 72 hours before post at which point equine security surveillance will begin and will continue for 24 hours a day until the horse runs. A three-part equine security team consisting of security officers, trained BC investigators and KHRC investigators will monitor all runners and keep security logs on all treatments, visitors and staff associated with the runner. 5. Comprehensive veterinary exams will be performed all week long on runners, observing horses under tack on the track and in-stall and jogging exams performed multiple times by a team of impartial Breeders Cup veterinarians combined with the KHRC veterinary team. These combined teams will also create and implement an injury management protocol for race days. 6. Post-race testing will be performed on the first four finishers plus any additional runner selected by the Stewards. The post-race samples will undergo the most rigorous instrumental analysis at a fully accredited lab selected by the Kentucky Horse Racing Commission. The results will be reconciled against a mass-spectral library of more than 1,500 Substances - inclusive of controlled therapeutic medications, banned substances, and a recently expanded anabolic steroid panel. This screening process is more rigorous than that applied to any human sporting discipline. 15

18 BRAND ENHANCEMENT & EXPERIENCE A Celebration of the Sport and Lifestyle of Horse Racing The Breeders Cup has grown from a one-day, seven-race event to a multi-day, 14-race celebration of the sport and lifestyle of horse racing that features championship racing worth $30 million in purses and awards, world-class hospitality and exclusive events. The Breeders Cup Challenge Series layers our brand on top of 85 of the best races in 12 countries around the world. The Breeders Cup is recognized globally as one of the world s most prestigious, world-class championship racing events. Our brand positioning and messaging continually reinforces our core value proposition of showcasing the best races, the best jockeys, the best trainers, the best owners, the best breeders, the best events and the best experience. The Breeders Cup continues to retain a luxury, lifestyle public relations firm, Nike Communications, to tell the brand story through targeted, top-tier national media outlets. The Breeders Cup fan development and engagement strategy relies heavily on digital and social media to reinforce the brand messaging and increase interest in the event and sport. In 2017, the Breeders Cup launched a new, mobile-first website that provides new and existing fans a visually appealing and engaging destination to learn about and experience the Breeders Cup. A native ios and Android mobile app was also created to offer live streaming of all Breeders Cup races, race and contender information, event and venue details and other interactive experiences. Breeders Cup became the first racing event in the U.S. to live stream from a jockey cam during a live race when Mike Smith wore the Jockey Cam powered by Aston Martin for most of his Breeders Cup mounts at Del Mar, including his victory ride aboard Caledonia Road in the Juvenile Fillies. The Jockey Cam was streamed live on the NBC Sports broadcast, BreedersCup.com and the Breeders Cup mobile app. In another first for the Breeders Cup, a 360 camera was installed in the Del Mar paddock and streamed live to BreedersCup.com and the mobile app to allow users at home and around the world to experience what it was like to be at Del Mar for the Breeders Cup. Breeders Cup continues to invest in growing our social channels, developing a consistent Breeders Cup voice on social media and increasing online engagement with our fans. During Breeders Cup week alone social media generated 29 million impressions, 2.5 million video minutes watched and 754,000 engagements. For the second year in a row, Breeders Cup partnered with Snapchat to offer a Live Story on Championship Saturday that generated 1.3 million unique views of 1,000 pieces of user generated Breeders Cup content. 16

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20 Television Exposure NBC Sports is the long-term home of the Breeders Cup (through 2025) and has shown tremendous commitment to the sport of horse racing in the past few years. The Breeders Cup Classic continues to be the only race ever broadcast on prime time network television and 2017 s Classic broadcast drew an average of 2 million viewers while NBCSN s Friday and Saturday shows posted a combined average of 550,000 viewers during the nine and half hours of coverage. Another 464,000 viewers streamed the Breeders Cup online or via the Breeders Cup and NBC Sports mobile apps. In addition to the 12 hours of Championship Week coverage, the expanded Breeders Cup Challenge Series (see full schedule in Appendix D) featured 11 races across 13.5 hours of live coverage across NBC and NBCSN bringing Breeders Cup total broadcast hours to 25.5 for the year. Breeders Cup is a trusted partner of NBC Sports and assists with the production, social media and other television needs at all of these Win And You re In sites. When adding the Triple Crown and other major event coverage, NBC Sports provided a total of 85.5 hours of racing coverage in 2017 including, for the first time, live coverage from Royal Ascot. In 2018 that international coverage was expanded and featured four Breeders Cup Challenge races, the first Win and You re In races ever held during the Royal Meeting. Breeders Cup and NBC Sports are currently discussing terms to renew the Breeders Cup Challenge Series beyond the current contract s expiration at the end of

21 Cheval: A Collection by Breeders Cup Leveraging the power of the Breeders Cup brand, a new, luxury merchandise line was developed and launched in 2017 featuring only the iconic horse head design from the Breeders Cup primary logo. Cheval, as it was named, was created with our merchandise partner, Upper Right Marketing, and represents the highest level of the Breeders Cup brand and experience. The Cheval brand embodies luxury, aspiration, excellence and prestige. Officially launched in October of 2017, initial sales were strong and the new merchandise line presents a long-term growth opportunity for Breeders Cup. 19

22 Providing a Customer and Participant Experience That Matches the Quality of Our Championship Racing Product In 2017, the Breeders Cup continued its relentless focus on improving the participant and fan event experience. To start, attendance was capped at 37,500 people to ensure those on-site had an enjoyable two days and that decision, despite forgoing additional ticketing revenue, proved to positively affect other KPIs, including short wagering and concession lines which assisted in producing record on-track handle and strong food and beverage sales. Breeders Cup utilized the grandstand parking lot area to create the Chalet Village, an exclusive seating area boasting two double-decker chalets with a private entryway providing guests additional luxury accommodations and strategically dispersing patrons around the venue to realize operational efficiencies. Temporary box seats were added to the Clubhouse and Grandstand areas; 3,000 chairs were upgraded in existing box seating, dining and suite areas; 200 tables were upgraded in the Turf Club, and; two local celebrity chefs Jeffrey Strauss of Pamplemousse Grill and Top Chef finalist Brian Malarkey curated special menus in certain dining areas to provide a better experience for our guests. In total, 2,500 temporary seats were added throughout the Del Mar racetrack to provide a better customer experience. Playing into the local market vibe, 750 tons of sand were brought into the Del Mar infield to create a fun, new area called The Beach that offered rail-side viewing, adirondack chairs with umbrellas and a private bar. The remainder of the infield played home to Taste of Breeders Cup: San Diego, a unique culinary experience celebrating the signature fare that has solidified San Diego as one of the country s top culinary destinations. The one-ofa-kind festival featured 21 different chefs and food vendors, a large video board, premium bars and a beer garden. In order to deliver seamless ingress and egress at Del Mar racetrack, Breeders Cup developed a comprehensive traffic control plan for the main roads surrounding the track, including flaggers, directional cones, traffic light control and law enforcement support. As part of the plan, Breeders Cup offered a courtesy Park-and-Ride program 20 20

23 that shuttled 7,500 fans to and from the racetrack from three off-site locations as well as complimentary shuttle service for participants and VIPs from official host hotels. During the two-day Championships, guests on-track were treated to special performances by Rock and Roll Hall of Fame member Richie Sambora and four-time Grammy-nominated singer and songwriter Jewel who sang an acapella version of Bing Crosby s Where the Turf Meets the Surf. Tapping into the strong local military presence in San Diego, the Navy Band (Friday) and the 1st Marine Division Band (Saturday) performed the National Anthem. A special flyover of three F/A-18 Hornet jets was conducted by the Marine Fighter Attack Squadron 232 Red Devils on Saturday. Chalet Village was home to the Trackside Breakfast Marquee presented by WinStar Farm and Fasig-Tipton, a 16,000 sq. ft. temporary chalet that provided Participants a luxurious way to watch their horses work in the morning during Breeders Cup week. Catered breakfast was provided by high-end local restaurant Pamplemousse Grille. Guests were offered complimentary shoe shines and other entertainment throughout the week, including various musicians and magicians. On Thursday before the World Championships, Participants gathered at the picturesque Birch Aquarium with cliff side views overlooking the Pacific Ocean in La Jolla for the 7th Annual, A Taste of the World event featuring fifteen international chefs and a special performance by Jewel. In partnership with the Del Mar Village Association, Breeders Cup constructed an 8,000 sq. ft. chalet on the grounds of Powerhouse Park overlooking the Del Mar beach. The Barn at the Beach, as it was named, played host to seven events throughout the week, including the Breeders Cup Post Position Draw presented by Rood & Riddle on Monday evening. The venue provided spectacular views of the Pacific Ocean and many of the events held there supported local causes. The Breeders Cup, Del Mar Racetrack, San Diego Tourism Authority, San Diego Sports Alliance and organizers of the Host Committee produced the 2017 Breeders Cup Festival, a weeklong series of events and activations that led up to Breeders Cup weekend. Festival events raised more than $200,000 for local, equine and national charities. 21

24 FINANCIAL PERFORMANCE SELECTED FINANCIAL DATA AND MANAGEMENT S DISCUSSION AND ANALYSIS OF OPERATING RESULTS Responsible Stewardship of Nominator Provided Financial Support Actual FYE Actual FYE Actual FYE Actual FYE Actual FYE 1/31/18 1/31/17 1/31/16 1/31/15 1/31/14 Revenues: Simulcast fees $ 12,612,501 $ 12,599,070 $ 11,939,746 $ 11,869,179 $ 12,138,106 Host track contribution 7,853,701 4,609,961 6,179,004 4,250,000 3,928,780 Entry fees 8,985,000 8,265,000 5,720,000 6,100,000 5,500,000 Nomination fees 15,669,308 15,610,640 15,265,536 14,620,520 14,952,119 Sponsorship & licensing 6,561,810 5,894,589 6,381,135 4,130,633 2,873,284 Total Revenues 51,682,320 46,979,260 45,485,421 40,970,332 39,392,289 Expenses: Championship purses & awards 28,166,481 27,703,799 25,980,500 26,293,250 26,461,000 Challenge awards & administrative costs 3,165,290 3,325,715 2,171,112 2,142,000 2,137,536 Direct event operating expenses 573, , , ,407 1,116,402 Marketing & enhanced experience expenses 3,340,001 3,731,940 3,435,394 3,466,340 3,158,381 Television 3,612,601 3,192,080 3,794,762 3,944,780 2,245,563 Sponsorship expenses 1,629,537 1,374,208 1,783,936 1,115,746 1,018,568 Nomination marketing & administration 366, , , , ,833 Salaries & benefits 4,391,176 3,940,351 4,136,117 3,843,227 3,791,085 Business travel 559, , , , ,639 NTRA/TAA support 192, , , , ,333 New business initiatives 2,081 1,459 45, ,784 92,510 General & administrative fees 1,558,842 1,538,680 1,484,737 1,557,028 1,845,929 Total Expenses 47,558,924 46,581,095 44,256,664 44,440,268 43,205,779 Net Operating Income 4,123, ,165 1,228,757 (3,469,936) (3,813,490) Investment Income 8,106,319 3,141,436 63,088 4,359,603 3,859,375 Racing Integrity Coalition/ 151, , , World Horseracing Consortium Innovation Committee 275,000 Net Income $ 11,802,804 $ 3,335,508 $ 842,725 $ 889,667 $ 45,885 Additional Financial Data: Debt/Investments Summary Line of credit outstanding permanent portion only - 675, ,454 5,455,439 9,194,171 Investment values 51,850,588 42,912,489 39,773,772 43,710,950 46,331,892 Investments position (net) 51,850,588 42,237,083 38,957,318 38,255,511 37,137,721 Other assets & liabilities 2,446, , ,901 60, ,105 (not utilized in the permanent portion of the line of credit calculation above) Total unrestricted $ 54,297,529 $ 42,494,726 $ 39,159,219 $ 38,316,493 $ 37,426,826 net assets 22

25 FINANCIAL PERFORMANCE The management of Breeders Cup Limited ( BCL ) has prepared the following discussion of financial results for the year ending January 31, A copy of the 2017 results (year ending January 31, 2018) along with the results for prior fiscal years 2013 to 2016 are attached for comparison purposes (Schedule A). For presentation purposes, each fiscal year will be referred to by the calendar year in which the Breeders Cup World Championships ( Championships ) were conducted. As discussed more fully below, you will note certain material differences in some line items comparing results for years where the event has been held at Santa Anita versus Del Mar. This discrepancy is due to negotiated differences in the respective deal structures. Simply stated, the Santa Anita deal structure contemplated a minimum guaranteed contribution by the host site ($4.2 million) while the Del Mar deal provides for upfront retention by the host site and a back-end revenue share. The impact in terms of financial reporting has been a shift of some expenses from the BCL only budget (as was the case at Santa Anita) to the event budget, reflected in Host Track Contribution, (as was the case at Del Mar). The end result is a more accurate placement of expenses that are more directly related to event execution which corresponds to the allocation of risk was a record year. BCL recorded both its highest ever net income of $11.8 million and highest ever net operating income of $4.1 million. Del Mar delivered as promised with ticket sales of $15.4 million and an all-time record of $25.2 million in on-track handle despite limiting on on-track attendance of 37,500 per day. Those figures compare to prior year ticket sales at Santa Anita of $9.6 million and on-track handle of $20.7 million. It is clear that Del Mar earned its place in our current roster of host track partners (Churchill Downs, Del Mar, Keeneland and Santa Anita) which have each established the ability to produce a strong financial performance and most importantly bring a positive owner and fan experience. Aside from the record financial performance, Del Mar delivered in spectacular fashion, featuring Southern California sunshine, beaches and first-class hospitality that introduced many of our core guests from the United States and abroad to experience Where the Turf Meets the Surf for the first time. Most importantly, the racing was incredible and included 159 starters, 71 of which were Group or Grade I winners. A total of 38 international runners competed in the Breeders Cup this year which is a new record high and seven more than in The foundation of the success achieved in 2017 is based off of the strategic objectives established in as follows: 1. Creation of a true sense of competition among potential host sites and host communities through the introduction of new venues (Keeneland and Del Mar) resulting in improved service delivery, capital investment in facilities, community support and involvement and financial return. 2. Development of a long-term television and media partnership with NBC, now the self-described television home of horse racing, and expansion of the brand across the Breeders Cup Challenge Series while building a storytelling and sponsorship sales platform for the Championships throughout the country and the world in the summer and fall. 3. Construction of consistent brand messaging, public relations and marketing programs in support of the Challenge and the Championships through expanded television coverage, earned media, and a creative and coherent social and digital media strategy. 23

26 FINANCIAL PERFORMANCE 4. Continual enhancement and upgrade of the participant experience through world class entertainment events, improved food and beverage options and concierge level customer service, making the Breeders Cup a can t miss event on the international racing calendar. 5. Maintenance of highest standard of integrity, security and safety in connection with the Championships and continuing to lead US racing by example in developing and implementing best management practices in pre- and post-race drug testing, out-of-competition testing, on-site security and video surveillance, racing surface inspections, pre-race veterinary exams and integration and cooperation with regulatory authorities. 6. Active management of expenses while seeking growth in core revenue areas such as ticket sales, wagering and sponsorship and continued delivery of experiential quality and the quality of the racing product. With the foregoing objectives in mind, we remain highly focused on conducting championship races of the highest caliber featuring an international cast of trainers, owners, breeders and most importantly, horses. REVENUES Total revenues for 2017, excluding gains on investments, were $51.7 million as compared to $47 million in Critical elements in continued overall growth of revenue are: (i) growth in the volume of wagering and more specifically on-track handle growth due to (1) increased premium seating which correlates to increased average wagers per person and (2) new requirements in California which treat a wager made via advanced deposit wagering ( ADW ) by a California resident at the racetrack as an on-track wager resulting in higher revenue to the host track, (ii) growth in the yield on simulcast wagers as the result of a change in pricing beginning in 2015 to 50% of gross rather than 50% of net takeout, (iii) overall growth in ticketing revenues embedded in the Event Budget, and (iv) sustained growth in sponsorship revenues. Admissions revenue is a key component of Host Track Revenue which varies greatly depending upon the host site and is primarily a function of premium seating capacity as discussed below. Simulcast Revenues Simulcast revenues in 2017 were a Breeders Cup record of $12.6 million. Total all source wagering was $170.8 million (the second highest in the history of Breeders Cup; the highest occurred in 2010 which included one additional Breeders Cup race). Common pool wagering increased by $4.8 million from 2016 which resulted in a positive variance of $390,000. After factoring in separate pool wagering, the end result is a total positive variance of $142,000 before various licensing fees. The positive variance is particularly impressive given the number of long-shot winners, which typically results in lower churn and lower net revenue. Positive factors that contributed to increased simulcast revenue included a larger average field size of 12.2 in 2017, up from 11.5 in Additionally, Congress enacted legislation shortly prior to the 2017 Breeders Cup which revised the mandatory tax withholding that previously considered only the base amount of a wager rather than the overall cost of a mutuel ticket. As such, fewer winning wagers trigger automatic withholding requirements which in turn generated greater liquidity for horseplayers to continue to make wagers throughout the day. 24

27 FINANCIAL PERFORMANCE We believe the industry continues to experience a shift in wagering from brick and mortar locations to ADW companies as evidenced by the $4.8 million increase in common pool simulcast wagering in Accordingly, we are continuing to project increases in simulcast handle. Host Track Contribution Host Track Contribution is tied to the net results from shared operational revenues and expenses between the host track and Breeders Cup included in a contractual budget called the Event Budget. The main sources of revenue within the Event Budget are on-track wagering, ticketing, and attendance related revenues such as parking and concessions (excluding food and beverages that are already included in the ticket price). Expenses within the Event Budget include labor costs (host track staffing and seasonal event staffing), rental fees (tote equipment, credit card terminals, production costs, and furniture), operating supplies (ticketing brochures, racing programs, and track apparel), racing and venue related expenses (veterinary panel, quarantine build-out, racing panel, and equine security), signage, participant hospitality, temporary facilities, and Breeders Cup Betting Challenge ( BCBC ) expenses. Most notably, the Host Track Contribution in 2017 was $7.9 million as compared to $4.6 million in Total Event Budget gross revenue was $23 million in 2017 and $14.1 million in The primary drivers of this line item were ticket sales revenues (excluding processing, parking and other fees) which totaled $15.4 million in 2017, as compared to $9.6 million in 2016 and on-track handle. Note that $156,911 from Trackside Marquee ticket sales in 2016 was not included in the Event Budget and was treated as BCL only revenue. Growth in ticket sales in 2017 resulted from several factors including an increased availability of premium seating, the strong demand to attend Del Mar as a first time venue, and local support from the San Diego area. On-track wagering in 2017 was particularly robust with total on-track handle of $25.2 million as compared to $20.7 million in 2016 resulting in a positive variance of $4.5 million of total handle and $900,000 of net on-track wagering revenue. Other revenue increases contained within the Event Budget included $812,000 of net revenue from general concession sales in 2017 compared to $173,000 in 2016 resulting in a positive variance of $639,000. These figures are especially impressive when taking into account reported on-track attendance on Saturday of 37,692 in 2017 versus 72,811 in These figures support our theory that increased premium seating results in other ancillary increased revenue (wagering, food and beverage and merchandise sales.) $360,000 of local sponsorships occurred in 2017 as compared to minimal local sponsorships in While, as noted above, the expense items included in the Event Budget vary between Santa Anita on one hand and Del Mar on the other, the primary drivers of this line item are expenses related to ticket sales. Total Event Budget expenses were $13.4 million in 2017 as compared to $8.4 million in Expense increases are mainly attributable to: (i) additional temporary structures; (ii) food and beverage costs attributable to increased premium ticket sales which included a food and beverage component; (iii) necessary offsite parking and transportation due to the limited Del Mar parking footprint; (iv) increased undercard purses and quarantine requirements, (v) horsemen gifting being allocated to the Event Budget versus the BCL Budget; and (vi) increased horsemen hospitality. 25

28 FINANCIAL PERFORMANCE More specifically, even though total revenue within the Event Budget had a positive variance of $7.9 million in 2017, total labor costs only increased by $37,000. Increased expenses associated with temporary structures in 2017 totaled $1.6 million (excluding the breakfast marquee/trophy lounge buildout costs which were allocated to the BCL Budget because those facilities were repurposed for the Trophy Lounge resulting in no ticket purchases for sponsors) as compared to $552,000 in 2016, resulting in a negative variance of $988,000. Entry Fees Entry fees totaled $9 million in 2017 versus $8.3 million Increased entry fees are the result of an increased field size of 159 starters in 2017 from 150 starters in At pre-entry, 10 out of 13 Championship races in 2017 had full fields or were oversubscribed compared to seven of 13 in NOMINATIONS Domestic Stallion Nominations Domestic stallion nomination fees in 2017 yielded $8.4 million as compared to $8.3 million in Advertised stud fees remained fairly consistent with stud fees in 2016, led by nine stallions with advertised fees of $100,000 or more and 20 stallions whose fees combined with live foal assessments paid $100,000 or more in fees. International Stallion Nominations International stallion nomination fees in 2017 yielded $2.3 million in fees, a positive variance of $46,000 from 2016, including seven stallions standing in Europe that stand for more than US$100,000. The economy in South America, in particular Argentina, continues to be difficult and remains an obstacle for generating significant stallion nomination fees from that region. Australian nominations have also declined due to distance and geography, but BCL still receives support from key nominators. Foal Nomination Fees Foal nomination fees slightly increased in 2017 and yielded $4.2 million with a positive variance of $118,000 from the prior years. The small increase in foal nominations corresponds to the Jockey Club s continued projection of flat foal crops year to year. Horses of Racing Age Nominations Horses of Racing Age nominations totaled $782,000 in 2017 as compared to $866,000 in Management continues to believe that there will be slight declines in Horse of Racing Age nominations from year to year due to increases in eligible foals under the adoption of the Breeders Cup International Stallion Program. With many more international runners becoming automatically eligible, the majority of late nominations will be comprised of those foals sired by North American stallions and not nominated to the Breeders Cup as foals. Sponsorship and Licensing Sponsorship and licensing (merchandise, television and radio, and other intellectual property rights) resulted in combined revenue of $6.56 million in 2017, a positive variance of $667,000 from Specifically, sponsorship had a positive variance of $136,000, 2.6% over In 26

29 FINANCIAL PERFORMANCE addition to sponsorship revenue, $360,000 of local sponsorship revenue was included in the Event Budget which is reflected in the Host Track Contribution. Los Angeles has historically been a difficult marketplace and increased sponsorship sales in 2017 are attributed to a more favorable marketplace in San Diego in addition to the event having significant visibility as a firsttime event within the community. Licensing had a positive variance of $531,000, 88% over These increases were attributable to: (i) a new clothing line and partnership with Upper Right Marketing resulting in $75,000 of additional revenue; (ii) $100,000 of new royalties relating to the establishment of online qualifiers to the Breeders Cup Betting Challenge via Horseplayers. com; and (iii) $216,000 of additional revenue through restructuring existing licensing agreements relating to selling our content for international distribution. Sponsorship in the American Thoroughbred industry continues to face challenges including animal welfare issues and various companies reluctant to sponsor industries connected to wagering. As a result of the 2008 financial crisis which greatly impacted sponsorships throughout sports, BCL s sponsorship efforts have shifted from maintaining a small number of key sponsorship partners to now over 40 sponsorship partners. Sponsorship diversification mitigates significant financial risk of losing a major sponsor and increases comfort among potential sponsors impressed by BCL s extensive roster of partners. BCL s major partnerships include Longines, Kendall-Jackson Wines, TwinSpires, Aston Martin, America s Best Racing, Maker s Mark, John Deere, Tito s Handmade Vodka, Lane s End, Harrah s and WinStar. Other major racing events such as Prix de l Arc de Triomphe, Goodwood, Royal Ascot and Dubai World Cup have major presenting or title sponsorship deals (indirectly through sovereign wealth funds) which likely encompass a high percentage of their total sponsorship revenue. BCL continues to have discussions with similar potential sponsors, but management believes a diversified sponsorship roster positions BCL for a stable future. EXPENSES WORLD CHAMPIONSHIP RACING EXPENSES Championship Purses 2017 Championship purses totaled $24.4 million which reflects no variance from the 2016 purses. While no purse increases occurred in 2017, purses will increase by $1.5 million in 2018 as the result of the creation of the $1 million Juvenile Turf Sprint and a $500,000 purse increase in the Sprint. Since 2015, Breeders Cup has increased purses by a combined total of $3.5 million or roughly 14%. Championship Nominator Awards Horses that finish first through fourth in any Breeders Cup World Championship race earn a foal nominator award for the breeder nominating the horse. A stallion nominator award is paid to the person who nominated the sire. Stallion nominator awards are no longer paid to European Breeders Fund nominated stallions who were not separately nominated to the Breeders Cup. Championship nominator awards are based on a percentage of nomination revenue so there was no mid-year adjustment needed in this category with respect to increases in entry fees. Championship nominator award expenses totaled $1.3 million in 2017, which is a negative variance of $118,000 from