Breeders Cup Limited January 31 2017 Audit Report.Pdf

BREEDERS’ CUP LIMITED AUDITED FINANCIAL STATEMENTS Years Ended January 31, 2017 and 2016

April 25, 2017

Dear Breeders’ Cup Nominators,

On January 24, 2017, I had the great privilege of accepting the Longine’s World’s Best Horse Race Award awarded to the 2016 Breeders’ Cup Classic. After 26 years in racing and having witnessed many highs and a few lows, I was remarkably surprised by how moved I felt at the time – not by a sense of personal accomplishment but by a sense of collective recognition for the Founders of the Breeders’ Cup, our nominators and supporting owners and trainers and, not least of all, a talented and committed group of management and staff. I am not, of course, standing on a deck with a sign reading “Mission Accomplished” but we can all take immense pride in the acknowledgement by a panel of international handicappers for a race that in a relatively short history has produced some of the most memorable performances in racing. While Arrogate and California Chrome deserve special recognition, I was reminded on that day and through that award of what a remarkable event the Breeders’ Cup is as the culmination of the collective efforts of breeders, owners, trainers, riders, grooms, hot walkers and racetracks and simulcast partners the world over.

The spectacular racing over the two days of the Breeders’ Cup in 2016 was not limited to the Classic. A record eleven returning Champions competed in front of a record 118,000 people including winners of the Dubai World Cup, Prix de l ’Arc de Triomphe, Arlington Million, King George VI and Queen Elizabeth Stakes as well as the Travers, Whitney and Pacific Classic. A total of 72 individual Group or Grade I winners participated in the 13 Championship races. As thrilling as the Classic was, the stretch duel between Beholder and Songbird in the Distaff will be long remembered as will the superb rides by long‐time friends and rivals Mike Smith and Gary Stevens.

All of this took place on perhaps the most spectacular visual stage in all of Thoroughbred racing, Santa Anita Park. The Breeders’ Cup would not exist without the hard work and enthusiasm of our host site partners and we are most grateful to the Stronach Group for welcoming our team and for delivering spectacular weather and exceptional hospitality for our guests.

2016 was a success on the racetrack and a financial one as well. With the encouragement of the Board we have effectively eliminated long‐term borrowing as a component of our financial operations having paid off the “permanent” element of our working capital line of credit that totaled approximately $9 million at its peak. As I write our working capital line of $16 million is used only for seasonal cash flow needs mostly relating to event operations and purse payments. 2016 also represented a turning point for events conducted at Santa Anita as net income from operations showed a positive return for the first time when Santa Anita has been a host site.

Ticket sales revenue in 2016 increased to $9.6 million as compared to the 2014 event at Santa Anita where sales totaled $8.6 million. Simulcast fees of $12.6 million set a new Breeders’ Cup record and total revenues exceeded $50 million for the first time in 2016.

I would be remiss were I not to mention our broadcast partner NBC which has been a partner in every sense since taking over broadcast rights in 2012 and which now self‐identifies as the television home of Thoroughbred racing. Production values continue to improve each year and we were very pleased to have reached more than 5.5 million viewers over the course of Championship Weekend. This was in addition to season long viewing of the Breeders’ Cup Challenge Series featuring great races from historic venues around the country including Belmont Park, Monmouth, Saratoga, Keeneland and Santa Anita. The Breeders’ Cup is all about showcasing the best our sport has to offer and the Challenge Series on NBC and NBCSN has greatly expanded the audience for Thoroughbred racing.

Once again, our nominators remain the foundation for the Breeders’ Cup with total nomination fees of over $14.7 million in 2016. The percentage of eligible foals nominated again exceeded 50% in 2016 while domestic stallions standing for more than $5,000 once again nominated at a rate of 95%.

As you can see, the Breeders’ Cup is in excellent condition and we look forward to the excitement and challenge of a new venue “Where the Turf Meets the Surf” on November 3 and 4, 2017. We can’t wait to see you there!

Many Thanks,

Craig Fravel President and CEO

BREEDERS’ CUP LIMITED

CONSOLIDATED FINANCIAL STATEMENTS January 31, 2017 and January 31, 2016

CONTENTS

INDEPENDENT AUDITOR’S REPORT ...... 4-5

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION ...... 6

CONSOLIDATED STATEMENTS OF ACTIVITIES AND CHANGES IN NET ASSETS ...... 7

CONSOLIDATED STATEMENTS OF CASH FLOWS ...... 8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ...... 9-18

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of January 31, 2017 and 2016, and the changes in its net assets and its cash flows for the years then ended, in accordance with accounting principles generally accepted in the United States of America.

Louisville, Kentucky April 25, 2017

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

Louisville, Kentucky April 25, 2017

BREEDERS’ CUP LIMITED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION January, 31 2017 and January 31, 2016

January 31, 2017 January 31, 2016 Assets Cash and cash equivalents $ 425,599 $ 228,046 Accounts receivable, net 1,967,178 3,092,786 Accrued interest receivable 38,716 35,996 Investments, at fair value 42,486,889 39,637,445 Other assets, net 562,686 454,478

Total assets $ 45,481,068 $ 43,448,751

Liabilities and Net Assets Accounts payable and accrued expenses $ 626,158 $ 1,147,693 Line of credit 2,295,184 3,076,840 Total liabilities 2,921,342 4,224,533

Capital contributions 65,000 65,000 Unrestricted net assets 42,494,726 39,159,218 Total net assets 42,559,726 39,224,218

Total liabilities and net assets $ 45,481,068 $ 43,448,751

See accompanying notes to 6. Consolidated Financial Statements.

BREEDERS’ CUP LIMITED CONSOLIDATED STATEMENTS OF ACTIVITIES AND CHANGES IN NET ASSETS For the Years Ended January 31, 2017 and 2016

Year ended Year ended January 31, 2017 January 31, 2016 Revenues Nomination fees, net of stallion assessment reserve of $75,000 in January 2017 and $40,000 in January 2016 $ 15,610,640 $ 15,265,536 Breeders’ Cup Championships fees 25,474,031 23,838,750 Sponsorship and licensing revenue 5,894,589 6,381,135 Unrealized and realized gains (losses) on investments 2,950,039 (124,957) Interest and dividend income 191,398 188,045 Total revenues 50,120,697 45,548,509

Expenses Purses, nominator and challenge awards 31,029,515 28,151,614 Television 3,192,080 3,794,762 Marketing and simulcast development 3,731,939 3,435,394 Personnel costs 3,940,351 4,136,117 General and administrative 1,982,967 1,926,741 Sponsorship 1,374,208 1,783,936 Direct event operations 734,315 354,879 Racing Integrity Coalition 169,092 449,120 Nominations expenses 313,525 381,088 NTRA membership dues 195,833 200,000 New Business Initiatives 36,459 - Aftercare Alliance contribution 42,900 42,900 Interest expense 42,005 49,233 Total expenses 46,785,189 44,705,784

Change in net assets 3,335,508 842,725

Total net assets, beginning of year 39,224,218 38,381,493

Total net assets, end of year $ 42,559,726 $ 39,224,218

7. See accompanying notes to Consolidated Financial Statements.

BREEDERS’ CUP LIMITED CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended January 31, 2017 and 2016

Year ended Year ended January 31, 2017 January 31, 2016x

Cash flows from operating activities Change in net assets $ 3,335,508 $ 842,725 Adjustments to reconcile change in net assets from operations to net cash provided by operating activities Realized gain on sale of investments (772,687) (1,057,450) Unrealized (gain)/loss on investments (2,266,617) 1,710,483 Depreciation and amortization 61,913 81,075 Changes in Accounts receivable, net 1,125,608 (1,515,257) Accrued interest receivable (2,720) (266) Other assets, net (170,121) (273,387) Accounts payable and accrued expenses (521,535) 586,810 Net cash provided by operating activities 789,349 374,733

Cash flows from investing activities Purchases of investments (10,039,518) (3,619,301) Proceeds from sales of investments 10,229,378 6,898,213 Net cash provided by investing activities 189,860 3,278,912

Cash flow from financing activities Payments under line of credit, net (781,656) (3,634,319) Net cash used for financing activities (781,656) (3,634,319)

Net change in cash and cash equivalents 197,553 19,326

Cash and cash equivalents at beginning of year 228,046 208,720

Cash and cash equivalents at end of year $ 425,599 $ 228,046

Supplemental disclosure of cash flow information Cash paid during the year for: Interest $ 42,005 $ 49,233

See accompanying notes to 8. Consolidated Financial Statements.

BREEDERS’ CUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS January 31, 2017 and January 31, 2016

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation: The consolidated financial statements include the financial information of Breeders’ Cup Limited (the “Company”) and its wholly owned, for-profit subsidiary, Breeders’ Cup Properties, LLC and Breeders’ Cup Charities, Inc., a 501 (c)(3) non-profit corporation. All intercompany balances and transactions have been eliminated in consolidation.

Purpose of Organization and Nature of Operations: Breeders’ Cup Limited was incorporated in 1980 as a non-profit organization whose purpose is to stimulate public interest in the sport of Thoroughbred horse racing. The primary goal of Breeders’ Cup Limited is to build broad-based positive public awareness of Thoroughbred racing, thereby increasing fan participation in the sport and expanding opportunities for development of the Thoroughbred industry. This objective is achieved through a multimillion dollar year-round racing and promotional program.

Breeders’ Cup Properties, LLC was established to own and operate commercial business ventures and investments that are profit motivated.

Breeders’ Cup Charities, Inc. was established as a means to raise funds from the public and Thor- oughbred industry participants to be donated to other charitable organizations focusing on equine and human health issues.

Revenue Recognition: Stallion nomination fees are recognized during the calendar year that corresponds to the related breeding season. Foal nomination fees are recognized during the year in which the foal is nominated. Championships fees include entry fees for horses and contributions from the host track. Fees associated with the Championships are recognized during the year in which the event is held.

Cash and Cash Equivalents: Breeders’ Cup Limited considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. At times, the Company maintains checking account balances in a financial institution in excess of the insurance limits provided by the Federal Deposit Insurance Corporation.

(Continued) 9.

BREEDERS’ CUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS January 31, 2017 and January 31, 2016

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Accounts Receivable: Accounts receivable consist primarily of nomination fees and amounts associated with the Championships. Interest is generally not charged on past due accounts. An allowance for doubtful accounts is provided based on historical collection experience and a review of the current status of existing receivables. Losses are charged off to the allowance when Breeders’ Cup Limited deems further collection efforts will not produce additional recoveries. The allowance balances were $53,000 and $55,000 as of January 31, 2017 and 2016, respectively.

Breeders’ Cup Limited requires additional stallion nomination fees, known as Live Foal Assessment Fees, for stallions producing 50 or more live foals in a breeding season. Refunds related to these Live Foal Assessments could be payable by Breeders’ Cup Limited if the number of actual live foals differs from the number on which the assessment was based. Live Foal Assessment Fee refunds for the year ended January 31, 2017 and 2016 were estimated at $75,000 and $40,000, respectively, and are recorded as an allowance against accounts receivable on the consolidated statements of financial position. If actual results vary from the estimate, changes in net assets in future years will be decreased or increased as appropriate.

Investment Valuation and Income Recognition: Breeders’ Cup Limited’s investments are reported at fair value. For purpose of calculating realized gain and losses, the specific identification method is used to determine the carrying value of the investment securities sold. Interest income is recorded on the accrual basis. Dividends are recorded on the ex dividend date.

Financial Accounting Standard Board guidance defines fair value as the price that would be received by the Company for an asset or paid by the Company to transfer a liability (an exit price) in an orderly transaction between market participants. This guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

(Continued)

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BREEDERS’ CUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS January 31, 2017 and January 31, 2016

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The following describes the valuation methods and assumptions used by the Company to estimate the fair values of investments.

Level 1 inputs: The fair values of common stock and mutual fund investments are determined by obtaining quoted prices on nationally recognized securities exchanges. Fair values of corporate bonds reflect the closing price reported in the active market in which the security or bond is traded. The fair values of the U.S. Treasury and Agency securities are calculated based on market prices of similar investments.

Level 2 or 3 inputs: The Company’s level 2 equity funds have observable inputs and market activity that allow for pricing based on the underlying market prices of the items in the investments, utilizing the market approach and income approach valuation techniques. The fair values of level 3 funds are based on the net asset values of such funds provided by the fund managers, adjusted if necessary for cash receipts, cash disbursements and any significant known valuation changes in market values. In addition, level 3 Funds have a significant restriction on redemption of funds (see note 3).

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

Advertising: The Company expenses advertising costs as incurred. Advertising expense was approximately $700,000 and $800,000 for the years ended January 31, 2017 and 2016, respectively.

Estimates in the Financial Statements: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. To the extent actual results differ from those estimates, future revenues and expenses could be affected.

Income Taxes: In respect to accounting for uncertainty in income taxes, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

11. (Continued)

BREEDERS’ CUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS January 31, 2017 and January 31, 2016

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The Company recognizes interest/or penalties related to income tax matters in income tax expense. The Company did not have any amounts accrued for interest and penalties at January 31, 2017 and January 31, 2016. The Company is no longer subject to examination by taxing authorities for years before 2013. The Company does not expect the total amount of unrecognized tax benefits to significantly change over the next 12 months. The Company’s for-profit subsidiary is subject to U.S. federal income tax as well as state income taxes.

Furniture, Fixtures, and Equipment: Furniture, fixtures, and equipment are recorded at cost. Furniture, fixtures, and equipment are depreciated using the straight-line method over their estimated useful lives. Major additions and improvements exceeding $2,000 with a useful life of greater than one year are capitalized, while maintenance and repairs are expensed as incurred. Upon retirement or sale, the cost of assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is credited or charged to operations. Accumulated depreciation was $846,201 and $849,107 for the years ended January 31, 2017, and 2016, respectively. The net value of property and equipment included in other assets at January 31, 2017 and 2016 is $229,184 and $175,096, respectively.

Impairment of Long-Lived Assets: The Company reviews for the impairment of long-lived assets subject to depreciation and amortization including, furniture, fixtures, and equipment, whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. No such impairment losses were recognized for the periods ended January 31, 2017 or 2016.

Subsequent Event Analysis: Management has performed an analysis of activities and transactions subsequent to January 31, 2017 to determine the need for any adjustments to or disclosures within the financial statements for the year ended January 31, 2017. Management has performed its analysis through April 25, 2017, the date the financial statements were available to be issued.

NOTE 2 – NTRA

The National Thoroughbred Racing Association, Inc. (“NTRA”). NTRA is a 501(c)(6) non-profit membership association organized to increase the public awareness of thoroughbred racing and to improve economic conditions for industry participants. Breeders’ Cup Limited is a founding member of the NTRA. Breeders’ Cup Limited paid annual membership dues to NTRA in the amount of $195,000 for the year ended January 31, 2017 and $200,000 for the year ended January 31, 2016.

12. (Continued)

BREEDERS’ CUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS January 31, 2017 and January 31, 2016

NOTE 3 – INVESTMENTS

The Company diversifies its invested holdings in a range of asset classes including equity mutual funds, government and corporate bonds and various types of alternative asset funds. The table below lists the fair value of each asset type as of January 31, 2017 and 2016. The Level 2 funds are (i) a domestic long- only equity fund focused on holding positions in companies with substantial U.S. operations and (ii) a long-term capital appreciation fund investing in a diversified portfolio of 50-110 global equities. The Level 3 funds include (i) a hedge fund of funds which seeks attractive risk‐adjusted returns while targeting low volatility and low correlation to traditional asset classes and (ii) a global private equity fund focused on making investments in growing companies that may be attractive IPO candidates or strategic acquisition targets within three to five years.

Investments measured at fair value on a recurring basis are summarized below:

Fair Value Measurements at January 31, 2017 Using Significant Quoted Prices in Other Significant Active Markets for Observable Unobservable Identical Assets Inputs Inputs Investments (Level 1) (Level 2) (Level 3) Total Mutual Funds Large Cap $ 3,473,161 $ - $ - $ 3,473,161 Mid Cap 4,047,281 - - 4,047,281 Equity Funds Domestic - 9,648,211 - 9,648,211 International - 7,906,284 - 7,906,284 U.S. Treasury and Agency 3,686,274 - - 3,686,274 Corporate Bonds 2,905,672 - - 2,905,672 Venture Capital - - 2,382,883 2,382,883 Hedge Funds - - 8,437,123 8,437,123 Total Investments $ 14,112,388 $ 17,554,495 $10,820,006 $ 42,486,889

13. (Continued)

BREEDERS’ CUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS January 31, 2017 and January 31, 2016

NOTE 3 – INVESTMENTS (Continued)

Fair Value Measurements at January 31, 2016 Using Significant Quoted Prices in Other Significant Active Markets for Observable Unobservable Identical Assets Inputs Inputs Investments (Level 1) (Level 2) (Level 3) Total Mutual Funds Large Cap $ 2,938,137 $ - $ - $ 2,938,137 Mid Cap 3,382,125 - - 3,382,125 Equity Funds Domestic - 8,150,038 - 8,150,038 International - 7,074,244 - 7,074,244 U.S. Treasury and Agency 4,208,797 - - 4,208,797 Corporate Bonds 2,626,194 - - 2,626,194 Venture Capital - - 3,219,560 3,219,560 Hedge Funds - - 8,038,350 8,038,350 Total Investments $ 13,155,253 $ 15,224,282 $11,257,910 $ 39,637,445

Reconciliations of beginning and ending balances for the Company’s fair value measurements of its Hedge Fund investment using Level 3 inputs for the years ended January 31, 2017 and 2016 are as follows: 2017 2016 Assets at beginning of period $ 8,038,350 $ 7,835,730 Investment return 398,773 202,620 Assets at end of year $ 8,437,123 $ 8,038,350

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BREEDERS’ CUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS January 31, 2017 and January 31, 2016

NOTE 3 – INVESTMENTS (Continued)

Reconciliations of beginning and ending balances for the Company’s fair value measurements of its Venture Capital investment using Level 3 inputs for the years ended January 31, 2017 and 2016 are as follows: 2017 2016 Assets at beginning of year $ 3,219,560 $ 3,470,940 Investment return (710,482) (109,804) Redemptions (156,195) (141,576) Purchases 30,000 - Assets at end of year $ 2,382,883 $ 3,219,560

Investment income for the years ended January 31, 2017 and 2016 consists of the following: 2017 2016 Investment income $ 361,219 $ 934,865 Investment management fees (259,086) (218,745) Net investment income $ 102,133 $ 716,120

Fair Value Based on Calculated Net Asset Values (NAV)

The table below presents liquidity information pertaining to investments for which fair values are determined on the basis of NAV and other valuation techniques at January 31, 2017:

Fair Value Redemption Frequency Redemption Notice Equity Funds (Domestic) – Level 2 $ 9,648,211 Weekly 6 Days Equity Funds (International) – Level 2 7,906,284 Quarterly 30 Days Total-Level 2 $17,554,495

Hedge Funds – Level 3 $ 8,437,123 Biannual 95 Days Venture Capital – Level 3 2,382,883 Restricted Redemption Total-Level 3 $10,820,006 is Restricted

15. (Continued)

BREEDERS’ CUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS January 31, 2017 and January 31, 2016

NOTE 3 – INVESTMENTS (Continued)

Venture Capital Redemption Period: The term of the Tiger Global Private Investment Partnership VI, L.P. (“Tiger Partnership VI”) commenced on June 15, 2010 and shall continue until December 31, 2020 unless dissolution occurs prior to this date due to circumstances provided for in the partnership agreement. The term of the Tiger Global Private Investment Partnership VII, L.P. (“Tiger Partnership VII”) commenced on February 1, 2012 and shall continue until December 31, 2022 unless dissolution occurs prior to this date due to circumstances provided for in the partnership agreement. The term of the Tiger Global Private Investment Partnership X, L.P. (“Tiger Partnership X”) commenced on Dec 15, 2016 and shall continue until December 31, 2025 unless dissolution occurs prior to this date due to circumstances provided for in the partnership agreement.

Venture Capital Future Commitments: Breeders’ Cup Limited has a total investment commitment to the Tiger Partnership X of $2,000,000 of which $30,000 was funded in the year ended January 31, 2017.

Venture Capital Valuation Period: The balance of the Tiger Partnership VI, Tiger Partnership VII, and Tiger Partnership X is valued at the end of each calendar quarter based on a hypothetical liquidation of all portfolio investments as determined by the Partnerships’ management. The last calculated balance, for each, was at December 31 and this value was used for January 31, 2017, and January 31, 2016 reporting purposes.

NOTE 4 – RELATED PARTY TRANSACTIONS

The Members and Directors of Breeders’ Cup Limited are primarily individuals involved in many facets of the Thoroughbred industry, including the breeding and racing of Thoroughbred horses. Breeders’ Cup Limited’s members, directors and employees may own horses directly or through partnerships that are eligible for Breeders’ Cup purses and awards. Certain members, directors or their farms are managers with respect to certain stallions and foals that collectively generate a majority of the stallion and foal nomination fees on behalf of Breeders’ Cup Limited. In addition, certain directors of Breeders’ Cup Limited also serve as directors of the NTRA.

NOTE 5 – INCOME TAXES

Breeders’ Cup Limited is exempt from federal income tax under section 501(c)(6) of the Internal Revenue Code. The for-profit subsidiary, Breeders’ Cup Properties, is subject to tax on taxable income, if any. The tax effect of the activities of Breeders’ Cup Limited and Breeders’ Cup Properties does not materially impact the consolidated financial statements.

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BREEDERS’ CUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS January 31, 2017 and January 31, 2016

NOTE 5 – INCOME TAXES (Continued)

The Company has generated net tax operating loss carry forwards of $7.9 million and $7 million (expiring from 2019 through 2034), for 2017 and 2016, respectively, available to offset future income, if any. This results in a deferred tax asset which is fully offset by an allowance since management cannot predict when, if ever, such an asset would be utilized.

NOTE 6 – LINE OF CREDIT

Breeders’ Cup Limited maintains a revolving line of credit with PNC bank up to $16,000,000. The current line of credit matures on September 30, 2017 and bears interest at LIBOR rate plus 1%. The interest rate charged on the line of credit was 1.78% and 1.43% at January 31, 2017 and 2016, respectively. Advances outstanding under the line were $2,295,184 and $3,076,840 as of January 31, 2017 and 2016, respectively. In addition to containing various covenants, the line of credit is secured by the company’s outstanding accounts receivable and a pledge agreement in which the Company grants to the bank a security interest in certain investments of the Company. The fair value of the pledged securities was $14,454,213 and $13,254,035 as of January 31, 2017 and 2016, respectively. In addition to the note mentioned above, Breeder’s Cup Limited maintains an unused letter of credit for $143,479 with PNC Bank, with respect to its New York office lease. This has been in effect since the beginning of the lease term on February 1, 2007 and will expire at lease end on January 30, 2019.

NOTE 7 – COMMITMENTS AND CONTINGENCIES

Rentals of office space under operating leases amounted to approximately $410,000 and $406,000 during the year ended January 31, 2017 and 2016 respectively. The Company has commitments related primarily to minimum lease payments.

The approximate future minimum payments under the leases are as follows for the periods ending January 31: 2018 $ 421,000 2019 252,000 $ 673,000

On March 30, 2017, the Company entered into a lease agreement for office space located at 215 West Main Street, Lexington, Kentucky. The lease term is for 60 months and commences on April 1, 2018. The annual base rent is $107,616 with a Common Area Maintenance monthly fee of $5,605.

From time to time, the Company is involved in litigation arising in the normal course of business. After consultation with legal counsel, it is management’s opinion any current matters will be resolved without material adverse effect on the consolidated statement of financial position or statement of activities.

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BREEDERS’ CUP LIMITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS January 31, 2017 and January 31, 2016

NOTE 8 – RETIREMENT PLANS

The Company maintains a 401(k) Retirement Plan that covers all full-time employees over the age of 21 upon three months of service. Benefits vest over a period of two to five years. The Company contributes an amount equal to four percent of a covered employee’s compensation. In addition, the Company matches amounts contributed by covered employees. Matching contributions amount to 100% of the first three percent of employees contributions. The Company pays all administrative costs of the plan. For the year ended January 31, 2017 and 2016, the Company’s contributions to the plan totaled $191,608 and $188,103, respectively.

NOTE 9 – FUTURE ACCOUNTING PRONOUNCEMENTS

Management of the Company is evaluating the possible effects of the future adoption of the following Accounting Standards Updates (“ASU”):

ASU No. 2014-09 Revenue from Contracts with Customers (Topic 606)

This standard is moving from recognizing revenue as earned to recognizing revenue as performance obligations are met. Contributions and investment income are not subject to this standard. However, many other revenues are covered such as membership dues, subscriptions, fees for services, licensing and etc. This standard will be effective for the Company’s fiscal year ending January 31, 2020.

ASU No. 2016-02 Leases (Topic 842)

This standard requires that both operating and capital leases be reflected on the statement of financial position so the user is provided a true picture of the assets the entity uses in its operations and the related risks. The new lessee accounting model is that an entity should recognize assets and liabilities arising from leases with a lease term of more than 12 months. They will be reflected as right-of-use assets and lease liabilities. This standard will be effective for the Company’s fiscal year ending January 31, 2021.

ASU No. 2016-14 Presentation of Financial Statements of Not-for-Profit Entities

Not-for-profit entities will be required to present two classes of net assets on the face of the statement of financial position; net assets without donor restrictions and net assets with donor restrictions. This standard will require the disclosure of the amounts and purposes of board-designated net assets either on the face of the statement of financial position or in the notes. This standard will be effective for the Company’s fiscal year ending January 31, 2019.

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