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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ___________________
Commission File Number 1-9319 Commission File Number 1-9320
CALIFORNIA JOCKEY CLUB BAY MEADOWS OPERATING COMPANY
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(Exact name of registrant as (Exact name of registrant as
specified in its charter) specified in its charter)
DELAWARE DELAWARE
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(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
94-0358820 94-2878485
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(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
2600 South Delaware Street 2600 South Delaware Street
P.O. Box 1117 P.O. Box 5050
San Mateo, California 94403 San Mateo, California 94402
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(Address of principal (Address of principal
executive offices) (Zip Code) executive offices) (Zip Code)
(415) 573-4514 (415) 574-7223
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(Registrant's telephone number, (Registrant's telephone number,
including area code) including area code)
Securities registered pursuant to Section 12 (b) of the Act:
(Title of each class) (Title of each class) Common Stock, $.01 par value per
share Common Stock, $.01 par value per share
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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ___________________
Commission File Number 1-9319 Commission File Number 1-9320
CALIFORNIA JOCKEY CLUB BAY MEADOWS OPERATING COMPANY
- --------------------------------- ---------------------------------------
(Exact name of registrant as (Exact name of registrant as
specified in its charter) specified in its charter)
DELAWARE DELAWARE
- --------------------------------- ---------------------------------------
(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or organization)
94-0358820 94-2878485
- ------------------------------------ -------------------------------------
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
2600 South Delaware Street 2600 South Delaware Street
P.O. Box 1117 P.O. Box 5050
San Mateo, California 94403 San Mateo, California 94402
- ------------------------------------ -------------------------------------
(Address of principal (Address of principal
executive offices) (Zip Code) executive offices) (Zip Code)
(415) 573-4514 (415) 574-7223
- ------------------------------------ -------------------------------------
(Registrant's telephone number, (Registrant's telephone number,
including area code) including area code)
Securities registered pursuant to Section 12 (b) of the Act:
(Title of each class) (Title of each class) Common Stock, $.01 par value per
share Common Stock, $.01 par value per share
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American Stock Exchange, Inc. American Stock Exchange, Inc.
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(Name of each exchange on which (Name of each exchange on which
registered) registered)
Securities registered pursuant to Section 12 (g) of the Act:
None
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(Title of class)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the paired voting stock held by non-affiliates of
California Jockey Club as of March 17, 1997, was $256,736,810 based upon a per
share price of $46.00. Directors and executive officers are considered
affiliates for purposes of this calculation, but should not necessarily be
deemed affiliates for any other purpose.
The aggregate market value of the paired voting stock held by non-affiliates of
Bay Meadows Operating Company as of March 17, 1997, was $251,494,650 based upon
a per share price of $46.00. Directors and executive officers are considered
affiliates for purposes of this calculation, but should not necessarily be
deemed affiliates for any other purpose.
5,763,257 shares of California Jockey Club Common Stock were outstanding as of
March 17, 1997.
5,763,257 shares of Bay Meadows Operating Company Common Stock were outstanding
as of March 17, 1997.
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PART I
ITEM 1. BUSINESS
The information set forth in "Business" below includes "forward-looking
statements" within the meaning of Section 21E of the Securities and Exchange
Act of 1934, as amended, and is subject to the safe harbor created by that
section. Readers are cautioned not to place undue reliance on these
forward-looking statements and to note that they speak only as of the date
hereof. Factors that realistically could cause actual results to differ
materially from those set forth in the forward-looking statements include the
following: nonconsummation of the merger agreement with Patriot American
Hospitality, Inc. ("Patriot"), nonconsummation of the Franklin Agreement or the
Iacocca Agreement (as hereinafter defined), failure to secure the necessary
governmental approvals to construct new stalls at the Bay Meadows Racecourse,
and the risk factors set forth in "Risk Factors" in Item 7.
INTRODUCTION
California Jockey Club ("Cal Jockey") operates as an equity real estate
investment trust under the Internal Revenue Code of 1986, as amended, and is the
owner of the Bay Meadows Racecourse (sometimes referred to herein as the
"Racecourse"). Bay Meadows Operating Company ("Bay Meadows") is a gaming and
entertainment company currently conducting horse racing at Bay Meadows
Racecourse in San Mateo, California. The Racecourse abuts the 101 Freeway which
is the main thoroughfare between the cities of San Jose and San Francisco. The
Racecourse is located about halfway between the two cities and is located about
seven miles south of the San Francisco International Airport. Cal Jockey and Bay
Meadows (collectively, the "Companies") are corporations which were incorporated
in 1983. The Companies' predecessor was incorporated in 1932 and began
conducting horse racing at the Racecourse in 1934. This document constitutes the
Annual Report on Form 10-K for both Cal Jockey and Bay Meadows.
Since 1983, Cal Jockey's shares of common stock, par value $.01 per share ("Cal
Jockey Common Stock"), have been paired and trade together with the shares of
common stock, par value $.01 per share ("Bay Meadows Common Stock"), of Bay
Meadows (the "Paired Shares") as a single unit on the American Stock Exchange
(the "AMEX") (symbol "CJ") pursuant to a stock pairing arrangement. The terms
of this pairing arrangement are set forth in the Pairing Agreement, dated as of
February 17, 1983 and amended from time to time thereafter, by and between Cal
Jockey and Bay Meadows (the "Pairing Agreement"). The pairing is evidenced by
"back-to-back" certificates and the certificates bear a legend referring to the
restrictions on transfer imposed by the bylaws of the Companies. As a result, a
stockholder can only purchase or sell an equal number of shares of both
companies.
THE PATRIOT TRANSACTION
On October 31, 1996, Cal Jockey and Bay Meadows entered into a merger agreement
with Patriot American Hospitality, Inc. ("Patriot"). The merger agreement was
approved unanimously by the Boards of Patriot, Cal Jockey and Bay Meadows and
is subject to approval by the shareholders of each of Patriot, Cal Jockey and
Bay Meadows.
Pursuant to the merger agreement, Patriot will merge with and into Cal Jockey,
with Cal Jockey being the surviving company. The shareholders of Cal Jockey
and Bay Meadows will have the option either to tender each of their paired
shares for $33.00 in cash or to retain their paired shares, which will remain
outstanding after the merger and will represent the same number of paired
shares of the Companies' common stock.
MERGER AGREEMENT. On October 31, 1996, Patriot, Cal Jockey and Bay Meadows
entered into a binding business combination agreement (the "October 31, 1996
Agreement") pursuant to which the parties agreed, subject to stockholder
approval and other conditions, to engage in a business transaction. The parties,
together with Patriot American Hospitality Partnership, L.P., a limited
partnership (the "Patriot Partnership"), thereafter entered into an Agreement
and Plan of Merger, dated as of February 24, 1997 (the "Merger Agreement"),
which by its terms supersedes the October 31, 1996 Agreement and more fully
details the transactions to be consummated by the parties.
Pursuant to the Merger Agreement, Patriot will merge with and into Cal Jockey
(the "Merger"), with Cal Jockey being the surviving company. In connection with
the Merger, Cal Jockey's name will be changed to "Patriot American Hospitality,
Inc." ("New Patriot REIT") and Bay Meadows' name will be changed to "Patriot
American Hospitality Operating Company" ("New Patriot Operating Company").
Patriot stockholders will be entitled to receive for each share of common stock,
no par value per share, of Patriot ("Patriot Common Stock") held by them at the
effective time of the Merger, as adjusted as a result of the two-for-one split
of Patriot stock announced in February 1997, 0.519 shares of common stock, par
value $.01 per share, of New Patriot REIT ("New Patriot REIT Common Stock") and
0.519 shares of common stock, par value $.01 per share, of New Patriot Operating
Company ("New Patriot Operating Company Common Stock") (subject to certain REIT
qualification requirements), which shares will be paired and transferable only
as a single unit. In addition, each outstanding Paired Share which is not
tendered pursuant to the joint self tender offer of Cal Jockey and Bay Meadows
(as described below), will remain outstanding after the Merger and will, without
any action on the part of the stockholders of Cal Jockey and Bay Meadows,
represent the same number of paired shares of New Patriot REIT Common Stock and
New Patriot Operating Company Common Stock.
In connection with the Merger, Bay Meadows will form an operating partnership
(the "New Patriot Operating Partnership") into which Bay Meadows will contribute
its assets in exchange for limited partnership units of the New Patriot
Operating Partnership, and Cal Jockey will contribute certain of its assets to
the Patriot Partnership in exchange for limited partnership units of the Patriot
Partnership. Upon completion of the Merger and the transactions contemplated by
the Merger Agreement (the "Related Transactions"), substantially all of the
operations of New Patriot REIT and New Patriot Operating Company will be
conducted through their respective operating partnerships. The Board of
Directors of each of Patriot, Cal Jockey and Bay Meadows has approved the
October 31, 1996 Agreement, the Merger Agreement and the Related
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Transactions, including, without limitation, the Merger, the Subscription (as
hereinafter defined), the issuance of up to approximately 30,500,000 shares of
Cal Jockey Common Stock and 30,500,000 shares of Bay Meadows Common Stock, the
contribution of the assets of Bay Meadows to the New Patriot Operating
Partnership and the contribution of certain of the assets of Cal Jockey to the
Patriot Partnership.
THE SUBSCRIPTION. By operation of the Merger, each issued and outstanding share
of Patriot Common Stock will be converted into the right to receive 0.519
shares of New Patriot REIT Common Stock subject to certain REIT qualification
requirements described below. The Patriot Partnership will, in connection with
the Merger, subscribe (the "Subscription") for shares of Bay Meadows Common
Stock (which in connection with the Merger will become New Patriot Operating
Company Common Stock) (the "Subscribed Shares") in an amount equal to the number
of shares of New Patriot REIT Common Stock that will be issued to Patriot
stockholders in the Merger. Immediately prior to the Merger, the Patriot
Partnership will fund the Subscription and Patriot and the Patriot Partnership
will designate the Patriot stockholders as the recipients of the Subscribed
Shares, in compliance with the Pairing Agreement, on the basis of 0.519
Subscribed Shares for each share of Patriot Common Stock outstanding at the
Effective Time, subject to certain REIT qualification requirements described
below. The result of the Merger and the Subscription will be that Patriot
stockholders will have the right to receive 0.519 shares of New Patriot REIT
Common Stock and 0.519 shares of New Patriot Operating Company Common Stock,
subject to certain REIT qualification requirements described below, for each
share of Patriot Common Stock held by them at the Effective Time, which shares
of New Patriot REIT Common Stock and New Patriot Operating Company Common Stock
will be paired and transferable only as a single unit.
So that New Patriot REIT will continue to qualify and maintain REIT status, the
Amended and Restated Certificates of Incorporation of New Patriot REIT and New
Patriot Operating Company (the "Restated Charters") will provide that no person
or entity may own, or be deemed to own by virtue of certain attribution rules of
the Code, in excess of 9.8% (the "Ownership Limit") of the total outstanding
shares of any class or series of New Patriot REIT Common Stock and New Patriot
Operating Company Common Stock or preferred stock of New Patriot REIT or New
Patriot Operating Company. If any holder of Patriot Common Stock would receive
in the Merger and the Subscription a number of paired shares of New Patriot REIT
Common Stock and New Patriot Operating Company Common Stock which would cause
such holder or any other person or entity to own, or be deemed to own, paired
shares of New Patriot REIT Common Stock and New Patriot Operating Company Common
Stock in excess of the Ownership Limit, then such holder shall acquire no right
or interest in such number of paired shares of New Patriot REIT Common Stock and
New Patriot Operating Company Common Stock that would cause such holder or any
other person or entity to exceed the Ownership Limit, but such holder shall, in
lieu of receiving those paired shares which would cause the Ownership Limit to
be exceeded (the "Excess Paired Shares"), have the right to be paid by New
Patriot REIT an amount in cash for such Excess Paired Shares equal to the
product of the fair market value per Excess Paired Share multiplied by the
number of such Excess Paired Shares.
THE SELF TENDER OFFER. In connection with the Merger, Cal Jockey and Bay Meadows
will commence a joint self tender offer (the "Offer") to purchase for cash at a
combined price of $33.00 per Paired Share up to that percentage of the issued
and outstanding Paired Shares of Cal Jockey Common Stock and Bay Meadows Common
Stock such that upon consummation of the Merger the stockholders of Cal Jockey
and Bay Meadows prior to the Merger will own at least 1.0% of the paired shares
of New Patriot REIT Common Stock and New Patriot Operating Company Common Stock.
The obligation of Cal Jockey and Bay Meadows to accept for payment and pay for
their respective portion of the Paired Shares validly tendered and not withdrawn
pursuant to the Offer will be subject to the satisfaction or waiver of the
conditions to the Merger Agreement and the Merger becoming effective pursuant to
the General Corporation Law of the State of Delaware and the Virginia Stock
Corporation Act. The purpose of the Offer is to permit the holders of Paired
Shares of Cal Jockey Common Stock and Bay Meadows Common Stock to receive cash
in the amount of $33.00 per Paired Share if such holders do not wish to become
holders of the paired shares of New Patriot REIT Common Stock and New Patriot
Operating Company Common Stock after the Merger. On the fifth business day
following the date Cal Jockey and Bay Meadows publicly announce that all
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of the conditions to the Merger Agreement have been satisfied or waived, the
Offer will expire and the acceptance for payment of the validly tendered Paired
Shares shall be conditioned only upon the Merger becoming effective. In the
event the Merger Agreement is terminated in accordance with its terms, the Offer
will simultaneously terminate. On March 17, 1997, the closing price of the
Paired Shares on the AMEX was $46.00.
FINANCING THE OFFER. Patriot will provide Cal Jockey and Bay Meadows with the
funds necessary to satisfy their payment obligations under the Offer by
borrowing the necessary amounts under its financing sources.
CONDITIONS TO THE MERGER AND THE OFFER. Consummation of the Merger and the
Offer is subject to various conditions (which must be satisfied or waived),
including: (i) approval of a proposal to adopt the Merger Agreement and the
Related Transactions, by the holders of two-thirds of the outstanding shares of
Patriot Common Stock, by the holders of a majority of the outstanding shares of
Cal Jockey Common Stock and by the holders of a majority of the outstanding
shares of Bay Meadows Common Stock; (ii) approval of a proposal to amend and
restate the Certificate of Incorporation of Cal Jockey and the Bylaws of Cal
Jockey by the holders of a majority of the outstanding shares of Cal Jockey
Common Stock; and (iii) approval of a proposal to amend and restate the
Certificate of Incorporation of Bay Meadows and the Bylaws of Bay Meadows by
the holders of a majority of the outstanding shares of Bay Meadows Common
Stock. These proposals are currently expected to be voted on at special
meetings to be held by the parties in May or June 1997. Although each of the
aforementioned proposals will be voted on separately, because each of the
proposals is a condition to closing, if any of the proposals is not adopted,
the parties will not be required to consummate the Offer, the Merger or any of
the Related Transactions. Prior to consummation of the Merger, Cal Jockey will
distribute to its stockholders a dividend in the amount of $0.10 per Paired
Share plus the amount per Paired Share equal to the proceeds generated from the
sale of Cal Jockey's 100,000 shares of Santa Anita Realty Enterprises, Inc.
stock, less the original purchase price for this stock, divided by the number of
Paired Shares outstanding. There can be no assurances that the proposal
conditions or other conditions to consummation of the Merger will be satisfied
or waived.
SALE TO PAINEWEBBER. Patriot and PaineWebber Incorporated ("PaineWebber") have
agreed in principle that following the close of the Merger, an affiliate of
PaineWebber will purchase substantially all of the land of Cal Jockey,
including the land subject to the Franklin Agreement and Iacocca Agreement, for
a purchase price of $83 million. New Patriot REIT would retain ownership of the
improvements located on the land. Simultaneously with the consummation of such
purchase, the PaineWebber affiliate and New Patriot REIT would enter into a
ground lease covering that portion of land on which the Racecourse is situated
for a term of seven years. New Patriot REIT would then sublease the Racecourse
land and related improvements to New Patriot Operating Company.
CALIFORNIA JOCKEY CLUB
Cal Jockey is incorporated under the laws of the State of Delaware. Cal Jockey's
principal executive offices are located at 2600 South Delaware Street, P.O. Box
1117, San Mateo, California 94403.
PROPERTIES
Cal Jockey's principal asset is the Racecourse, a horse race track located on
approximately 175 acres of contiguous land in San Mateo, California. The
principal Racecourse facilities include:
- - the main one-mile dirt horse race track with six furlongs and 1-1/4 mile
chutes, inside of which is a seven furlong turf course;
- - the track's infield area, on which is situated a nine hole par three golf
course;
- - a main structure, which contains a grandstand, a clubhouse and a premier
seating and dining club (the "Turf Club"), all of which can accommodate
approximately 25,000 people for racing events;
- - a parking area, which can accommodate approximately 10,000 automobiles, a
portion of which is provided by an easement granted by the County of San
Mateo;
- - a barn and stable area situated on approximately 38 acres and containing
approximately 1,550 horse stalls; and
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- - a 5/8-mile training track oval situated on approximately 40 acres adjacent
to the barn and stable area (the "Training Track Area").
In addition, Cal Jockey owns an approximately 2 acre parcel in close proximity
to the Racecourse on which an indoor tennis club is located (the "Tennis Club
Parcel") and an approximately 1-1/2 acre parcel that abuts a street known as El
Camino Real and is separated from the 175 acre site by railroad tracks.
Historically, the entire 175 acre site has been used in conjunction with
Thoroughbred racing.
1983 REORGANIZATION
In 1983, the Companies' predecessor was reorganized into two companies, Cal
Jockey (which became the owner of the 175 acre site) and Bay Meadows (which
operates Bay Meadows Racecourse). Cal Jockey is engaged in managing its real
estate holdings, although it does not have active business operations. Cal
Jockey has historically generated revenue through the lease or sale of its
assets. Substantially all of Cal Jockey's revenue has been derived from its
lease with Bay Meadows. See "Lease of Racing Facility." Cal Jockey intends to
continue to meet the requirements for classification as a real estate investment
trust. So long as Cal Jockey qualifies as a real estate investment trust, it is
able to distribute its otherwise taxable income to its stockholders without
incurring a corporate level tax on that income.
POTENTIAL FOR ADDITIONAL INCOME
Dating back to the early 1970's, California Jockey Club (the predecessor to the
Companies before the 1983 reorganization) and subsequently both the Bay Meadows
and the Cal Jockey Boards of Directors concluded that the Training Track Area
could be developed for commercial purposes without adversely affecting Bay
Meadows' ability to carry on live Thoroughbred racing. The Cal Jockey Board of
Directors continues to believe that there is an opportunity to generate
additional income for stockholders by leasing or selling a portion of Cal
Jockey's 175 acres. The Cal Jockey Board of Directors believes that exploring
alternative means of generating stockholder income is prudent because of
negative trends in Thoroughbred racing. Evidence of these trends includes: (1)
the continued decline of on-track attendance at Bay Meadows, (2) the continued
decline in the quantity and quality of Thoroughbreds nationally and at Bay
Meadows, and (3) increased competition in the form of the new Seattle
Thoroughbred racing facility (Emerald Downs), other types of legalized gambling
and a widening array of professional and amateur sporting events. Accordingly,
Cal Jockey has engaged in the leasing and sale of a portion of its 175 acres.
PENDING SALES AND NEGOTIATIONS
In 1995, the Cal Jockey Board of Directors concluded that it would be in the
best interests of its stockholders to sell a substantial portion (approximately
32 acres) of the barn and stable area (the "Stable Area") and the Training
Track Area, rather than to develop them or continue to lease them to Bay
Meadows. The decisions reflected Cal Jockey's desire to seek out opportunities
for additional income. In addition, the Cal Jockey Board of Directors was
motivated by the substantial investment that Cal Jockey likely would be
required to make to renovate the existing Racecourse barns and to mitigate the
current water runoff problem associated with the continued operation of the
existing Racecourse barns (see "Water Treatment System") if the Stable Area is
not sold and continues to be used for the stabling of horses. Further, Cal
Jockey believes that the increased presence in San Mateo of the purchaser of
the Stable Area (Property Resources, Inc. and its affiliated entities) should
enhance the likelihood of obtaining the necessary Entitlements (as hereinafter
defined) for both transactions. See "The Entitlement Process." Accordingly, in
May 1995 and December 1995 Cal Jockey entered into agreements to sell the
Stable Area and the Training Track Area, respectively. See "Terms of the
Pending Sales of the Training Track and Stable Areas." By engaging in these
transactions, which it entered into prior to the Merger Agreement, Cal Jockey
seeks to achieve substantial liquidity which can be reinvested in income
generating properties, generating additional income for its stockholders. There
can be no assurances that these sales will be consummated.
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In July 1996, Cal Jockey entered into an Agreement of Purchase and Sale with
Public Storage, Inc. (the "Public Storage Agreement") to sell the Tennis Club
Parcel for approximately $2,200,000. Public Storage, Inc. intends to convert
the land into mini-storage units. The sale of the Tennis Club Parcel is subject
to various contingencies including approval by the City of San Mateo of a
rezoning of the property and, therefore, no assurance can be given that such
sale will be consummated.
In November 1996, Cal Jockey entered into a non-subordinated ground lease (the
"Borders Lease") with Borders, Inc. ("Borders"), a bookstore chain. The Borders
Lease covers 2.3 acres of land formerly used by Bay Meadows as a parking lot and
land adjacent to the parking lot. The San Mateo Planning Commission voted to
approve the development of a Borders bookstore on the site on October 14, 1996.
The initial term of the Borders Lease is for 20 years with a fixed net annual
rent of $278,500 for years 1 through 10, $362,050 for years 11 through 15 and
$416,350 for years 16 through 20. The Borders Lease has eight five-year renewal
options with an annual Consumer Price Index adjustment beginning in the fifth
option term.
Cal Jockey is about to enter into an agreement with the County of San Mateo,
(the "County"), which owns certain adjoining property commonly known as the San
Mateo Expo Center (the "Expo Center"). Under the agreement, the County will
relinquish certain easements (or a portion thereof) that encumber a portion of
the property being improved as a four lane public street, one of the primary
off-site improvements required as a condition to obtaining the Entitlements (as
defined below). In consideration of the County relinquishing these easement
rights, Cal Jockey shall cause a portion of the County's parking lot at the
Expo Center to be paved and shall relinquish a portion of Cal Jockey's parking
easement that encumbers the Expo Center property. Cal Jockey will also (i)
agree to allow Expo Center personnel to use the Delaware Street entrance to Bay
Meadows, as well as any entrance from Saratoga Drive into Bay Meadows to
accommodate Expo Center traffic and parking and (ii) accede to various County
requests regarding parking fees.
TERMS OF THE PENDING SALES OF THE TRAINING TRACK AND STABLE AREAS
STABLE AREA. On May 31, 1995, Cal Jockey entered into an Agreement of Purchase
and Sale with Property Resources, Inc. ("Property Resources"), a subsidiary of
Franklin Resources, Inc., (as amended, the "Franklin Agreement"), providing for
the sale of the Stable Area. Assuming all other conditions precedent are
satisfied or waived, escrow is to close 330 days following the date on which Cal
Jockey obtains the Entitlements (as defined below).
The Franklin Agreement contemplates the sale of the Stable Area for a purchase
price of approximately $21,000,000. In addition, Property Resources is obligated
to fund 44% of the cost of various off-site improvements required by the City of
San Mateo and the State of California in connection with the entitlements for
the development of the property (the "Entitlements"). Property Resources intends
to develop the Stable Area with an office complex for use by Franklin Resources,
Inc. and its affiliated entities.
The transaction is subject to a number of conditions precedent including that of
Cal Jockey obtaining from the City of San Mateo all necessary permits to develop
the office complex. To date, Property Resources has deposited $350,000 into an
escrow account as required by the Franklin Agreement. Future deposits are
required upon satisfaction of certain conditions. The escrowed amounts, plus
interest, are refundable if the conditions to closing by Property Resources are
not satisfied, and will serve as liquidated damages to Cal Jockey if such
conditions are satisfied but Property Resources fails to consummate the purchase
of the Stable Area.
TRAINING TRACK AREA. In December 1995, Cal Jockey entered into an Agreement of
Purchase and Sale (as amended, the "Iacocca Agreement") with Lee Iacocca &
Associates, Inc. ("Iacocca") providing for the sale of the Training Track Area.
In the Third Amendment, effective June 28, 1996, Iacocca assigned its rights
under the prior agreement to Airdial Company, LLC, a newly-formed limited
liability company ("Airdial"), the members of which include some of the
principals involved with Iacocca.
The development plan for the Training Track Area calls for the construction of
single-family and multi-family housing units, a superior first class hotel and
neighborhood retail uses. The Iacocca Agreement contemplates the sale of the
Training Track Area to Airdial for a purchase price of $30,750,000, subject to
adjustment if certain of the Entitlements are not obtained. In addition, Airdial
is obligated to fund 53% of the off-site improvements required by the City of
San Mateo and the State of California in connection with the Entitlements for
the development of the property. See "--Stable Area."
To date, Airdial has delivered to escrow an irrevocable standby letter of credit
in favor of Cal Jockey in the sum of $500,000. Within three days after Cal
Jockey obtains the Entitlements, Airdial is obligated to deliver to escrow a
second such letter of credit also in the amount of $500,000. These letters of
credit are released if the conditions to
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closing are not satisfied. The parties further agreed that $1,000,000 shall be
the amount of liquidated damages to Cal Jockey if all conditions to Airdial's
purchase are satisfied or waived, but Airdial fails to consummate the purchase
of the Training Track Area.
Closing of the transaction is subject to a number of conditions precedent
including Cal Jockey obtaining from the City of San Mateo the necessary
Entitlements to proceed with development plans, together with a development
agreement. If the conditions are satisfied or waived, it is contemplated that
escrow would close in Fall 1998.
THE ENTITLEMENT PROCESS. As noted above, Cal Jockey is charged with the
responsibility of obtaining the Entitlements for both the Stable Area and the
Training Track Area developments. The development plan being proposed covers
both developments as part of one plan. To assist in obtaining the Entitlements,
Cal Jockey has retained Calthorpe Associates, one of the premier land planning
firms in Northern California. Calthorpe Associates, together with a team of
other consultants, is developing a specific plan covering both developments. The
public comment period closed on November 25, 1996 and the final Environmental
Impact Report ("EIR") and specific plan has been prepared. It is anticipated
that the San Mateo Planning Commission and the City Council will vote on final
certification of the EIR and approval of the specific plan at a meeting
currently scheduled for late April 1997. However, there can be no assurances
that Cal Jockey will be successful in obtaining the necessary Entitlements to
avoid termination of the Franklin Agreement or the Iacocca Agreement.
COST OF ENTITLEMENT PROCESS. Through December 31, 1996, Cal Jockey has expended,
in connection with the Entitlement process, $2,242,000 for the services of
Calthorpe Associates, engineers, lawyers and other consultants. These amounts
have been capitalized and added to the basis in land.
POSSIBLE TAX CONSEQUENCES. Both the Franklin Agreement and the Iacocca Agreement
provide that the purchasers will cooperate with Cal Jockey in structuring the
transactions as tax-deferred exchanges. It is the present intention of Cal
Jockey's Board of Directors to seek income-generating properties that would meet
the investment criteria to be established for this purpose by a committee of the
Cal Jockey Board of Directors. To the extent the sales proceeds are used to
defray Cal Jockey's portion of the traffic circulation and other off-site
improvement costs or to construct new facilities on Cal Jockey's retained
property or are retained by Cal Jockey, the sales
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proceeds will not qualify for tax-deferred treatment and will not be available
for distribution to stockholders. However, it is Cal Jockey's present intention
to borrow the funds for such off-site improvements or new facilities, so that
all of the proceeds could qualify for tax-deferred treatment. There can be no
assurances that the transactions will qualify as tax-deferred exchanges or that
suitable properties for exchange will be located and the exchanges can be
effectuated within the relatively short time periods allowed by applicable IRS
regulations. If the sales of the Training Track Area or the Stable Area cannot
be qualified as tax-deferred exchanges, but the proceeds qualify for capital
gains treatment, Cal Jockey can elect to pass through the gain to its
stockholders who would be taxed at applicable capital gains rates. If the
proceeds are not distributed but they qualify for capital gains treatment, the
gain will be taxed to Cal Jockey at applicable capital gains rates. Cal Jockey's
basis in the land being sold under the Iacocca Agreement and the Franklin
Agreement is estimated at approximately $27,000 per acre.
FINANCING CAL JOCKEY'S SHARE OF OFF-SITE IMPROVEMENT COSTS
Based upon the current cost estimates, if neither the Franklin Agreement nor the
Iacocca Agreement is terminated, it appears that Cal Jockey's proportionate
share of the off-site improvement costs will be approximately $330,000. Due to
the inherent uncertainties involved in these estimates, there can be no
assurances that these cost estimates will not be further revised or such
revisions may not be significant. Cal Jockey intends to use internally generated
funds or to borrow whatever sums are required to defray these costs. However,
there is no assurance that Cal Jockey will have sufficient internally generated
funds or will be able to borrow these funds.
PLANNING FOR TRAINING AND STABLING
Recognizing that the proposed sale of the Training Track Area and the Stable
Area might require locating off-site areas to carry out these activities, Cal
Jockey explored, with Bay Meadows, numerous properties in a variety of nearby
locales. None of these jointly investigated properties has proved to be
appropriate.
An alternative under consideration is a proposal to construct 954 new stalls at
Bay Meadows, some of which might be recessed into the ground on the northern end
of the infield of the main track with the balance located in a portion of the
existing parking area just north of the existing grandstand. A tunnel under the
race tracks would have to be constructed in order to connect the stable areas.
This alternative presents a number of complex planning, financing and
construction issues. No approval of such a proposal has been given by Cal Jockey
or the City of San Mateo, and any approval by Cal Jockey would be contingent on
the results of economic, environmental and other feasibility studies. There can
be no assurances that the necessary permits or financing will be secured or
agreement with the City of San Mateo will be reached as necessary to implement
this alternative.
LEASE OF RACING FACILITY
Bay Meadows leases Bay Meadows Racecourse from Cal Jockey. Pursuant to the
terms of the lease agreement, which commenced on April 1, 1993 and expired on
March 31, 1996, Cal Jockey received the greater of (a) $3,000,000 annually or
(b) the sum of 1.5% of the on-track pari-mutuel handle when there were live
races at Bay Meadows, 1% of the pari-mutuel handle wagered at Northern
California satellite wagering facilities receiving races from Bay Meadows, 1%
of the pari-mutuel handle wagered at Bay Meadows when it was acting as a
satellite wagering facility for other host associations conducting racing in
Northern California, 25% of the net commissions from exported and improted
races from Southern California and interstate locations, and between 60% and
90% of various non-racing sublease rental income. In addition, Cal Jockey also
received a specified percentage of the annual pari-mutuel handle in excess of
$350,000,000.
The Master Lease Agreement pursuant to which Bay Meadows leased the Racecourse
Properties from Cal Jockey expired on March 31, 1996. Cal Jockey and Bay
Meadows have had discussions regarding the extension of the Master Lease
Agreement. The companies now have conflicting views concerning the existence of
any Master Lease Agreement extension. Cal Jockey believes that no lease exists
and that Bay Meadows is a tenant at will paying rent at the rate in the prior
Master Lease Agreement. Bay Meadows believes that the Master Lease Agreement has
been extended for an additional three years with a ten percent increase in rent
but otherwise substantially on the same terms as the previous lease. Bay Meadows
has, however, continued to pay rent at a rental rate equivalent to that
contained in the expired lease agreement through the first quarter of 1997. No
amounts of additional rent , in any, have been accrued at December 31, 1996. In
the event that the Companies reach a reconciliation on any lease extension,
retroactive changes in the rental amounts, in any, will be recorded in the
period that such reconciliation occurs. No assurances can be given concerning
the possible effects that the ultimate resolution of this matter will have on
the future operations of the Companies.
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SEASONAL VARIATIONS IN BUSINESS
Cal Jockey is subject to significant seasonal variations in revenues primarily
due to the fact that the lease revenues are affected by the seasonality of
Thoroughbred racing. See "Lease of Racing Facility" and "BAY MEADOWS OPERATING
COMPANY -- Bay Meadows' Horse Racing Season." The following table sets forth
certain financial information concerning Cal Jockey for the quarterly periods
indicated:
CALIFORNIA JOCKEY CLUB
QUARTERS ENDED 1996
--------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RACING DAYS)
Number of live racing days 63 0 25 27
Total revenues $ 2,338 $ 527 $ 1,340 $ 1,207
Costs and expenses 407 484 1,850(1) 3,887(1)
------- ------- ------- -------
Net income (loss) $ 1,931 $ 43 $ (510) $(2,680)
======= ======= ======= =======
Net income (loss) per share $ .34 $ .01 $ (.09) $(.47)
======= ======= ======= =======
(1) Includes merger related costs of $3,504,000 and legal fees of $1,124,000.
QUARTERS ENDED 1995
--------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RACING DAYS)
Number of live racing days 20 10 27 51
Total revenues $ 903 $ 734 $1,482 $2,122
Costs and expenses 324 351 431 412
------ ------ ------ ------
Net income $ 579 $ 383 $1,051 $1,710
====== ====== ====== ======
Net income per share $ .10 $ .07 $ .18 $ .30
====== ====== ====== ======
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QUARTERS ENDED 1994
--------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RACING DAYS)
Number of live racing days 21 0 24 68
Total revenues $1,083 $ 444 $1,300 $2,349
Costs and expenses 343 347 325 541
------ ------ ------ ------
Net income $ 740 $ 97 $ 975 $1,808
====== ====== ====== ======
Net income per share $ .13 $ .02 $ .17 $ .31
====== ====== ====== ======
CAPITAL IMPROVEMENTS
In 1996, capital improvement expenditures were $271,000 which primarily
consisted of electrical, plumbing and flooring improvements related to offices
and dining areas.
WATER TREATMENT SYSTEM
The City of San Mateo (the "City"), along with the State of California, has
mandated that water runoff from Bay Meadows' barn area be disconnected from the
municipal sewer collection system. Cal Jockey is cooperating with the City and
State Regional Water Quality Control Board to resolve this situation. If the
Stable Area is sold as proposed to Property Resources, the problem with water
runoff as it presently exists is expected to be eliminated. If the Franklin
Agreement were terminated or the proposal for new barn construction failed to
be approved, the costs associated with resolving the matter are estimated to be
approximately $1,500,000.
EMPLOYEES
At December 31, 1996, Cal Jockey had three employees.
COMPETITION
Cal Jockey's financial condition and results of operations are affected by the
various competitive factors affecting Bay Meadows. See the information set forth
below under the caption "BAY MEADOWS OPERATING COMPANY -- Competition."
BAY MEADOWS OPERATING COMPANY
Bay Meadows is organized under the laws of the State of Delaware. Bay Meadows'
principal executive offices are located at Bay Meadows Racecourse, 2600 South
Delaware Street, P.O. Box 5050, San Mateo, California 94402.
Bay Meadows is a gaming and entertainment company currently engaged primarily in
the business of conducting and offering pari-mutuel wagering on Thoroughbred
racing at the Racecourse. Additionally, Bay Meadows acts as an off-track
satellite wagering facility, allowing patrons to wager on horse races at other
tracks even when live Thoroughbred racing is not being conducted at the
Racecourse. In addition to live Thoroughbred racing at the Racecourse, Bay
Meadows simulcasts its live horse races to as many as 31 sites in California and
450 sites in the remainder of the world. Also, Bay Meadows accepts simulcasts of
horse races conducted throughout the United States, Canada, Mexico, Australia
and Hong Kong. Bay Meadows generates revenues from commissions on pari-mutuel
wagering, admissions, parking, program sales and the food and beverage
concessions at the Racecourse.
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Substantially all of Bay Meadows' revenues are derived from the Thoroughbred
racing activities conducted at Bay Meadows. Annual revenues and net income have
historically fluctuated based to a large extent on the number of days during any
given year that live horse racing is conducted at the Racecourse. Selected
comparative figures for the last four calendar years are as follows:
1996 1995 1994 1993 1992
(IN THOUSANDS, EXCEPT FOR HORSE RACING DAYS)
Number of live horse racing days 115 108 113 104 111
Commissions (revenue derived from
pari-mutuel wagering) $ 15,880 $ 14,916 $ 14,871 $ 12,690 $ 14,128
Total revenues of Bay Meadows $ 53,472 $ 50,256 $ 51,187 $ 44,642 $ 48,537
Bay Meadows rent paid to Cal Jockey $ 4,918 $ 4,762 $ 4,777 $ 3,607 $ 4,229
Income of Bay Meadows before
income tax provision $ 715 $ 936 $ 1,140 $ 174 $ (792)
Bay Meadows also generates revenues from subletting the racetrack facilities to
the San Mateo County Fair for horse racing events (historically, a two week
horse race meet), as well as to trade shows and others for various events and
from operating an indoor tennis club near the racetrack facilities and a nine
hole golf course located on the infield of the racetrack. See "Effects of Other
Cal Jockey Transactions."
BAY MEADOWS' HORSE RACING SEASON
California law permits a racing association in the Northern California Racing
Zone (such as Bay Meadows) to conduct no more than 22 weeks of live horse
racing each year. In calendar years 1996 and 1995, Bay Meadows conducted 115
and 108 live horse racing days, respectively. The CHRB has granted Bay Meadows
102 racing days for the calendar year 1997 horse racing season, allocated
during the periods from early January through late March and late August
through mid-November. However, until relatively recently, Bay Meadows' horse
racing season historically ran from late August through late January. In such
years the number of horse racing days in a calendar year included horse racing
days for two different horse racing seasons.
The following table sets forth information relating to live horse racing days
and the attendance and pari-mutuel handle for the calendar years indicated.
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CALENDAR YEARS
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
(IN THOUSANDS, EXCEPT FOR HORSE RACING DAYS)
Number of live horse racing days 115 108(1) 113 104 111
Total on-track attendance 511 489 536 527 588
Average daily on-track attendance 4.4 4.5 4.7 5.1 5.3
Total intertrack attendance 595 568 652 708 777
Average daily intertrack attendance 5.2 5.3 5.8 6.8 7.0
Total on-track and intertrack attendance 1,106 1,057 1,188 1,236 1,365
Average daily on-track and intertrack attendance 9.6 9.8 10.5 11.9 12.3
Live - on-track pari-mutuel handle $ 60,159 $ 61,261(1) $ 75,889 $ 90,126 $ 112,664
Live - N. CA network pari-mutuel handle $ 69,188 $ 66,720(1) $ 82,482 $ 109,347 $ 125,099
Live - exported pari-mutuel handle $ 253,323 $ 214,686(1) $ 163,452(2) $ 42,364(2) $ 31,021
Live - imported pari-mutuel handle $ 122,942 $ 115,293(1) $ 100,218 $ 24,479 $ 10,256
Non-merged handle $ 8,267 $ 6,330(1) $ 7,170 $ 8,740 $ 5,679
Total pari-mutuel handle $ 513,879 $ 464,290 $ 429,211 $ 275,056 $ 284,719
(1) Does not include two racing days which were rained out in January 1995.
(2) The increase between calendar years 1993 and 1994 was due in large part
to a change in California law which permitted wagers on Bay Meadows'
horse races to be places at off-track locations in Southern California.
PARI-MUTUEL REVENUES
All wagering at Bay Meadows is pari-mutuel, meaning that individuals wager
against each other and not against the operator of the facility. Bay Meadows, as
the horse race track operator, has no interest in the results of any horse race.
Bay Meadows places the wagers into a pool and deducts both its commission and a
variety of statutory deductions from the wagers, the amount of which is fixed by
the State of California.
In California, other horse racing associations, certain fairs and certain
Indian Reservations operate as off-track wagering facilities. Off-track
wagering on horse races conducted at Bay Meadows is permitted at 31 locations
in California, 14 of which comprise the Northern California Off-Track Network
("Live-N. CA Network").
Legislation has been enacted in certain states permitting the transmission of
pari-mutuel wagers across state lines. This format permits patrons wagering in
those states on horse races at Bay Meadows to participate in the same
pari-mutuel pool as Bay Meadows patrons and patrons at other California
satellite locations. Off-track wagering on Bay Meadows' live horse races is
conducted in as many as 31 sites in California and up to 450 sites throughout
the rest of the world.
During Bay Meadows' live meets, pari-mutuel revenues and respective commission
rates are derived from four sources: (i) wagers made at Bay Meadows on horse
races at Bay Meadows ("Live-On-Track") (5.4%-6.9%); (ii) wagers made throughout
the Live-N. CA Network on horse races at Bay Meadows (3.3%-4.9%); (iii) wagers
made throughout locations in Southern California and at out-of-state locations
on horse races conducted at Bay Meadows ("Live-Export") (1.3%-1.5%); and (iv)
wagers made at Bay Meadows and throughout the Live-N. CA Network on horse races
conducted in Southern California and at out-of-state locations ("Live-Import")
(2.6%-5.2%). Additionally, during its live horse race meet, Bay Meadows
receives fees from certain out-of-state locations that accept wagers on Bay
Meadows' horse races which are not included in Bay Meadows' pari-mutuel pool
("Nonmerged Fees"). During the remainder of the year when Bay Meadows is not
conducting live horse racing, Bay Meadows receives satellite fees generated
through its operation as an off-track wagering facility ("Satellite Fees").
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The following table sets forth Bay Meadows' revenue derived from pari-mutuel
handle (net of statutory payments) for the calendar years indicated:
CALENDAR YEARS
----------------------------------------------------------------------
1996 1995 1994 1993 1992
(IN THOUSANDS, EXCEPT FOR HORSE RACING DAYS)
Live race days 115 108 113 104 111
Revenue:
Live - On-Track $ 3,921 $ 4,020 $ 5,002 $ 5,956 $ 7,426
Live - N. CA Network $ 3,061 $ 2,911 $ 3,223 $ 4,751 $ 5,417
Live - Exported $ 2,974 $ 2,441 $ 1,950 $ 859 $ 498
Live - Imported $ 5,751 $ 5,299 $ 4,407 $ 1,072 $ 293
Nonmerged Fees $ 287 $ 77 $ 101 $ 52 $ 51
Satellite Fees $ 1,694 $ 1,702 $ 1,488 $ 1,448 $ 1,586
SEASONAL VARIATIONS IN BUSINESS
Bay Meadows' revenues are subject to seasonal variations as a result of the
allocation of racing days by the CHRB. Historically, the Bay Meadows racing meet
commenced in August each year and ended the following January. However, the 1995
horse racing season was comprised of three smaller meets held during the months
of March-April, August-November and December 1995-January 1996. The 1996 horse
racing season was comprised of two smaller meets held during late January
through late March and late August through early November. For 1997, Bay
Meadows' season has been divided into two meets, one from late January through
late March and the second from late August through mid-November. See
"--Regulation." Seasonal variations are reflected in the financial information
for Bay Meadows Operating Company and its subsidiary, Bay Meadows Catering, set
forth below for the quarterly periods indicated.
BAY MEADOWS OPERATING COMPANY AND SUBSIDIARY
QUARTERS ENDED 1996
----------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RACING DAYS)
Number of live racing days 63 0 25 27
Total revenues $ 26,692 $ 2,636 $ 12,080 $ 12,064
Costs and expenses $ 23,557 $ 3,946 $ 12,270 $ 12,984
Net income (loss) $ 1,877 $ (782) $ (98) $ (542)
Net income (loss) per share $ .33 $ (.14) $ (.02) $ (.09)
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QUARTERS ENDED 1995
-----------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RACING DAYS)
Number of live racing days 20 10 27 51
Total revenues $ 9,587 $ 7,238 $ 13,058 $ 20,373
Costs and expenses $ 9,461 $ 7,465 $ 13,022 $ 19,372
Net income (loss) $ 68 $ (123) $ 20 $ 512
Net income (loss) per share $ .01 $ .02 $ .01 $ .09
QUARTERS ENDED 1994
----------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RACING DAYS)
Number of live racing race days 21 0 24 68
Total revenues $ 9,979 $ 2,421 $ 11,716 $ 27,071
Costs and expenses $ 9,774 $ 3,549 $ 11,621 $ 25,103
Net income (loss) $ 205 $ (1,128) $ 443 $ 1,072
Net income (loss) per share $ .04 $ (.20) $ .08 $ .18
REGULATION
Horse racing is highly regulated in California. As a result, Bay Meadows faces
an increasing number of limitations on how it conducts its Thoroughbred racing
operations. The scheduling, length and conduct of meets and the distribution of
the pari-mutuel purse is determined by California Law and the CHRB. The CHRB is
charged with regulating horse racing and wagering at horse racing meets in
California. The CHRB is also charged with the responsibility of licensing horse
racing associations on an annual basis to conduct horse racing meets.
To conduct a Thoroughbred racing meet and to act as a satellite facility, Bay
Meadows is required to secure, on an annual basis, a license from the CHRB.
Although Bay Meadows has been granted an annual license each year since 1934,
including one for the 1997 horse racing season, no assurance can be given that
Bay Meadows will continue to receive this annual license.
As a condition of the issuance of the annual license, California law requires
that a certain number of horse racing days be conducted as charity days. The net
proceeds from these charity days, up to a maximum amount of 0.2% of on-track
handle on live horse races for the meet, are distributed to beneficiaries
through a nonprofit organization approved by the CHRB.
The CHRB is also responsible for allocating horse racing days to horse racing
associations; Bay Meadows can only conduct live Thoroughbred horse racing on
days allocated to it by the CHRB. No assurance can be given that competition for
horse racing days will not affect the allocation of horse racing days to Bay
Meadows in the future. See "--Competition."
Following consummation of the Merger, New Patriot Operating Company will
have to file an amendment to Bay Meadows' CHRB 1997 application for its 1997
license reflecting the corporate restructuring that will occur in the Merger.
In informal discussions,
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representatives of the CHRB have indicated that it would not object to such an
amendment to the 1997 application. No assurances can be given, however, that the
CHRB will not object to such an amendment when it is filed.
LEGISLATION
Because Thoroughbred racing is highly regulated by the State of California, the
enactment of new legislation can impact Bay Meadows in both positive and
negative ways. In 1996, a new law was passed by the California Legislature
reducing the effective license fee payable by Bay Meadows from 3.83% to 3.52%
commencing January 1, 1997.
Because of the myriad legislative bills relating to gaming and horse racing
introduced each year in the California Legislature, it is impossible for Bay
Meadows to identify which will receive serious consideration, much less be
enacted. Accordingly, Bay Meadows is unable to predict the impact which future
legislation may have on its operations.
There is, however, considerable concern in the horse racing industry about
potential legislation which may result in the expansion of gaming, particularly
gambling on Indian reservations, and which would likely would negatively impact
horse racing.
COMPETITION
Horse racing dates are allocated annually by the CHRB and, to the extent
possible, are allocated in a manner to avoid overlaps in Northern California.
Historically, the dates allocated to Bay Meadows have not overlapped with those
of Golden Gate Fields, the only other horse racing association in the San
Francisco Bay Area. However, Bay Meadows has been allocated dates, from time to
time, that have resulted in it conducting racing concurrently in Northern
California with the California State Fair in Sacramento, California and the Big
Fresno Fair in Fresno, California. Over the last two years, competition for
horse racing dates has increased among Bay Meadows, Golden Gate Fields and some
county fairs. It can no longer be assumed that the CHRB will grant a racetrack
its historic racing dates or that dates granted will not overlap with those
granted to other racing on operations in Northern California.
Although Bay Meadows has little direct competition from other tracks in the San
Francisco Bay Area when Bay Meadows is conducting live horse racing, competition
is developing through businesses in various states or foreign countries
accepting wagers on races at Bay Meadows placed by telephone or via the
Internet. Bay Meadows is not able to estimate the magnitude of telephone or
Internet wagering or the impact such wagering will have on its results of
operations or financial condition.
To some extent, Bay Meadows also competes for patrons with off-track wagering
facilities in Northern California. Because of distance and traffic congestion, a
patron might find wagering at an off-track wagering facility to be more
convenient.
The San Francisco Bay Area annually has numerous professional and amateur
sporting events and other entertainment attractions which compete with Bay
Meadows for the sports and entertainment dollar. Bay Meadows also competes with
other forms of legalized gambling, particularly Indian gaming, and other forms
such as the California State lottery and local card clubs. It is very difficult,
however, to evaluate the competitive impact of these other forms of
entertainment and gambling other than to say they are significant.
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During the last few years, racetracks throughout the United States have
experienced a decline in their horse population. As a result of this decline,
there has been a reduction in the size of the fields competing in horse races.
Generally, the amount wagered on a given race is impacted by the size of the
field. Bay Meadows competes for horses with other tracks throughout the United
States and, particularly, with tracks in Southern California, Arizona and
Washington.
PROPOSED SALES OF STABLE AREA AND TRAINING TRACK AREA
As discussed above (see "--CALIFORNIA JOCKEY CLUB--Pending Sales and
Negotiations"), Cal Jockey has entered into an agreement to sell substantially
all of the Stable Area where most of the horses racing at Bay Meadows are
stabled during Bay Meadows' meets. Cal Jockey has also entered into an agreement
to sell the adjoining Training Track Area, on which a 5/8 mile training track is
now situated. Since the sales of the Stable Area and the Training Track Area
were announced, Bay Meadows and Cal Jockey have been investigating and
considering various alternative stabling arrangements.(See "--CALIFORNIA JOCKEY
CLUB--Planning for Training and Stabling.")
Bay Meadows has publicly proposed a plan for the construction of 954 stalls on
the property being retained by Cal Jockey. Patriot, which has agreed to a
business combination agreement with Cal Jockey and Bay Meadows (see "--The
Patriot Transaction") has indicated its support for such plan. Property
Resources, the purchaser of the Stable Area has indicated its support for such
plan, has agreed to amend the Franklin Agreement as part of the implementation
of the plan and has indicated its intent to permit Bay Meadows to continue to
use 1,100 existing stalls in the Stable Area through March 1998. No approval to
this plan has been given by Cal Jockey, with any approval contingent on the
results of economic, environmental and other feasibility studies. Implementation
of the plan is subject to a number of conditions including the arrangement of
financing acceptable to Patriot and the receipt of the requisite governmental
approvals.
EFFECTS OF OTHER CAL JOCKEY TRANSACTIONS
Cal Jockey recently entered an agreement with Borders for the long-term ground
lease of a parking lot adjacent to the Bay Meadows Racecourse. As a result of
this transaction, Bay Meadows has lost a number of convenient parking spaces for
its patrons and an important pedestrian access to its facility. However, there
are an excess number of parking spaces available at Bay Meadows, the remaining
spaces may not be as convenient for certain patrons and there can be no
assurance that the parking revenue currently being generated will not be
adversely affected.
Bay Meadows manages and operates the Sundown Tennis Club, an indoor tennis
facility on land in close proximity to the Racecourse. On July 18, 1996, Cal
Jockey entered an agreement to sell the Tennis Club Parcel.(See "--CALIFORNIA
JOCKEY CLUB--Pending Sales and Negotiations.") For the twelve months ended
December 31, 1996, Bay Meadows' operating income associated with the Sundown
Tennis facility was $70,000.
Bay Meadows also manages and operates a nine-hole golf course in the infield of
the racetrack. The recent opening of a golf facility in close proximity to Bay
Meadows has had an adverse impact on the results of operations of the Bay
Meadows' golf course. Further, Bay Meadows' golf course will be eliminated if
new stables are built as planned. For the twelve months ended December 31, 1996,
Bay Meadows' operating income associated with the golf course was $95,000.
CONCESSIONAIRE
Bay Meadows Catering ("Catering"), a wholly owned subsidiary of Bay Meadows,
provides food and beverage services at the Turf Club and at refreshment stands
located in the Grandstand and Clubhouse areas of the racetrack facility.
Catering also enters into contracts with racing associations and groups which
sublease Bay Meadows Racecourse to provide such food and beverage service.
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CAPITAL IMPROVEMENTS
For the twelve month period ending December 31, 1996, Bay Meadows expended
$1,285,000 in capital improvements consisting primarily of costs relating to
construction of a television studio, control room and associated equipment,
enterprise networking system and a POS system.
EMPLOYEES
Bay Meadows employs approximately 200 employees throughout the year and an
additional 350-550 seasonal employees on horse racing days. Substantially all of
Bay Meadows' employees, other than the administrative staff, are members of
various unions. Bay Meadows believes it has good relations with its employees
and their unions.
ITEM 2. PROPERTIES
Information with respect to the property owned by Cal Jockey and Bay Meadows is
set forth under Item 1 - "Business" and incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
Bay Meadows and Cal Jockey are, in the ordinary course of business, involved in
litigation and other legal matters. In addition, Bay Meadows and/or Cal Jockey
is a party to the following legal proceedings.
Volkman et al. v. California Jockey Club et al.
On or about July 3, 1996, plaintiff stockholders filed a petition for writ of
mandate in San Mateo County Superior Court against Cal Jockey and its directors,
seeking an order directing Cal Jockey to hold its annual meeting of stockholders
earlier than the date set by Cal Jockey. A judgment so directing Cal Jockey was
entered, and the meeting was held on August 30, 1996. Cal Jockey does not intend
to appeal, and has settled the matter in its entirety with payment of certain
fees and expenses incurred by the plaintiffs.
California Jockey Club v. Bay Meadows Operating Company et al.
On August 13, 1996, Cal Jockey filed a complaint in United States District Court
for the Northern California District of California against Bay Meadows, its
President (F. Jack Liebau), and the members of the California Jockey Club
Shareholders Committee, a group of stockholders supporting a slate of nominees
to the Cal Jockey Board of Directors in opposition to those nominated by Cal
Jockey's management. The complaint alleged violations of federal securities law
by reason of defendants' failure to make required filings and disclosures in
connection with the Cal Jockey proxy contest. The complaint sought to compel
defendants to make the required disclosures and to enjoin them from soliciting
or voting proxies. On November 7, 1996, Cal Jockey, with the consent of Bay
Meadows, requested that the case be placed on inactive status through an order
of administrative closure and stay. Bay Meadows believes this suit is without
merit.
Bay Meadows Foundation v. Bay Meadows Operating Company and California Jockey
Club
On December 29, 1995, the Bay Meadows Foundation filed a complaint in San Mateo
Superior Court against Cal Jockey and Bay Meadows. The complaint alleges failure
to properly calculate and pay charity proceeds as required by law and includes
causes of action for violation of statute, breach of fiduciary duty and
imposition of a constructive trust and accounting. Specifically, the complaint
alleges that Bay Meadows improperly deducted rent payments made to its
affiliate, Cal Jockey, from the charity net proceeds. The complaint also seeks
punitive damages and attorney's fees. On March 25, 1996, Cal Jockey and Bay
Meadows filed their answer to the complaint. The answer denies the allegations
of the complaint and asserts
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affirmative defenses against the Bay Meadows Foundation. Specifically, Cal
Jockey and Bay Meadows maintain that the deduction of rent payments was lawful
and consistent with both the administrative determination made by the California
Horse Racing Board ("CHRB") in 1991 that such rent payments were deductible
under the financial reporting instructions subsequently promulgated by the CHRB.
The parties are currently engaged in civil discovery and Cal Jockey and Bay
Meadows plan to vigorously defend themselves against the lawsuit.
Pati Misskelley v. Bay Meadows Operating Company and Frank Trigeiro et al.
On June 4, 1996, the plaintiff, a former accounts receivable clerk, filed suit
against Bay Meadows and certain of its employees in the United States District
Court for the Northern District of California, alleging gender and age
discrimination. The plaintiff was terminated by Bay Meadows after her position
was eliminated as part of a restructuring of the accounting department. In her
suit, the plaintiff seeks unspecified damages. Bay Meadows believes that this
suit is without merit.
Property Resources, Inc. v. Bay Meadows, Operating Company, et al.
On August 16, 1996, Property Resources, Inc. ("PRI"), a subsidiary of Franklin
Fund, Inc., filed suit in the San Mateo County Superior Court against Bay
Meadows, its directors and others, for intentional interference with PRI's
contract with Cal Jockey for the sale of real property on which Bay Meadows'
stables are located. PRI sought a temporary restraining order which would have
prevented Bay Meadows and its management from communicating with its
stockholders, Cal Jockey, San Mateo city officials or the press about a wide
range of topics, including on-site stabling of horses at Bay Meadows. On August
15, 1996, the Court denied PRI's request for the temporary restraining order. On
November 7, 1996, the San Mateo Superior Court dismissed PRI's remaining claims
with leave to amend. The parties subsequently settled this matter with the
agreement that the parties would pay their respective legal fees and costs, and
the lawsuit was subsequently dismissed on February 10, 1997.
Pauline Madera v. Bay Meadows Operating Company and Morris Webb
On December 20, 1995, Ms. Madera, an employee of Bay Meadows Catering filed a
complaint in San Mateo County Superior Court seeking unspecified damages for
sexual battery, intentional infliction of emotional distress, negligent
infliction of emotional distress and sexual harassment. Neither Ms. Madera nor
Mr. Webb were employed in a management or supervisory position by Bay Meadows.
Bay Meadows has settled this matter.
Management of the Companies believe that the pending legal actions against
either of the Companies will not have a material impact on the separate or
combined financial statements of the Companies, taken as a whole.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth, for the fiscal quarters indicated, the high
and low sales prices for the Paired Common Stock, and the cash dividends paid
by Cal Jockey on the CJC Common Stock for the periods indicated. The prices are
as reported by the AMEX.
Cash Dividends
Per Share
High Low Paid by Cal Jockey
---- --- ------------------
Fiscal 1996 Quarter Ended:
March 31, 1996 14-3/4 14-5/8
June 30, 1996 17-3/8 17-1/8 $.40
September 30, 1996 20-1/8 19-3/4
December 31, 1996 40-7/8 40-3/8
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Cash Dividends
Per Share
High Low Paid by Cal Jockey
---- --- ------------------
Fiscal 1995 Quarter Ended:
March 31, 1995 17-1/4 13-3/4
June 30, 1995 16-3/4 14-1/2 $.25
September 30, 1995 16-3/8 15-5/8
December 31, 1995 16-3/8 14 $.40
As of March 17, 1997, there were approximately 2,640 stockholders of record of
the Cal Jockey Common Stock and approximately 2,640 stockholders of record of
the Bay Meadows Common Stock. On March 17, 1997, the closing price of the
Paired common stock as reported on AMEX was $46.00.
Cal Jockey has paid, and intends to continue to pay, regular semi-annual
dividends (except for fourth quarter 1996) based on management's estimate of
earnings for the entire calendar year and, if necessary, to pay special
dividends after the close of the year to effect distribution of at least 95% of
its taxable net income (other than net capital gains), so as to continue to
qualify as a real estate investment trust.
Bay Meadows has not paid cash dividends on the Bay Meadows Common Stock since
its formation and does not expect to pay cash dividends in the foreseeable
future.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the financial statements and related notes thereto.
COMBINED SELECTED FINANCIAL DATA
CALIFORNIA JOCKEY CLUB AND
BAY MEADOWS OPERATING COMPANY AND SUBSIDIARY
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RACING DAYS)
Number of live racing days 115 108 113 104 111
Operating Data:
Revenues $ 53,932 $ 50,709 $ 51,575 $ 44,993 $ 48,985
Net income (loss) (791)(2) 4,200 4,212 1,153(1) 2,150
Net income (loss) per share (.13)(2) .73 .73 .20(1) .37
Cash dividends per share .40 .65 .60 .30 .60
Balance Sheet Data:
Total assets $ 27,676 $ 37,935 $ 36,786 $ 44,993 $ 33,999
- ----------
(1) Includes a charge of $1,400,000 recorded as a result of litigation
settlement.
(2) Includes merger related costs of $3,995,000 and legal fees of $1,549,000.
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SELECTED FINANCIAL DATA
CALIFORNIA JOCKEY CLUB
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RACING DAYS)
Number of live racing days 115 108 113 104 111
Operating Data:
Revenues $ 5,412 $ 5,241 $ 5,176 $ 3,984 $ 4,736
Net income (loss) (1,216)(2) 3,723 3,620 980 (1) 2,854
Net income (loss) per share (.21)(2) .65 .63 .17 (1) .49
Cash dividends per share .40 .65 .60 .30 .60
Balance Sheet Data:
Total assets 23,374 $ 22,147 $ 22,129 $ 21,914 $ 23,950
- ----------
(1) Includes a charge of $1,400,000 recorded as a result of litigation
settlement.
(2) Includes merger related costs of $3,504,000 and legal fees of
$1,124,000.
CONSOLIDATED SELECTED FINANCIAL DATA
BAY MEADOWS OPERATING COMPANY AND SUBSIDIARY
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RACING DAYS)
Number of live racing days 115 108 113 104 111
Operating Data:
Revenues $ 53,472 $ 50,256 $ 51,187 $ 44,642 $ 48,537
Net income 455 477 592 173 (692)
Net income per share .08 .08 .10 .03 (.12)
Cash dividends per share -- -- -- -- --
Balance Sheet Data:
Total assets $ 6,634 $ 16,357 $ 16,648 $ 10,821 $ 11,263
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of the Companies'
financial condition and results of operations. The discussion should be read in
connection with Item 8 - " Financial Statements and Supplementary Data."
The information set forth in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" below includes "forward-looking statements"
within the meaning of Section 21E of the Securities and Exchange Act of 1934, as
amended, and is subject to the safe harbor created by that section. Readers are
cautioned not to place undue reliance on these forward-looking statements and to
note that they speak only as of the date hereof. Factors that realistically
could cause actual results to differ materially from those in the
forward-looking statements are set forth below and include the following:
nonconsummation of the Merger Agreement, the Franklin Agreement or the Iacocca
Agreement, failure to secure the necessary governmental approvals to construct
new stalls at the Racecourse, as well as the risk factors set forth in this Item
7.
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GENERAL
The results of operations of Cal Jockey and Bay Meadows are dependent upon the
operations of Bay Meadows Racecourse as a live Thoroughbred racing facility and
as a simulcast wagering facility for other racing associations. The operations
of this facility are the primary source of the Companies' respective revenues
and net income. Cal Jockey's income is almost entirely dependent upon collection
of rent from Bay Meadows pursuant to a master lease.
Bay Meadows' income is primarily dependent upon the success of the Thoroughbred
racing meet it conducts. The total number of Bay Meadows' racing days has
increased from 81 days in 1985 to a high of 115 days in 1996. Bay Meadows plans
to conduct 104 racing days in the 1997 calendar year. Since the introduction of
intertrack wagering in October 1985, the components of Bay Meadows' revenues
have continued to change. Starting with the 1990-1991 racing meet, several
interstate locations were included in Bay Meadows' pari-mutuel pools.
Additionally, the expansion of intrastate wagering has positively impacted the
handle on exported races. While all of these factors have contributed to an
increase in the total pari-mutuel handle from $192,378,000 in 1985 to
$513,880,000 in 1996, the profitability of each of the components of the handle
is different. In 1996, the total pari-mutuel handle was comprised of (i) wagers
made at Bay Meadows on horse races at Bay Meadows (11.7%), (ii) wagers made
throughout the Northern California Off-track Network on horse races at Bay
Meadows (13.5%), (iii) wagers made throughout locations in Southern California
and at out-of-state locations on horse races conducted at Bay Meadows (50.9%);
and (iv) wagers made at Bay Meadows and throughout the Northern California
Off-Track Network on horse races conducted in Southern California and at
out-of-state locations (23.9%). (See "BAY MEADOWS OPERATING COMPANY--Pari-Mutuel
Revenues").
In addition, the related decline in daily average on-track attendance from
approximately 8,700 in 1985 to approximately 4,400 in 1996 has had a material
impact on non-wagering revenue sources (food, beverage and gift shop sales,
admissions, parking fees and program sales). The daily average on-track
attendance for 1996 decreased approximately 2% compared to the prior year.
Under the terms of the master lease agreement, Bay Meadows' percentage rental
payments to Cal Jockey are based on the amount of pari-mutuel handle derived
from wagers on Bay Meadows' live Thoroughbred racing meet and wagers placed at
Bay Meadows Racecourse when it serves as a simulcast wagering facility for other
racing associations (See Item 1 - "CALIFORNIA JOCKEY CLUB -- Lease of Racing
Facilities"). Bay Meadows also collects additional revenue by subleasing the
racecourse facilities to the San Mateo County Fair and others.
On October 31, 1996, Cal Jockey and Bay Meadows entered into a business
combination agreement with Patriot American Hospitality, Inc. ("Patriot"). The
agreement was approved unanimously by the Boards of Patriot, Cal Jockey and Bay
Meadows and is subject to approval by the shareholders of each of Patriot, Cal
Jockey and Bay Meadows. The parties, together with Patriot American Hospitality
Parnership, L.P., a limited partnership (the "Patriot Partnership"), thereafter
entered into an Agreement and Plan of Merger, dated as of February 24, 1997
(the "Merger Agreement"), which by its terms supersedes the October 31, 1996
Agreement and more fully details the transactions to be consummated by the
parties.
Pursuant to the Merger Agreement, Patriot will merge with and into Cal Jockey,
with Cal Jockey being the surviving company. In connection with the Merger, Cal
Jockey's name will be changed to "Patriot American Hospitality, Inc." ("New
Patriot REIT") and Bay Meadows' name will be changed to "Patriot American
Hospitality Operating Company" ("New Patriot Operating Company"). The
shareholders of Cal Jockey and Bay Meadows will have the option either to
tender each of their paired shares for $33.00 in cash or to retain their paired
shares, which will then remain outstanding after the Merger and will represent
the same number of paired shares of New Patriot REIT common stock and New
Patriot Operating Company common stock. (See Item 1 --"BUSINESS--THE PATRIOT
TRANSACTION").
Patriot loaned $2,900,000 to Cal Jockey for payment of the breakup fee due upon
termination of the prior merger agreement with Hudson Bay Partners, LP ("Hudson
Bay"). Patriot will be entitled to receive a $5,000,000 termination fee, and
the repayment of the $2,900,000 loan for the Hudson Bay termination fee in the
event the Cal Jockey and Bay Meadows boards of directors receive a higher
unsolicited offer which the accept. All merger related costs have been expensed
as incurred. Such amounts include the breakup fee, legal and accounting costs
related to the transaction.
CALIFORNIA JOCKEY CLUB
RESULTS OF OPERATIONS: YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED
DECEMBER 31, 1995
In 1996, total revenues for Cal Jockey increased $171,000 (3%), compared to the
prior year. Rental income derived from the leasing of its racing facility is
based on pari-mutuel wagering at Bay Meadows and increased $175,000 (4%) as a
result of seven more racing days in 1996 than in 1995. Total interest income
decreased $3,000 from the prior year, primarily as a result of a lower average
balance of investments.
Expenses for the year ended December 31, 1996, increased $5,110,000 (337%),
primarily as a result of costs related to acquisition proposals and Cal
Jockey's proxy contest. Legal fees increased from $80,000 for the year ended
December 31, 1995 to $1,124,000 for the year ended December 31, 1996. The
increase in legal fees are similarly attributed to the proxy contest. General
and administrative costs increased $565,000 primarily due to the proxy
contest.
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RESULTS OF OPERATIONS: YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED
DECEMBER 31, 1994
In 1995, total revenues for Cal Jockey increased $65,000 (1%), compared to the
prior year. Rental income derived from the leasing of its racing facility
decreased $34,000 (1%). This decrease was primarily the result of Bay Meadows
racing five fewer days in 1996 compared to the prior year. Total
interest income increased $106,000 from the prior year, primarily as a result of
a higher average balance of investments.
While total expenses for 1995 decreased $38,000 (2%) compared to 1994, General
and Administrative expense increased $145,000. The 33% increase in general and
administrative expenses is due to Cal Jockey's employment of a real estate
manager, as of September 1, 1994, and the overhead associated with having an
employee.
LIQUIDITY AND CAPITAL RESOURCES
During 1996, Cal Jockey's primary sources of capital were from proceeds of
maturing securities and a note payable. Net cash used in operating activities
was $1,655,000, consisting primarily of a net loss excluding depreciation, and
$1,763,000 increase in receivables from Bay Meadows, offset by an increase of
$424,000 in accounts payable and accrued liabilities. The net loss for 1996
was primarily due to merger related costs, and increases in legal expense and
general and administrative costs. Receivables from Bay Meadows increased due
primarily to amounts related to the rental of the race facility. Net cash
provided by investing activities was $1,210,000, consisting of net proceeds of
$2,614,000 on maturities of securities held to maturity, offset by purchases of
$1,404,000 of property plant and equipment. Net cash provided by financing
activities was $594,000, consisting of proceeds of $2,900,000 from a note
payable with Patriot in connection with the merger agreement, offset by
$2,306,000 paid in dividends on common stock.
Cash and cash equivalents increased by $149,000 during 1996 from $989,000 at the
end of 1995 to $1,138,000 at the end of 1996. The note payable to Patriot bears
interest of 5% per annum and principal and accrued interest on the note payable
to Patriot American is due the earlier of June 30, 1997 or termination of the
Merger Agreement. Cal Jockey's financial condition and results of operations
are affected by Thoroughbred racing. This is due to the fact that the lease
revenues are dependent on Bay Meadows operations. During 1996, there were seven
more race days than 1995 (115 v. 108). In 1997, Bay Meadows has been allocated
11 less Thoroughbred racing days than in 1996. This is expected to negatively
impact revenues and profitability for 1997.
Cal Jockey anticipates that funds generated internally and its cash reserves
will be sufficient to meet its liquidity requirements for the foreseeable
future.
INFLATION
Inflation is not expected to materially impact Cal Jockey.
BAY MEADOWS OPERATING COMPANY
RESULTS OF OPERATIONS: YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED
DECEMBER 31, 1995
Total revenues increased $3,216,000 (6%) for 1996, compared with 1995. This
was primarily due to an increase in pari-mutuel revenues of $2,521,000.
Pari-mutuel revenues increased due primarily to an additional seven more live
racing days in 1996 than 1995 (115 vs. 108).
Concession revenues increased $546,000, and admissions, programs, parking and
other racing income increased $64,000, having been positively impacted by the
same factors which affected pari-mutuel revenues.
During 1996, there were charges in the components of pari-mutuel wagering. Live
on-track wagering decreased 2% while live off-track racing in Northern
California increased 4%. Wagers made on Southern California on races conducted
at Bay Meadows increased from $132,033,000 in 1995 to $144,361,260 (9%). Bay
Meadows receives a fee of 2.5% of handle on these races and is required to pay
50% of the fee received to horse owners as purses. In addition, wagers made at
out-of-state locations on races conducted at Bay Meadows increased $28,246,000
from $88,985,000 in 1995 to $117,231,000 in 1996. Fees on these races generally
range from 2.5% to 3.75% of the handle on these races at the export locations
and are statutorily divided among purses, the State of California and incentive
awards.
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Management believes revenues earned are a better financial barometer than
handle. Handle derived from out-of-state locations is far less profitable than
wagering within California. Admissions, programs, parking and other racing
revenue increased from $5,164,000 in 1995 to $5,228,000 in 1996.
Total costs and expenses increased $3,437,000 (7%) for the year ended
December 31, 1996, compared with the prior year. This was primarily due to
increases in expenses associated with higher operating revenues, including (i)
purses and incentive awards ($1,308,000), (ii) direct operating costs
($1,547,000) and (iii) racing facility rental ($181,000). Additionally, legal
expenses of $425,000 were incurred related to litigation commenced by Cal
Jockey with respect to its proxy contest and other legal matters. Another
$491,000 of expenses were incurred related to the proposed merger transactions.
RESULTS OF OPERATIONS: YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED
DECEMBER 31, 1994
Total revenues decreased $931,000 (2%) for 1995, compared with the prior year
because of a large decrease in pari-mutuel revenue which was partially offset by
producer fees, rental of racing facility revenues, concession sales and other
income. This decrease was primarily due to Bay Meadows racing five fewer days in
calendar year 1995 as compared to 1994 (108 vs. 113).
Compared to 1994, there was a change in the components of pari-mutuel wagering.
While wagering decreased on-track and off-track in Northern California, wagers
increased at locations in Southern California and out-of-state on races
conducted at Bay Meadows. Wagers made in Southern California on races conducted
at Bay Meadows increased from $100,737,000 in 1994 to $132,033,000 in 1995. Bay
Meadows receives a fee of up to 2.5% of handle on these races and is required to
pay 50% of the fee received to horse owners as purses. In addition, wagers made
at out-of-state locations on races conducted at Bay Meadows increased
$19,100,000 from $69,885,000 in 1994 to $88,985,000 in 1995. Fees on these races
generally range from 2.5% to 3.75% of the handle on these races at the export
location and are statutorily divided among purses, the State of California and
incentive awards.
Management believes fees earned are a better financial barometer than handle
because, with the advent of simulcasting, handle has become less meaningful.
Simulcast handle is sometimes counted by more than one track, and handle derived
from out-of-state locations is far less profitable than wagering within
California. Admissions, programs, parking and other racing income decreased
$235,000 due primarily to a decrease in the number of race days.
Total costs and expenses decreased $727,000 (2%) for the year ended December
31, 1995, compared with 1994. This was primarily due to decreases in expenses
associated with lower operating revenues, including (i) purses and incentive
awards ($1,038,000), (ii) commissions paid to guest locations ($136,000), and
(iii) racing facility rental ($38,000). General and administrative expenses
decreased $136,000 (4%) for the year ended December 31, 1995, compared with
1994. Compared to 1994, direct operating expenses increased by $344,000 in 1995.
In addition, $666,000 in expenses were incurred in connection with the
unsuccessful attempt to establish a Card Club, compared to $209,000 in 1994. A
loss on disposal of fixed assets in the amount of $99,000 was recorded in 1995
due to accelerated replacement of certain fixed assets.
INFLATION
Inflation is not expected to materially impact Bay Meadows.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased to $889,000 at December 31, 1996 from
$6,318,000 at December 31, 1995. Net cash used in operating activities was
$4,144,000, consisting primarily of a $3,319,000 decrease in accounts payable
and accrued liabilities, a $1,014,000 decrease in accrued purses, a $3,056,000
decrease in amounts due to Thoroughbred horse owners, and a $4,477,000 decrease
in uncashed pari-mutual tickets and vouchers, offset by a $1,944,000 decrease
in accounts receivable, a $3,056,000 decrease of amounts held on deposit for
Thoroughbred horse owners, and a $1,763,000 increase amounts payable to Cal
Jockey. The net cash used in operating activities were primarily due to the
timing of live race days in 1996 as compared to 1995. At December 31, 1995,
Bay Meadows was racing live, whereas at December 31, 1996 the race meet had
concluded over a month earlier, therefore allowing for all assets and
liabilities to be settled prior the year end. Net cash used in investing
activities was $1,285,000 for the purchase of property, plant and equipment.
Net cash from financing activities was zero, consisting of $4,000,000 in
proceeds and subsequent repayment of a note payable.
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As of December 31, 1996, Bay Meadows' current liabilities exceeded its current
assets by $3,048,000. The current ratio (current assets to current liabilities)
was .38 to 1 as of December 31, 1996, as compared to .81 to 1 as of December 31,
1995. This was primarily due to the changes in the 1996 racing calendar. For the
calendar year 1997, Bay Meadows has been allocated eleven less Thoroughbred
racing days than in the prior year, which is expected to negatively impact
revenues and profitability in 1997.
Bay Meadows is dependent on Cal Jockey's assistance in securing a bank line of
credit for its working capital needs throughout the year. Bay Meadows received a
signed commitment from Cal Jockey to guaranty a $2,500,000 bank line of credit.
Bay Meadows obtained this bank line of credit on March 10, 1997, and it is
available through February 1, 1998. Bay Meadows anticipates that it may be
required to borrow or seek an alternative source of funds to ensure liquidity
after that date if the Merger is not consummated.
RISK FACTORS
REAL ESTATE INVESTMENT RISKS
General Risks
Cal Jockey's investments will be subject to varying degrees of risk generally
incident to the ownership of real property. The underlying value of Cal
Jockey's real estate investments and Cal Jockey's income and ability to make
distributions to its stockholders will be dependent upon the ability of Cal
Jockey to manange its real property in a manner sufficient to maintain or
increase revenues and to generate sufficient income in excess of operating
expenses. Income from investments may be adversely affected by changes in
national economic conditions, changes in local market conditions due to changes
in general or local economic conditions and neighborhood characteristics,
changes in interest rates, the impact of present or future environmental
legislation and compliance with environmental laws, the ongoing need for
capital improvements, changes in real estate tax rates and other operating
expenses, adverse changes in govermental rules and fiscal policies, adverse
changes in zoning laws, civil unrest, acts of God, including earthquakes and
other natural disasters (which may result in uninsured losses), acts of war and
other factors which are beyond the control of Cal Jockey.
Value and Illiquidity of Real Estate
Real estate investments are relatively illiquid. The ability of Cal Jockey to
vary its portfolio in response to changes in economic and other conditions will
therefore be limited. If Cal Jockey must sell an investment, there can be no
assurance that Cal Jockey will be able to dispose of it in the time period it
desires or that the sales price of any investment will recoup or exceed the
amount of Cal Jockey's investment.
Property Taxes
Cal Jockey's and Bay Meadow's racing facilities are subject to real property
taxes. The real property taxes on the racing facilities in which Cal Jockey
invests may increase or decrease as property tax rates change and as the value
of the properties are assessed or reassessed by taxing authorities. If property
taxes increase as a result of such reappraisals or reassessments, Cal Jockey's
ability to make expected distributions to its stockholders could be adversely
affected.
POTENTIAL RISKS RELATED TO ENTITLEMENTS FOR FRANKLIN AGREEMENT AND IACOCCA
AGREEMENT.
As a condition to consummation of the land sale transactions contemplated by
the Franklin Agreement and the Iacocca Agreement, Cal Jockey is required to
secure certain planning, land use, and zoning Entitlements from the City of San
Mateo allowing the development of the subject properties. Cal Jockey also is
required to obtain final certification of an EIR analyzing the environmental
effects (such as impacts on traffic flow, air quality, and growth inducement)
of certain of the Entitlements. The City of San Mateo has scheduled a series of
Planning Commission and City Council meetings to evaluate the Entitlements and
the EIR, culminating in a final City Council meeting currently expected to be
held on Tuesday, April 22, 1997 at which meeting the City Council is expected
to make a final decision as to the certification of the EIR with a decision as
to approval of the Entitlements shortly thereafter. Although Cal Jockey
anticipates approval of the Entitlements and certification of the EIR, it is
possible that the schedule for the final decision could be delayed and it also
is possible that the Entitlements and/or EIR could be rejected or subject to
significant or changed conditions of approval. Any such delay, rejection, or
addition of significant or changed conditions could have an effect on the
obligations of Property Resources and Airdial to consummate the purchase of the
Stable Area and the Training Track Area. In addition, both the Franklin
Agreement and the Iacocca Agreement require as a condition to the buyers'
obligations to consummate the sale transactions, that Cal Jockey secure a
Development Agreement vesting the rights of Property Resources and Airdial to
develop the property subject to set conditions and fees. While a draft of such
agreement has been submitted to the City of San Mateo, city officials have not
yet indicated whether the city will agree to execute such an agreement. Such a
failure of the city to agree to a Development Agreement could give rise to
rights of termination of the Franklin Agreement and the Iacocca Agreement by
Property Resources and Airdial, respectively.
REIT TAX RISKS
Dependence on Qualification as a REIT
Cal Jockey operates in a manner designed to permit it to qualify as a REIT for
federal income tax purposes, but no assurance can be given that Cal Jockey will
be able to continue to operate in a manner so as to qualify or remain so
qualified. Qualification as a REIT involves the application of highly technical
and complex Code provisions for which there are only limited judicial or
administrative interpretations. Qualification as a REIT also involves the
determination of various factual matters and circumstances not entirely within
Cal Jockey's control. In addition, no assurance can be given that new
legislation, new regulations, administrative interpretations or court decisions
will not change the tax laws with respect to qualification as a REIT or the
federal income tax consequences of such qualification. Cal Jockey, however, is
not aware of any currently pending tax legislation that would adversely affect
the ability of Cal Jockey to continue to qualify as a REIT.
If Cal Jockey were to fail to qualify as a REIT, Cal Jockey would be subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at corporate rates. In addition, unless entitled to relief under
certain statutory provisions, Cal Jockey also would be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. This treatment would reduce the net earnings of Cal
Jockey available for distribution to stockholders because of the additional tax
liability to Cal Jockey for the year or years involved. In addition,
distributions would no longer be required to be made.
HORSE RACING INDUSTRY RISKS
Regulation of Gaming Operations
Bay Meadows' pari-mutuel wagering operations are contingent upon the continued
governmental acceptance of such operations as forms of legalized gambling. As a
form of gambling, pari-mutuel wagering is subject to extensive licensing and
regulatory control by the CHRB and other California authorities. These
regulatory authorities have broad powers with respect to the licensing of
gaming operations, and may revoke, suspend, condition or limit the gaming
operations of Bay Meadows. Any such change in regulations may have a material
adverse effect on Bay Meadows' financial condition and results of operations.
Stable Area
Bay Meadows' operations are conducted at the Racecourse. Cal Jockey has agreed
to sell the Stable Area of the Racecourse pursuant to the Franklin Agreement.
The purchaser of the Stable Area has indicated its intention to tear down the
existing stables on or about March 1998. Bay Meadows has publicly proposed a
plan for the construction of 954 on-site stalls replacing the stalls to be torn
down and Patriot has indicated its support for this plan. The cost for the
construction of such stalls is estimated to be between $8 million to $10
million. There can be no assurance that Bay Meadows will obtain in a timely
fashion the necessary governmental approvals to construct such stalls before
March 1998. If such replacement stalls are not built as contemplated, Bay
Meadows' financial condition and results of operations may be adversely
affected. Further, any prolonged suspension of operations at the facility due
to destruction of or material damage to the facility or for other reasons could
have a material adverse effect on Bay Meadows' financial condition and results
of operations. Bay Meadows intends to maintain property and business
interruptions insurance to protect against such types of disruption, but there
can be no assurance that the proceeds of such insurance would be adequate to
repair or rebuild its facilities in such event or to compensate Bay Meadows
for losses incurred during the period of any such disruption.
Dependence on Relationship with Owners and Trainers Associations
Bay Meadows' Thoroughbred horse racing operations requires it to maintain good
working relationships with the Thoroughbred Owners of California (the "Owners
Association"), the organization recognized by the CHRB as representing owners
of Thoroughbreds participating in horse racing meets at the Racecourse, and the
California Horsemen's Benevolent and Protective Association (the "Trainers
Association"), the organization recognized by the CHRB as representing
trainers. If Bay Meadows is unable to continue its present relationships with
the Owners Association or the Trainers Association or finds itself unable to
attract a sufficient number of horses to its live horse race meets, such events
could have a material adverse effect on Bay Meadows' financial condition and
results of operations.
Competition
Thoroughbred horse racing, and gaming generally, are competitive industries. Bay
Meadows competes in regional markets with other horse race courses, off-track
betting, state-run lotteries and Indian reservation gaming. Many of these
competitors have resources that exceed those of Bay Meadows. Bay Meadows also
competes locally with other sporting and entertainment businesses. Approval of
legislation legalizing casinos and other forms of gaming or expansion of gaming
at Indian reservations could increase competition for Bay Meadows in the future
and could have a material adverse effect on Bay Meadows' financial condition and
results of operations. Also, Bay Meadows may face increasing competition from
businesses accepting wagers by telephone and via the Internet.
Declines in On-Track Attendance
Many race tracks across the nation, including the Racecourse, are experiencing
declines in on-track attendance. There can be no assurance that Bay Meadows
will not experience further declines in on-track attendance, which declines
could have a material adverse effect on its results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by Item 8 has been provided on pages F-1 through F-27
of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
CALIFORNIA JOCKEY CLUB
NAME AGE DIRECTOR PRINCIPAL OCCUPATION AND
FROM BUSINESS EXPERIENCE
James P. Conn 59 1983- Managing Director and Chief Investment Officer of Financial Security
present Assurance since 1993. Director of Santa Anita Realty Enterprises.
Former President and Chief Executive Officer of Bay Meadows
(Thoroughbred racing) from March 1988 to November 1992. Director of
Gabelli Equity Trust (publicly-held investment company) and Gabelli
Asset Fund since 1988. Director of Gabelli Global Multi-Media Trust
and Gabelli Global Growth Fund. Director of the former California
Jockey Club from 1969 until its reorganization on March 31, 1983.
David M. Gjerdrum 51 1996- President of KERMA, Inc. an electronic marketing and system consulting
present firm, since 1991.
James M. Harris* 64 1983- President and Treasurer of the Company since 1983, and Secretary since
present September 1996. Vice President of Cazenove, Inc., International
Stockbrokers, for more than five years (until retirement in 1992).
Director of the former California Jockey Club from 1969 until its
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reorganization on March 31, 1983.
Brian M. Herrera 43 1992- President, Herrera Cadillac (auto dealership) since October 1991.
1996
Marylin Kyne Gunderson 74 1983- Private investor for more than five years. Secretary of the Company
1996 from 1985 to 1989.
Richard E. Perazzo 50 1990- Self-employed Certified Public Accountant since 1990. Chief Financial
1996 Officer and Treasurer of Bay Meadows Operating Company from 1983 to
1989. Controller of the former California Jockey Club from 1976 to
1983. Director of Bay Meadows Operating Company from 1983 to 1989.
Kjell H. Qvale* 77 1991- Chairman of the Board of Cal Jockey since 1991, and Secretary from
present 1991 through September 1996. Chairman of the Board of British Motor
Car Distributors, Ltd. (an automotive sales company) since 1948.
Chairman of the Board of KJB Development Corp. (an automobile and
investment company) for over 35 years. Chairman of the Board of
First National Bank of Marin. Prior to 1991, President and
Director of Pacific Racing Association d.b.a. Golden Gate Fields
(Thoroughbred racing), over 2 years.
Ronald J. Volkman 59 1996- Chairman of the Board and President of ATX, Inc., a real estate
present development company, since 1991. Chairman of the Board of Dallas
Pump Service & Supply Co. Inc. and Four Seasons Travel Inc. since 1991.
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*Executive Officers of Cal Jockey
There is no family relationship among any of Cal Jockey's executive officers,
directors or nominees for director.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires Cal Jockey's
directors and executive officers, and persons who own more than ten percent of a
registered class of its equity securities, to file with the Securities and
Exchange Commission and the American Stock Exchange initial reports of ownership
and reports of changes in ownership of Common Stock and other equity securities
of Cal Jockey. Executive officers, directors and greater than ten-percent
shareholders are required by SEC regulation to furnish Cal Jockey with copies of
all Section 16(a) forms they file.
To Cal Jockey's knowledge, based solely on review of the copies of such reports
furnished to Cal Jockey and written representations that no other reports were
required, during the fiscal year ended December 31, 1996, all executive
officers, directors and greater than ten-percent beneficial owners complied with
any applicable Section 16(a) filing requirements.
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BAY MEADOWS OPERATING COMPANY
NAME AGE DIRECTOR PRINCIPAL OCCUPATION AND
SINCE BUSINESS EXPERIENCE
Eugene F. 59 1983 Vice President - Racing of the Bay Meadows since March 1995. Director
Barsotti, Jr. of Racing of the Company since September 1987. Assistant Racing
Secretary of Bay Meadows Racing Association and Pacific Racing
Association from 1975 until September 1987. Director of the former
California Jockey Club from 1981 until its reorganization in 1983.
F. Scott Gross 50 1996 President and COO of Primus Management, Inc., company specializing in
acquisition, development and finance and operation of hospitals.
President and CEO of National Medical Enterprises (health care
company) from 1984 to 1987. Operates J & L Thoroughbred Racing Stable.
Greg S. Gunderson 46 1996 District Sales and Marketing for TCI of California. General Manager
and CEO of Portland Meadows Racetrack from 1989 to 1992. Director of
Bay Meadows 1983 - 1988. Director of Marketing for Bay Meadows from
1977 to 1988 and Operations Manager from 1974 to 1976.
John C. Harris 53 1992 Chairman of the Board since October 1992. Owner and Chief Executive
Officer of Harris Farms, Inc., a diversified agricultural production