-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VBWaCnuhx2LirGlF6lX1kaRHuIepGvYT7OnCpRjB1aDtXW9BrzwIKpVMA6IQbokx 6gxCtSetoYsP8ux8Ni9B1g== 0000950149-97-000697.txt : 19970401 0000950149-97-000697.hdr.sgml : 19970401 ACCESSION NUMBER: 0000950149-97-000697 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: CALIFORNIA JOCKEY CLUB CENTRAL INDEX KEY: 0000016343 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-RACING, INCLUDING TRACK OPERATION [7948] IRS NUMBER: 940358820 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09319 FILM NUMBER: 97571550 BUSINESS ADDRESS: STREET 1: 2600 S DELAWARE ST STREET 2: P O BOX 1117 CITY: SAN MATEO STATE: CA ZIP: 94402 BUSINESS PHONE: 4155734514 MAIL ADDRESS: STREET 1: 2600 S DELAWARE ST CITY: SAN MATEO STATE: CA ZIP: 94402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAY MEADOWS OPERATING CO CENTRAL INDEX KEY: 0000715273 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-RACING, INCLUDING TRACK OPERATION [7948] IRS NUMBER: 942878485 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09320 FILM NUMBER: 97571551 BUSINESS ADDRESS: STREET 1: 2600 S DELEWARE ST STREET 2: P O BOX 5050 CITY: SAN MATEO STATE: CA ZIP: 94402 BUSINESS PHONE: 4155747223 MAIL ADDRESS: STREET 1: 2600 S DELAWARE ST CITY: SAN MATEO STATE: CA ZIP: 94402 10-K 1 FORM 10-K FOR THE PERIOD ENDED 12/31/96 1 ================================================================================ 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 - -------------------------------------- -------------------------------------- ================================================================================ -1- 2 ================================================================================ 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 - -------------------------------------- -------------------------------------- ================================================================================ -2- 3 American Stock Exchange, Inc. American Stock Exchange, Inc. - -------------------------------------- -------------------------------------- (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 ---------------------------------------------------------- (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. ================================================================================ -3- 4 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 -4- 5 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 -5- 6 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 -6- 7 - - 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. -7- 8 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 -8- 9 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 -9- 10 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. -10- 11 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 ====== ====== ====== ======
-11- 12
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. -12- 13 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. -13- 14
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"). -14- 15 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)
-15- 16
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, -16- 17 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. -17- 18 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. -18- 19 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 -19- 20 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
-20- 21
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. -21- 22 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. -22- 23 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. -23- 24 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. -24- 25 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. -25- 26 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
-26- 27 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.
- -------------- *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. -27- 28
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 and marketing company. Thoroughbred owner and breeder for over 25 years. Director and past president of California Thoroughbred Breeders Association. Member of the Jockey Club. Lee R. Tucker 65 1990 Secretary of the Bay Meadows since June 1995. President and Chairman of the Board of L.M., Inc. (food brokers and investment) since 1980. Anthony J. Zidich 68 1991 Treasurer of the Bay Meadows since January 1993. City Treasurer, City of Daly City, since 1972. Director of the Peninsula Quarter Horse Racing Association since 1980. Director of the Horseman's Quarter Horse Racing Association since 1989. EXECUTIVE OFFICERS OF BAY MEADOWS F. Jack Liebau* 58 1994 President and Chief Executive Officer of the Bay Meadows since November 1992 and a Director since January 1994. Director and past president, California Thoroughbred Breeders Association. Member of the Jockey Club. From 1987-1996, President and Director of N.J. Financial Corporation and its affiliated companies. From 1985 -1995 Of Counsel, and from 1981-1986, Partner, Morgan, Lewis & Bockius (law firm). From 1968-1981, Partner, Adams, Duque & Hazeltine (law firm).
-28- 29 Frank Trigeiro 58 Vice President - Finance of the Bay Meadows since March 1995. Vice President - Finance of the Maryland Jockey Club from 1986 to 1994; Chief Financial Officer and Director of the Southern California Racing Association, 1979 to 1983; Chief Financial Officer of the Northern California Racing Association, 1979 to 1983; Officer and Director of Racing Management, Inc., 1979 to 1983; Controller of the Golden Bear Raceway, 1975 to 1983; and Controller of Calny Food Services, Inc., a publicly held national fast food company. Mr. Trigeiro spent eight years in the public accounting profession prior to the foregoing endeavors.
- ----------------- *Also a director of Bay Meadows. There is no family relationship among any of the Company'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 Bay Meadows' 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 Bay Meadows with copies of all Section 16(a) forms they file. To Bay Meadows' knowledge, based solely on review of the copies of such reports furnished to Bay Meadows and written representations that no other reports were required, during the fiscal year ended December 31, 1996, all Section 16(a) filing requirements applicable to its executive officers, directors and greater than ten-percent beneficial owners were complied with. ITEM 11. EXECUTIVE COMPENSATION CALIFORNIA JOCKEY CLUB Cal Jockey's executive officers serve in such capacities without compensation for their services. For 1996, members of the Board of Directors received a fee of $14,000 for twelve months of service, adjusted pro rata to reflect actual months served. During 1996, each director was also provided a food and beverage allowance of $1,000 for use by the director and his or her guests in the Directors Room and Turf Club at Bay Meadows Racecourse. The Directors who are appointed to various committees serve in such capacities without compensation for their services. The members of Cal Jockey's Audit Committee are James Conn, David Gjerdrum and James Harris. The functions of the Audit Committee are to review the annual financial statements with the Company's independent public accountants prior to publication, to review their work, approve any non-audit services performed by them, and to make annual recommendations to the Board of Directors for the appointment of independent public accountants for the ensuing year. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION: Cal Jockey does not compensate its executive officers for their services. Accordingly, there is no Compensation Committee and no report on executive compensation included in this Annual Report. BAY MEADOWS OPERATING COMPANY The following table discloses compensation earned for each of the three fiscal years ended December 31, 1994-1996, by Bay Meadows' Chief Executive Officer at the end of 1996 and each executive officer of Bay Meadows at the end of -29- 30 1996 whose aggregate cash compensation in 1996 exceeded $100,000 (all such executive officers, including the President and Chief Executive Officer, are collectively referred to herein as the "Named Executive Officers").
SUMMARY COMPENSATION TABLE LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS ----------------------------- ------------------------ SECURITIES UNDERLYING NAME AND PRINCIPAL OPTIONS/ ALL OTHER POSITION SALARY BONUS SARS (#) COMPENSATION YEAR ($) ($) ($) F. Jack Liebau 1996 258,900(a)(b) 35,000 20,000(e) 11,250(c) President and CEO 1995 225,000(a) 50,000(d) 25,000 11,250(c) 1994 206,250(a) 50,000(d) 20,000 15,750(c) Frank Trigeiro 1996 125,900(b) 5,000 7,500(e) 8,750(c) Vice President-Finance 1995 115,000 7,500 8,625(c)
(a) From March 1, 1994 to February 29, 1996, Mr. Liebau was employed by Bay Meadows pursuant to a written employment agreement. Although Mr. Liebau continues to be employed substantially in accordance with the terms of that employment agreement, the term of the written agreement has not been formally extended. (b) During 1996, Messrs. Liebau and Trigeiro were each provided living accomodations by Bay Meadows valued at $25,300 and $12,600, respectively. Each of the named executive officers also has the use of an automobile owned by Bay Meadows. (c) Contribution to pension plan. (d) Bonus attributable to services rendered during the indicated year, and paid in 1996. (e) The information regarding stock options granted during 1996 included in Note 7 of the Notes to the Financial Statements--STOCK OPTION PLAN is incorporated herein by reference. OPTION/SAR GRANTS IN LAST FISCAL YEAR The following table sets forth certain information concerning Options/SARs granted during 1996 to the Named Executive Officers:
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION INDIVIDUAL GRANTS FOR OPTION TERM (a) - -------------------------------------------------------------------------------------- ----------------------------- NUMBER OF SECURITIES % OF TOTAL UNDERLYING OPTIONS/SARS OPTIONS/ GRANTED TO EXERCISE OR SARS EMPLOYEES IN BASE PRICE EXPIRATION NAME GRANTED (#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10% ($) F. Jack Liebau 20,000(b) 38.10% $14.75 3/2/2001 185,524 470,154 Frank Trigeiro 7,500(b) 14.29% $14.75 3/29/2001 169,571 176,308
(a) These columns present hypothetical future values of the stock obtainable upon exercise of the options net of the exercise price, assuming that the market price of the Paired Common Stock appreciates at a five and ten percent compound annual rate over the ten-year term of the options. The five and ten percent rates of stock price appreciation are presented as examples pursuant to the Proxy Rules and do not necessarily reflect managment's assessment of the Companies' future stock performance. The potential realizable values presented are not intended to indicate the value of the options. (b) The information regarding stock options granted during 1996 included in Note 7 of the Notes to the Financial Statements--STOCK OPTION PLAN is incorporated herein by reference. -30- 31 AGGREGATED OPTIONS/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTIONS/SAR VALUES The following table summarizes options and SARs exercised during 1996 and presents the value of unexercised options and SARs held by the Named Executive Officers at December 31, 1996:
VALUE OF NUMBER OF UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS/SARS OPTIONS/SARS SHARES AT FISCAL AT FISCAL ACQUIRED VALUE YEAR-END (#) YEAR-END ($) ON EXERCISE REALIZED EXERCISABLE (E)/ EXERCISABLE (E)/ NAME (#) ($) UNEXERCISABLE (U) UNEXERCISABLE (U) F. Jack Liebau 0 N/A 86,667 E 2,264,175 E 8,333 U (a) -- U Frank Trigeiro 0 N/A 7,500 E 195,938 E
(a) The stock option agreement underlying these options provides that vesting of these options will accelerate upon a change in control of Bay Meadows. Accordingly, the options will become exercisable when the Merger is consummated. PENSION PLANS The table that follows shows the estimated annual benefits payable upon retirement to non-union employees of Bay Meadows under the California Race Track Pension Plan. Participants are fully vested after five years of service.
AVERAGE ANNUAL EARNINGS 5 YEARS 10 YEARS 20 YEARS 30 YEARS 40 YEARS $ 50,000 $ 6,250 $ 12,500 $ 25,000 $ 37,500 $ 50,000 100,000 12,500 25,000 50,000 75,000 100,000 150,000 and over 18,750 37,500 75,000 112,500 118,800 (a)
(a) In accordance with Section 415 Limits - IRS Code. The compensation covered by the above plan is annual earnings of an employee. The covered compensation is the same as the compensation reported in the Summary Compensation Table under the Salary column (up to a maximum of $150,000 per year). The pension table above sets forth estimated annual retirement benefits, payable (as a straight-life annuity), assuming retirement at age 65, using the normal form of benefit under the above plan; the benefits listed are not subject to any deduction for social security or other offset amounts. -31- 32 The number of years of credited service at December 31, 1996, for the Named Executive Officers is as follows: Mr. F. Jack Liebau (four years) and Frank Trigeiro (two years). There were no Long-Term Incentive Plan Awards granted or options repriced during 1996. COMPENSATION OF DIRECTORS For 1996, members of the Board of Directors received an annual fee of $12,000 each. Eugene F. Barsotti, Jr. and F. Jack Liebau, as employees of Bay Meadows, received no such annual fee. The Directors who are appointed to various committees serve in such capacities without compensation for their services. During 1996, each director was also provided a food and beverage allowance of $1,000 for use by the director and his guests in the Directors Room and Turf Club at Bay Meadows Racecourse. CHANGES IN CONTROL ARRANGEMENTS Bay Meadows has in effect severance agreements with certain members of senior management, including Messrs. Liebau and Trigeiro. These agreements, which were entered on August 30, 1996, each provide that if, following a change in control of Bay Meadows, the respective employee's employment is terminated prior to January 1, 1998, or within 24 months following a change in control of Bay Meadows prior to January 1998, he or she will be entitled to receive (i) payment of full base salary from the date of notice of termination to the date of termination (but no less than 30 days) at the highest rate in effective during the 12 months immediately preceding the notice of termination, (ii) a lump sum payment equal to the amount of his or her annual base salary at the highest rate in effective during the 12 months immediately preceding notice of termination and the amount of any bonuses or other incentive compensation paid during the 12 months immediately preceding notice of termination or calendar year 1996, whichever is greater (or, with respect to Mr. Liebau, two times the sum of such amounts), (iii) at his or her option, either continued contributions to his or her retirement plan through January 1, 1998 or a lump sum equal to the actuarial equivalent of the additional retirement pension to which he or she would have been entitled had he or she continued service under such plan for an additional two years, (iv) the right to purchase any Bay Meadows automobile assigned to him or her for book value, (v) payment of all legal fees and expenses incurred as a result of the termination and (vi) continued coverage under Bay Meadows' health care and welfare benefit plans for two years. STOCK PERFORMANCE GRAPH The following graph shows a comparison of cumulative returns during the five year period ended December 31, 1996, of the Paired Common Stock (BMOC/CJC), Standard and Poor's 500 Composite Index (S&P 500 Index), and the National Association of Real Estate Investment Trust's all REIT Index: -32- 33 [STOCK PERFORMANCE GRAPH]
1990 1991 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- ---- ---- BMOC/CJC 100 106 100 116 139 148 423 S & P 500 Index 100 131 140 155 157 218 268 All REIT Index 100 136 155 186 192 221 299
The stock performance graph assumes that the original investment in the Paired Common Stock and the amount invested in the two indexes was $100 on December 31, 1990, and that all dividends during the period were reinvested. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION: The members of Bay Meadows' Compensation Committee are Lee R. Tucker (Chairman), John C. Harris, and Anthony J. Zidich. Since October 1992, Mr. Harris has served as Bay Meadows' Chairman of the Board. COMPENSATION COMMITTEE REPORT The Compensation Committee is composed of three outside directors and is responsible for annually reviewing the compensation paid to all of the officers of the Bay Meadows. The Compensation Committee develops recommendations with respect to the Board of Directors for adoption and/or modification. The Compensation Committee seeks to provide the Bay Meadows' executive officers with reasonable and sufficient compensation to attract and retain experienced individuals as executive officers. The Bay Meadows' executive officers are primarily compensated through their salaries, although Bay Meadows has a stock option plan. Bay Meadows does not have any formal bonus plan or restricted stock plan. In exercising its judgment as to the appropriate compensation to be paid to each executive officer, the Compensation Committee reviews annually the experience and performance of each executive officer as well as the Bay Meadows' overall performance. There is, however, no specific quantifiable relationship between Bay Meadows performance and the compensation levels for executive officer. The Compensation Committee also -33- 34 considers the compensation packages at other publicly-traded companies which run Thoroughbred racing meets. As part of its review in 1996, the Compensation Committee considered the results of a compensation study performed by outside consultants at the request of the Compensation Committee. In comparing the Bay Meadows' salaries to those paid by other companies, the Compensation Committee takes into account the small number of executive officers at Bay Meadows, the responsibilities resulting from Bay Meadows being publicly held and the limited forms of compensation it uses. The Compensation Committee also takes into account prior salary adjustments, as well as the relative salary levels of Bay Meadows' executive officers. Mr. Liebau was appointed as President and Chief Executive Officer of the Company in November 1992. In view of the factors considered by the Compensation Committee which are discussed above, Mr. Liebau's base compensation was increased from $225,000 to $265,000 in 1996. Specifically, in setting Mr. Liebau's salary last year, the Committee took into account a number of factors including the results of the compensation study performed by the outside consultants, salaries paid by other gaming companies, Bay Meadows and Mr. Liebau's performances, Mr. Liebau's prior experience as a lawyer and corporate executive, his knowledge of the Thoroughbred industry and the amount of time he was spending in fulfilling his duties as President and CEO. Compensation Committee Lee R. Tucker, Chairman John C. Harris, Member Anthony J. Zidich, Member STOCK OPTION COMMITTEE REPORT The Company has a stock option plan, and from time to time options have been awarded to executive officers and other employees. The stock option plan is a part of the compensation package for executive officers and stock options can augment an employee's salary. On March 29, 1996, Mr. Liebau was granted stock options to purchase up to 20,000 shares of BMOC Common Stock at the March 29, 1996 market price of $14.75. On March 29, 1996 Mr. Trigeiro was granted stock options to purchase up to 7,500 shares of BMOC Common Stock at the March 29, 1996 market price of $14.75. The levels of the option grants were based on the judgment of the Board taking into account the Company's overall performance, the recipient's compensation level, the levels of prior option grants to the Company's executive officers and key employees and the levels of prior option grants to the Company's former officers. Other grants of options were made to various key employees during 1996. Stock Option Committee Lee R. Tucker, Chairman John C. Harris, Member Anthony J. Zidich, Member ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT CALIFORNIA JOCKEY CLUB SECURITY OWNERSHIP The following table sets forth, as of March 17, 1997, the number of shares of Paired Common Stock owned (i) by each director, (ii) by all directors and executive officers as a group, and (iii) by all those known by Cal Jockey to be -34- 35 beneficial owners of more than five percent (5%) of Paired Common Stock, together with the percentage of stock so owned. Cal Jockey has no executive officers who are not also directors.
AMOUNT AND NATURE OF BENEFICIAL PERCENTAGE NAMES OF BENEFICIAL OWNER (1) OWNERSHIP (2) OF TOTAL (7) James P. Conn 55,000 (3) 1.0 % David M. Gjerdrum 24,010 (4) * James M. Harris 17,012 (5) * Kjell H. Qvale 85,000 1.5 % Ronald J. Volkman 1,000 * FMR Corporation 421,500 (6) 7.3 % All directors and executive officers as a group (5 persons) 182,022 3.2 %
- -------------- *Less than one percent (1%) of the outstanding Paired Common Stock. (1) The address of all persons, other than FMR Corporation is 2600 S. Delaware Street, P.O. Box 1117, San Mateo, CA 94403. The address of FMR Corporation is 82 Devonshire Street, Boston, MA 02109. (2) Unless otherwise indicated in the footnotes and subject to community property laws where applicable, each named stockholder has sole voting and investment power with respect to the shares of Paired Common Stock beneficially owned by such stockholder. (3) Includes 20,000 shares issuable upon exercise of outstanding stock options exercisable within 60 days of March 17, 1997. (4) Includes 24,000 shares held in a testamentary trust of which Mr. Gjerdrum is a residual beneficiary and pursuant to which he will receive approximately 8,000 shares upon the demise of his mother. (5) Includes 4,000 shares owned by Mr. Harris' mother for which Mr. Harris holds a power of attorney. (6) A Schedule 13G filing dated February 10, 1997 was made by FMR Corporation. The Schedule 13G indicates that FMR Corporation is a parent holding company with sole voting power over 28,800 shares and sole dispositive power over 421,500 shares. (7) Percentages shown indicate what the total percentage beneficial ownership of Paired Common Stock would be for each named stockholder if such holder, but no other stockholder, whether or not named, exercised those of his or her stock options that were exercisable on March 17, 1997, or which will become exercisable 60 days thereafter. CHANGES IN CONTROL On October 31, 1996, Patriot American Hospitality, Inc. ("Patriot"), Cal Jockey and Bay Meadows entered into a binding business combination agreement (the "October 31, 1996 Agreement") pursuant to which the parties agreed to engage in a business combination transaction. The parties, together with Patriot American Hospitality Partnership, L.P., 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 -35- 36 transactions to be consummated by the parties. The Merger Agreement contemplates that Patriot will merge with and into Cal Jockey, with Cal Jockey being the surviving company. For a more complete description of the Patriot transaction, see "Item 1. Business--The Patriot Transaction" hereto, which is incorporated herein by reference. BAY MEADOWS OPERATING COMPANY SECURITY OWNERSHIP The following table sets forth, as of March 17, 1997, the number of shares of Paired Common Stock owned (i) by each director, (ii) by all directors and executive officers as a group, and (iii) by all those known by Bay Meadows to be beneficial owners of more than five percent (5%) of the Paired Common Stock, together with the percentage of stock so owned.
AMOUNT AND NATURE OF BENEFICIAL PERCENTAGE NAMES OF BENEFICIAL OWNER (1) OWNERSHIP (2) OF TOTAL(10) Eugene F. Barsotti, Jr 55,634 (3)(4) * F. Scott Gross 3,000 * Greg S. Gunderson 49,636 * John C. Harris 71,245 (5) 1.1 % Lee R. Tucker 7,300 * Anthony J. Zidich 5,000 * F. Jack Liebau 96,667 (6) 1.0 % Frank Trigeiro 7,500 (7) * FMR Corporation 421,500 (8) 7.3 % All Directors and executive officers as a group (8 persons) 295,982 (9) 5.1 %
- -------------- *Less than one percent (1%) of the outstanding Paired Common Stock. (1) The address of all persons, other than FMR Corporation is c/o Bay Meadows Operating Company, 2600 South Delaware Street, San Mateo, CA 94402. The address of FMR Corporation is 82 Devonshire Street, Boston, MA 02109. (2) Unless otherwise indicated in the footnotes and subject to community property laws where applicable, each named stockholder has sole voting and investment power with respect to the shares of Paired Common Stock beneficially owned by such stockholder. (3) Includes 43,692 shares held in a revocable trust, 100 shares held in an Individual Retirement Account for the benefit of his wife, and 176 shares held in an Individual Retirement Account for the benefit of Mr. Barsotti. (4) Includes 11,666 shares issuable upon exercise of outstanding stock options within 60 days of March 17, 1997. (5) Includes 9,000 shares of Paired Common Stock held by Harris Farms, Inc., of which Mr. Harris is the sole shareholder. (6) Includes 86,667 shares issuable upon exercise of outstanding stock options exercisable within 60 days of March 17, 1997. -36- 37 (7) Includes 7,500 shares issuable upon exercise of outstanding stock options exercisable within 60 days of March 17, 1997. (8) A Schedule 13G filing dated February 10,1997 was made by FMR Corporation. The Schedule 13G indicates that FMR Corporation is a parent holding company with sole voting power over 28,800 shares and sole dispositive power over 421,500 shares. (9) Includes 94,167 shares issuable upon exercise of outstanding stock options exercisable within 60 days of March 17, 1997. (10) Percentages shown indicate what the total percentage beneficial ownership of Paired Common Stock would be for each named stockholder if such holder, but no other stockholder, whether or not named, exercised those of his stock options that were exercisable on March 17, 1997, or which will become exercisable 60 days thereafter. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information regarding certain relationships and related transactions is included in Note 13 of Notes to the Financial Statements - Related Party Transactions and incorporated herein by reference. -37- 38 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) (1) Index to Financial Statements.
PAGE IN DESCRIPTION FORM 10-K Independent Auditors' Report F-1 Combined Balance Sheets of California Jockey Club and Bay Meadows Operating Company and Subsidiary as of December 31, 1996 and 1995 F-2 Separate and Combined Statements of Income (Loss) of California Jockey Club and Bay Meadows Operating Company and Subsidiary for the Years Ended December 31, 1996, 1995, and 1994 F-3, F-4, F-5 Combined Statements of Stockholders' Equity of California Jockey Club and Bay Meadows Operating Company and Subsidiary for the Years Ended December 31, 1996, 1995 and 1994 F-6 Combined Statements of Cash Flows of California Jockey Club and Bay Meadows Operating Company and Subsidiary for the Years Ended December 31, 1996, 1995 and 1994 F-7 Balance Sheets of California Jockey Club as of December 31, 1996 and 1995 F-8 Statements of Stockholders' Equity of California Jockey Club for the Years Ended December 31, 1996, 1995 and 1994 F-9 Statements of Cash Flows of California Jockey Club for the Years Ended December 31, 1996, 1995 and 1994 F-10 Consolidated Balance Sheets of Bay Meadows Operating Company and Subsidiary as of December 31, 1996 and 1995 F-11 Consolidated Statements of Stockholders' Equity of Bay Meadows Operating Company and Subsidiary for the Years Ended December 31, 1996, 1995 and 1994 F-12 Consolidated Statements of Cash Flows of Bay Meadows Operating Company and Subsidiary for the Years Ended December 31, 1996, 1995 and 1994 F-13 Notes to Financial Statements F-14 - F-27
(a) (2) Financial Statement Schedule. The financial statement schedules listed below are filed with this report: All schedules for which provision is made in the applicable rules and regulations of the Securities and Exchange Commission are omitted because they are not required under the related instructions or are not applicable or the required information is shown in the financial statements or notes thereto. -38- 39 (a)(3) Exhibits The exhibits listed in the accompanying Exhibit Index are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K. -39- 40 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized. CALIFORNIA JOCKEY CLUB BAY MEADOWS OPERATING COMPANY By: /s/ James M. Harris By: /s/ F. Jack Liebau ------------------------------- ------------------------------ James M. Harris F. Jack Liebau President, Treasurer and Secretary President and Chief Executive Officer Date: March 31, 1997 Date: March 31, 1997 By: /s/ Frank Trigeiro ------------------------------ Frank Trigeiro Vice President - Finance Date: March 31, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrants in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ Eugene F. Barsotti, Jr. Director, March 31, 1997 - ------------------------------ (Eugene F. Barsotti, Jr.) Bay Meadows Operating Company /s/ James P. Conn Director, March 31, 1997 - ------------------------------ (James P. Conn) California Jockey Club /s/ David M. Gjerdrum Director, March 31, 1997 - ------------------------------ (David M. Gjerdrum) California Jockey Club /s/ Greg S. Gunderson Director, March 31, 1997 - ------------------------------ (Greg S. Gunderson) Bay Meadows Operating Company -40- 41
SIGNATURE TITLE DATE /s/ James M. Harris Director, President, Treasurer and Secretary, March 31, 1997 - -------------------------- (James M. Harris) California Jockey Club (Principal Executive Officer and Principal Financial Officer and Financial Accounting Officer) /s/ F. Jack Liebau Director, March 31, 1997 - -------------------------- (F. Jack Liebau) Bay Meadows Operating Company (Principal Executive Officer /s/ Kjell H. Qvale Chairman, March 31, 1997 - -------------------------- (Kjell H. Qvale) California Jockey Club /s/ Lee R. Tucker Director, March 31, 1997 - -------------------------- (Lee R. Tucker) Bay Meadows Operating Company /s/ Ronald J. Volkman Director, March 31, 1997 - -------------------------- (Ronald J. Volkman) California Jockey Club /s/ Anthony J. Zidich Director, March 31, 1997 - -------------------------- (Anthony J. Zidich) Bay Meadows Operating Company
-41- 42 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders California Jockey Club San Mateo, California and Board of Directors and Stockholders Bay Meadows Operating Company San Mateo, California We have audited the accompanying balance sheets of California Jockey Club, consolidated balance sheets of Bay Meadows Operating Company and subsidiary, and combined balance sheets of California Jockey Club and Bay Meadows Operating Company and subsidiary (the "Companies") as of December 31, 1996 and 1995, and the related statements of income (loss), stockholders' equity and cash flows of the respective entities for the each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of California Jockey Club, of Bay Meadows Operating Company and subsidiary and of the combined Companies at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. As discussed in Note 2, the Companies have entered into a proposed merger agreement with Patriot American Hospitality, Inc. ("Patriot"). The proposed merger is subject to the approval by the shareholders of Patriot and the paired shareholders of the Companies. Also, as discussed in Notes 7 and 8, certain disputes between the Companies have not been resolved concerning stock options for Cal Jockey Stock which Bay Meadows asserts were granted during 1996 and the Master Lease Agreement between the Companies, which Bay Meadows asserts has been extended. DELOITTE & TOUCHE LLP March 28, 1997 San Francisco, California F-1 43 CALIFORNIA JOCKEY CLUB AND BAY MEADOWS OPERATING COMPANY AND SUBSIDIARY
COMBINED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (In thousands, except share and per share amounts) - ----------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, -------------------------- ASSETS 1996 1995 CURRENT ASSETS: Cash and cash equivalents $ 2,027 $ 7,307 Securities available for sale (at fair value) 2,612 1,187 Securities held to maturity (at cost, fair value of $4,479 in 1996 and $7,076 in 1995) 4,463 7,077 Amounts held on deposit for Thoroughbred horse owners 3,056 Accounts receivable (net of allowance for doubtful accounts of $77 in 1996 and $82 in 1995) 527 2,442 Prepaid expenses and other current assets 525 377 ---------- ---------- Total current assets 10,154 21,446 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT: Land 691 691 Land held for sale 3,083 1,954 Racing plant 24,177 23,906 Tennis facility held for sale 308 308 Equipment and leasehold improvements 11,032 10,088 ---------- ---------- Total 39,291 36,947 Accumulated depreciation and amortization (22,092) (20,759) ---------- ---------- Property, plant and equipment - net 17,199 16,188 ---------- ---------- OTHER ASSETS (net of accumulated amortization of $1,374 in 1996 and $1,221 in 1995) 96 223 ---------- ---------- DEFERRED INCOME TAXES 227 78 ---------- ---------- TOTAL $ 27,676 $ 37,935 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,328 $ 4,676 Accrued liabilities 1,983 1,530 Note payable 2,900 Accrued purses 1,014 Due to Thoroughbred horse owners 3,056 Income taxes payable 75 Uncashed pari-mutuel tickets and vouchers 4,477 ---------- ---------- Total current liabilities 6,211 14,828 ---------- ---------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common Stock (paired shares), $.01 par value: authorized, 10,000,000 shares each; issued and outstanding: 5,763,257 shares each in 1996 and 1995 116 116 Additional paid in capital 18,385 18,385 Retained earnings 1,750 4,817 Unrealized gain (loss) on securities available for sale 1,214 (211) ---------- ---------- Total stockholders' equity 21,465 23,107 ---------- ---------- TOTAL $ 27,676 $ 37,935 ========== ==========
The accompanying notes are an integral part of these financial statements. F-2 44 CALIFORNIA JOCKEY CLUB AND BAY MEADOWS OPERATING COMPANY AND SUBSIDIARY
SEPARATE AND COMBINED STATEMENTS OF INCOME (LOSS) YEAR ENDED DECEMBER 31, 1996 (In thousands, except share and per share amounts) - ----------------------------------------------------------------------------------------------------------------------------------- BAY MEADOWS CALIFORNIA OPERATING JOCKEY COMPANY AND CLUB SUBSIDIARY ELIMINATIONS COMBINED REVENUES: Pari-mutuel revenue $ 41,476 $ 41,476 Producer fees 683 683 Admissions, programs, parking and other racing income 5,228 5,228 Concession sales 3,038 3,038 Rental of racing facility $ 4,918 1,521 $ (4,918) 1,521 Interest and dividend income 484 182 (8) 658 Other income 10 1,344 (26) 1,328 --------- --------- --------- --------- Total 5,412 53,472 (4,952) 53,932 --------- --------- --------- --------- COSTS AND EXPENSES: Purses and incentive awards 17,054 17,054 Commissions paid to guest tracks 2,614 2,614 Direct operating costs 20,950 20,950 Cost of concession sales 926 926 Depreciation and amortization 932 754 1,686 Racing facility rental 4,943 (4,918) 25 Marketing 1,436 1,436 General and administrative expense 1,068 3,019 (34) 4,053 Loss on disposal of fixed assets 145 145 Merger related costs 3,504 491 3,995 Legal expense 1,124 425 1,549 --------- --------- --------- --------- Total 6,628 52,757 (4,952) 54,433 --------- --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAX PROVISION (1,216) 715 (501) INCOME TAX PROVISION 260 260 --------- --------- --------- --------- NET INCOME (LOSS) $ (1,216) $ 455 $ - $ (761) ========= ========= ========= ========= NET INCOME (LOSS) PER SHARE $(.21) $.08 $(.13) ========= ========= ========= WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 5,763,257 5,763,257 5,763,257 ========= ========= =========
The accompanying notes are an integral part of these financial statements. F-3 45 CALIFORNIA JOCKEY CLUB AND BAY MEADOWS OPERATING COMPANY AND SUBSIDIARY
SEPARATE AND COMBINED STATEMENTS OF INCOME YEAR ENDED DECEMBER 31, 1995 (In thousands, except share and per share amounts) - ------------------------------------------------------------------------------------------------------------------------- BAY MEADOWS CALIFORNIA OPERATING JOCKEY COMPANY AND CLUB SUBSIDIARY ELIMINATIONS COMBINED REVENUES: Pari-mutuel revenue $ 38,955 $ 38,955 Producer fees 704 704 Admissions, programs, parking and other racing income 5,164 5,164 Concession sales 2,492 2,492 Rental of racing facility $ 4,743 1,510 $ (4,743) 1,510 Interest and dividend income 487 190 677 Other income 11 1,241 (45) 1,207 --------- ---------- --------- ---------- Total 5,241 50,256 (4,788) 50,709 --------- ---------- --------- ---------- COSTS AND EXPENSES: Purses and incentive awards 15,746 15,746 Commissions paid to guest tracks 2,548 2,548 Direct operating costs 19,403 19,403 Cost of concession sales 856 856 Depreciation and amortization 935 680 1,615 Racing facility rental 4,762 (4,743) 19 Marketing 1,401 1,401 General and administrative expense 503 2,896 (45) 3,354 Loss on disposal of fixed assets 99 99 Card club costs 666 666 Legal expense 80 263 343 --------- ---------- --------- ---------- Total 1,518 49,320 (4,788) 46,050 --------- ---------- --------- ---------- INCOME BEFORE INCOME TAX PROVISION 3,723 936 4,659 INCOME TAX PROVISION 459 459 --------- ---------- --------- ---------- NET INCOME $ 3,723 $ 477 $ - $ 4,200 ========= ========== ========= ========== NET INCOME PER SHARE $.65 $.08 $.73 ========= ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 5,759,668 5,759,668 5,759,668 ========= ========== ==========
The accompanying notes are an integral part of these financial statements. F-4 46 CALIFORNIA JOCKEY CLUB AND BAY MEADOWS OPERATING COMPANY AND SUBSIDIARY SEPARATE AND COMBINED STATEMENTS OF INCOME YEAR ENDED DECEMBER 31, 1994 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) - -------------------------------------------------------------------------------
BAY MEADOWS CALIFORNIA OPERATING JOCKEY COMPANY AND CLUB SUBSIDIARY ELIMINATIONS COMBINED REVENUES: Pari-mutuel revenue $ 40,161 $ 40,161 Producer fees 669 669 Admissions, programs, parking and other racing income 5,399 5,399 Concession sales 2,490 2,490 Rental of racing facility $ 4,777 1,555 $(4,777) 1,555 Interest and dividend income 381 81 462 Other income 18 832 (11) 839 --------- --------- ------- --------- Total 5,176 51,187 (4,788) 51,575 --------- --------- ------- --------- COSTS AND EXPENSES: Purses and incentive awards 16,784 16,784 Commissions paid to guest tracks 2,684 2,684 Direct operating costs 19,059 19,059 Cost of concession sales 715 715 Depreciation and amortization 956 724 1,680 Racing facility rental 4,800 (4,777) 23 Marketing 1,274 1,274 General and administrative expense 397 2,945 (11) 3,331 Loss on disposal of fixed assets 162 503 665 Card club costs 209 209 Legal expense 41 350 391 --------- --------- ------- --------- Total 1,556 50,047 (4,788) 46,815 --------- --------- ------- --------- INCOME BEFORE INCOME TAX PROVISION 3,620 1,140 4,760 INCOME TAX PROVISION 548 548 --------- --------- ------- --------- NET INCOME $ 3,620 $ 592 $ -- $ 4,212 ========= ========= ======= ========= NET INCOME PER SHARE $.63 $.10 $.73 ==== ==== ==== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 5,753,257 5,753,257 5,753,257 ========= ========= =========
The accompanying notes are an integral part of these financial statements. F-5 47 CALIFORNIA JOCKEY CLUB AND BAY MEADOWS OPERATING COMPANY AND SUBSIDIARY
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (In thousands, except per share amounts) - ------------------------------------------------------------------------------------------------------------------------- UNREALIZED GAIN (LOSS) ON ADDITIONAL SECURITIES COMMON PAID IN RETAINED AVAILABLE STOCK CAPITAL EARNINGS FOR SALE TOTAL BALANCE AT JANUARY 1, 1994 $ 116 $ 18,262 $ 3,603 $ 21,981 NET INCOME 4,212 4,212 DIVIDENDS, $.60 PER PAIRED SHARE (3,452) (3,452) UNREALIZED LOSS ON SECURITIES AVAILABLE FOR SALE $ (23) (23) ------- --------- -------- ---------- --------- BALANCE AT DECEMBER 31, 1994 116 18,262 4,363 (23) 22,718 NET INCOME 4,200 4,200 DIVIDENDS, $.65 PER PAIRED SHARE (3,746) (3,746) STOCK OPTIONS EXERCISED 123 123 UNREALIZED LOSS ON SECURITIES AVAILABLE FOR SALE $ (188) (188) ------- --------- -------- ---------- --------- BALANCE AT DECEMBER 31, 1995 116 18,385 4,817 (211) 23,107 NET LOSS (761) (761) DIVIDENDS, $.40 PER PAIRED SHARE (2,306) (2,306) UNREALIZED GAIN ON SECURITIES AVAILABLE FOR SALE 1,425 1,425 ------- --------- -------- ---------- --------- BALANCE AT DECEMBER 31, 1996 $ 116 $ 18,385 $ 1,750 $ 1,214 $ 21,465 ======= ========= ======== ========== =========
The accompanying notes are an integral part of these financial statements. F-6 48 CALIFORNIA JOCKEY CLUB AND BAY MEADOWS OPERATING COMPANY AND SUBSIDIARY
COMBINED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS) - ------------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 OPERATING ACTIVITIES: Net income (loss) $ (761) $ 4,200 $ 4,212 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,686 1,615 1,680 Deferred income taxes (149) (121) 43 Loss on disposal of fixed assets 145 99 665 Changes in operating assets and liabilities: Accounts receivable 1,915 (1,091) 84 Amounts held on deposit for Thoroughbred horse owners 3,056 (53) (214) Income taxes receivable and payable (75) (297) 394 Prepaid expenses and other current assets (174) (180) 175 Accounts payable (3,348) 1,513 2,254 Accrued liabilities 453 (1,686) 260 Accrued purses (1,014) (836) 970 Due to Thoroughbred horse owners (3,056) 53 214 Uncashed pari-mutuel tickets and vouchers (4,477) 2,056 839 ------- ------- ------ Net cash provided by (used in) operating activities (5,799) 5,272 11,576 ------- ------- ------ INVESTING ACTIVITIES: Purchase of securities held to maturity (13,461) (11,005) (1,398) Maturities of securities held to maturity 16,075 10,498 1,250 Purchase of property, plant and equipment (2,689) (3,191) (2,054) ------- ------- ------ Net cash used in investing activities (75) (3,698) (2,202) ------- ------- ------ FINANCING ACTIVITIES: Proceeds from notes payable 6,900 Repayment of notes payable (4,000) (1,475) Stock options exercised 123 Dividends on Common Stock (2,306) (3,746) (3,452) ------- ------- ------ Net cash provided by (used in) financing activities 594 (3,623) (4,927) ------- ------- ------ (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,280) (2,049) 4,447 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 7,307 9,356 4,909 ------- ------- ------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,027 $ 7,307 $ 9,356 ======= ======= ====== NONCASH INVESTING ACTIVITY - Accrued but unpaid purchase of property, plant and equipment $ 170 ======== OTHER CASH FLOW INFORMATION: Interest paid $ 118 $ 53 $ 88 Income taxes paid 955 65 301 Income taxes refunded 236 189
The accompanying notes are an integral part of these financial statements. F-7 49 CALIFORNIA JOCKEY CLUB
BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE AMOUNTS) - ------------------------------------------------------------------------------------------------------------- 1996 1995 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 1,138 $ 989 Securities available for sale (at fair value) 2,612 1,187 Securities held to maturity (at cost, fair value of $4,479 in 1996 and $7,076 in 1995) 4,463 7,077 Accounts receivable 36 7 Receivable from Bay Meadows Operating Company 2,332 569 Prepaid expenses 3 -------- --------- Total current assets 10,584 9,829 -------- --------- PROPERTY, PLANT AND EQUIPMENT: Land 691 691 Land held for sale 3,083 1,954 Racing plant 24,177 23,906 Tennis facility 308 308 Equipment 460 456 -------- --------- Total 28,719 27,315 Accumulated depreciation (15,929) (14,997) -------- --------- Property, plant and equipment - net 12,790 12,318 -------- --------- TOTAL $ 23,374 $ 22,147 ======== ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 184 $ 129 Accrued liabilities 509 140 Note payable 2,900 -------- --------- Total current liabilities 3,593 269 ======== ========= COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common Stock, $.01 par value, authorized 10,000,000 shares; issued and outstanding 5,763,257 shares in 1996 and 5,763,257 shares in 1995 58 58 Additional paid in capital 17,597 17,597 Retained earnings 912 4,434 Unrealized gain (loss) on securities available for sale 1,214 (211) -------- --------- Total stockholders' equity 19,781 21,878 -------- --------- TOTAL $ 23,374 $ 22,147 ======== =========
The accompanying notes are an integral part of these financial statements. F-8 50 CALIFORNIA JOCKEY CLUB
STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - --------------------------------------------------------------------------------------------------------- UNREALIZED GAIN (LOSS) ON ADDITIONAL SECURITIES COMMON PAID IN RETAINED AVAILABLE STOCK CAPITAL EARNINGS FOR SALE TOTAL BALANCE AT JANUARY 1, 1994 $ 58 $ 17,478 $ 4,289 $ 21,825 NET INCOME 3,620 3,620 DIVIDENDS, $.60 PER SHARE (3,452) (3,452) UNREALIZED LOSS ON SECURITIES AVAILABLE FOR SALE $ (23) (23) -------- ---------- ---------- --------- ---------- BALANCE AT DECEMBER 31, 1994 58 17,478 4,457 (23) 21,970 NET INCOME 3,723 3,723 DIVIDENDS, $.65 PER SHARE (3,746) (3,746) STOCK OPTIONS EXERCISED 119 119 UNREALIZED LOSS ON SECURITIES AVAILABLE FOR SALE $ (188) (188) -------- ---------- ---------- --------- ---------- BALANCE AT DECEMBER 31, 1995 58 17,597 4,434 (211) 21,878 NET LOSS (1,216) (1,216) DIVIDENDS, $.40 PER SHARE (2,306) (2,306) UNREALIZED GAIN ON SECURITIES AVAILABLE FOR SALE 1,425 1,425 -------- ---------- ---------- --------- ---------- BALANCE AT DECEMBER 31, 1996 $ 58 $ 17,597 $ 912 $ 1,214 $ 19,781 ======== ========== ========== ========= ==========
The accompanying notes are an integral part of these financial statements. F-9 51 CALIFORNIA JOCKEY CLUB
STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (In thousands) - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 OPERATING ACTIVITIES: Net income (loss) $ (1,216) $ 3,723 $ 3,620 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation 932 935 956 Loss on disposal of fixed assets 162 Changes in operating assets and liabilities: Accounts receivable (29) 46 49 Receivable from Bay Meadows Operating Company (1,763) 1,422 (1,670) Prepaid expenses and other assets (3) 32 (9) Accounts payable 55 34 67 Accrued liabilities 369 76 3 -------- -------- -------- Net cash provided by (used in) operating activities (1,655) 6,268 3,178 -------- -------- -------- INVESTING ACTIVITIES: Purchase of securities held to maturity (13,461) (11,005) (1,398) Maturities of securities held to maturity 16,075 10,498 1,250 Purchase of property, plant and equipment (1,404) (1,557) (945) -------- -------- -------- Net cash provided by (used in) investing activities 1,210 (2,064) (1,093) -------- -------- -------- FINANCING ACTIVITIES: Proceeds of note payable 2,900 Stock options exercised 119 Dividends on common stock (2,306) (3,746) (3,452) -------- -------- -------- Net cash provided by (used in) financing activities 594 (3,627) (3,452) -------- -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 149 577 (1,367) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 989 412 1,779 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,138 $ 989 $ 412 ======== ======== ========
The accompanying notes are an integral part of these financial statements. F-10 52 BAY MEADOWS OPERATING COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (In thousands, except share and per share amounts) - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 889 $ 6,318 Amounts held on deposit for Thoroughbred horse owners 3,056 Accounts receivable (net of allowance for doubtful accounts of $77 in 1996 and $82 in 1995) 491 2,435 Prepaid expenses and other current assets 522 377 -------- -------- Total current assets 1,902 12,186 -------- -------- PROPERTY, PLANT AND EQUIPMENT: Equipment and leasehold improvements 10,572 9,631 Accumulated depreciation and amortization (6,163) (5,761) -------- -------- Property, plant and equipment - net 4,409 3,870 -------- -------- OTHER ASSETS (net of accumulated amortization of $1,374 in 1996 and $1,221 in 1995) 96 223 -------- -------- DEFERRED INCOME TAXES 227 78 -------- -------- TOTAL $ 6,634 $ 16,357 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,144 $ 4,547 Accrued liabilities 1,474 1,390 Accrued purses 1,014 Due to Thoroughbred horse owners 3,056 Payable to California Jockey Club 2,332 569 Income taxes payable 75 Uncashed pari-mutuel tickets and vouchers 4,477 -------- -------- Total current liabilities 4,950 15,128 -------- -------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common Stock .01 par value authorized 10,000,000 shares; issued and outstanding: 5,763,257 shares in 1996 and 1995 58 58 Additional paid in capital 788 788 Retained earnings 838 383 -------- -------- Total stockholders' equity 1,684 1,229 -------- -------- TOTAL $ 6,634 $ 16,357 ======== ========
The accompanying notes are an integral part of these financial statements. F-11 53 BAY MEADOWS OPERATING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (In thousands, except per share amounts) - ------------------------------------------------------------------------------- ADDITIONAL COMMON PAID IN RETAINED STOCK CAPITAL EARNINGS TOTAL BALANCE AT JANUARY 1, 1994 $ 58 $ 784 $ (686) $ 156 NET INCOME 592 592 ------ ------ ------ ------ BALANCE AT DECEMBER 31, 1994 58 784 (94) 748 STOCK OPTIONS EXERCISED 4 4 NET INCOME 477 477 ------ ------ ------ ------ BALANCE AT DECEMBER 31, 1995 58 788 383 1,229 NET INCOME 455 455 ------ ------ ------ ------ BALANCE AT DECEMBER 31, 1996 $ 58 $ 788 $ 838 $1,684 ====== ====== ====== ======
The accompanying notes are an integral part of these financial statements. F-12 54 BAY MEADOWS OPERATING COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (In thousands) - ------------------------------------------------------------------------------------------------------- 1996 1995 1994 OPERATING ACTIVITIES: Net income $ 455 $ 477 $ 592 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 754 680 724 Deferred income taxes (149) (121) 43 Loss on disposal of fixed assets 145 99 503 Changes in operating assets and liabilities: Accounts receivable 1,944 (1,137) 35 Amounts held on deposit for Thoroughbred horse owners 3,056 (53) (214) Income taxes receivable and payable (75) (297) 394 Prepaid expenses and other assets (171) (212) 184 Accounts payable (3,403) 1,479 2,187 Accrued liabilities 84 (1,762) 257 Accrued purses (1,014) (836) 970 Due to Thoroughbred horse owners (3,056) 53 214 Payable to California Jockey Club 1,763 (1,422) 1,670 Uncashed pari-mutuel tickets and vouchers (4,477) 2,056 839 --------- --------- --------- Net cash (used in) provided by operating activities (4,144) (996) 8,398 --------- --------- --------- INVESTING ACTIVITIES Purchase of property, plant and equipment (1,285) (1,634) (1,109) --------- --------- --------- FINANCING ACTIVITIES: Proceeds from note payable 4,000 Repayment of note payable (4,000) (1,475) Stock options exercised 4 --------- --------- --------- Net cash (used in) provided by financing activities - 4 (1,475) --------- --------- --------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,429) (2,626) 5,814 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,318 8,944 3,130 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 889 $ 6,318 $ 8,944 --------- --------- --------- NONCASH INVESTING ACTIVITY - Accrued but unpaid purchase of property, plant and equipment $ 170 --------- OTHER CASH FLOW INFORMATION: Interest paid $ 118 $ 53 $ 88 Income taxes paid 955 765 301 Income taxes refunded 236 189
The accompanying notes are an integral part of these financial statements. F-13 55 CALIFORNIA JOCKEY CLUB AND BAY MEADOWS OPERATING COMPANY AND SUBSIDIARY NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION - California Jockey Club ("Cal Jockey") is a real estate investment trust which owns the Bay Meadows Racecourse and other real property located in San Mateo, California. Cal Jockey leases the racing facility to Bay Meadows Operating Company ("Bay Meadows"). The shares of Cal Jockey and Bay Meadows are paired one-for-one and can only be transferred in units. The Combined Financial Statements include the accounts of both Cal Jockey and Bay Meadows. Bay Meadows is engaged in operating and subleasing the facility, and operates a portion of the food and beverage concessions. All significant inter-company transactions and accounts have been eliminated in consolidation and combination. Certain prior year amounts have been reclassified to conform to the 1996 presentation. The Companies' fiscal year ends December 31. At December 31, 1995 and 1994 Bay Meadows was conducting a Thoroughbred horse racing meet. At December 31, 1996 the Thoroughbred horse racing meet had been completed. Accordingly, certain assets and liabilities related to the racing meet had been settled as of December 31, 1996. In order to conduct a Thoroughbred horse racing meet and to act as a satellite facility, Bay Meadows needs to secure, on an annual basis, a license from the California Horse Racing Board ("CHRB"). The issuance of this annual license to Bay Meadows is essential for it to continue to conduct Thoroughbred horse racing meets at Bay Meadows Racecourse. Although Bay Meadows has received a license for the 1997 race meet, there is no assurance that Bay Meadows will continue to receive this annual license. Bay Meadows has been granted an annual license each year since 1934. Thoroughbred racing is highly regulated by state law and the number of weeks available for racing in Northern California is subject to statute. The statute dictates the number of racing weeks allowed in the Northern California Racing Zone. There is no assurance that competition for racing weeks will not affect the allocation of racing weeks to Bay Meadows in the future. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PROPERTY, PLANT AND EQUIPMENT - Property is carried at cost. At December 31, 1996, land and land held for sale was $3,774,000. Land held for sale includes $2,242,000 in costs incurred to develop the land including zoning and engineering costs. Additionally, the tennis facility held for sale is subject to an agreement to sell the property to Public Storage, Inc. for approximately $2,200,000. (See Note 11 - Proposed Land Sales). No assurance can be gained that activities will ultimately result in the development or sale of such land. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of 30 years for plant and from 3 to 20 years for equipment. Leasehold improvements are amortized over their useful lives from 3 to 20 years. Expenditures for property additions and betterments are added to the property accounts, while those for maintenance and repairs are expensed as incurred. F-14 56 On January 1, 1996, the Companies adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of". SFAS No. 121 establishes recognition and measurement criteria for impairment losses whenever events or changes in circumstances indicate that the carrying value of assets may not be recoverable. Prior to the adoption of SFAS No. 121, assets were assessed for impairment based on their replacement costs or market value, or the undiscounted future cash flows expected to be generated by the assets. Additionally, assets are assessed for impairment when they are taken out of service or replaced. Such replacements resulted in write-downs for the Companies of $145,000, $99,000 and $665,000 in 1996, 1995 and 1994, respectively. Because the impairment criteria required under SFAS No. 121 are substantially similar to those previously used by the Companies, the adoption of SFAS No. 121 did not have a material effect on the financial statements. CASH AND CASH EQUIVALENTS - consist of demand deposits held in banks, money market funds and certificates of deposit with maturities of three months or less at the date of acquisition. REVENUE - Bay Meadows records Pari-mutuel revenues and Admissions, parking and other racing income associated with Thoroughbred horse racing at Bay Meadows Racetrack daily based upon cash received. Costs and expenses associated with Thoroughbred horse racing revenues, including purses and incentive awards, commissions paid to guest tracks, and direct operating costs are charged against income in those periods in which they Thoroughbred horse racing revenues are recognized. Other costs and expenses are recognized as they are incurred throughout the year. LEGAL EXPENSES - Legal expenses include all attorney fees incurred by the Companies with the exception of fees incurred in conjunction with the proposed merger agreement (see Note 2 - Proposed Merger Agreement). Such amounts are included in Merger Related Costs. SECURITIES AVAILABLE FOR SALE AND SECURITIES HELD TO MATURITY - The Companies classify investments into three categories: held to maturity, trading, and available for sale. The Companies have no trading securities. Securities which the Company has the ability and intent to hold to maturity are recorded at cost with any discount or premium amortized using a method that is not materially different from the interest method. Securities held to maturity consist of certificates of deposit and government securities with maturities greater than three months when acquired. Securities available for sale are reported at fair value with net unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity. Securities available for sale consist of investments in the common stock of a publicly traded Real Estate Investment Trust (See Note 13 - Related Party Transactions). AMOUNTS HELD ON DEPOSIT FOR THOROUGHBRED HORSE OWNERS - Amounts represent purses, net of entry fees, collected by Bay Meadows and placed on deposit for the benefit of certain Thoroughbred owners, while Bay Meadows conducts its racing meet. These amounts and 55% of the interest earned thereon, both of which are not available for Bay Meadows' purposes, are the property of such Thoroughbred owners and are physically segregated in accordance with the agreement. OTHER ASSETS - principally include amounts capitalized and amortized over an eight-year useful life relating to the purchase of racing rights. STOCK-BASED COMPENSATION - The Companies account for stock-based awards to employees using the intrinsic value method in accordance with APB No. 25, Accounting for Stock Issued to Employees. The Companies have adopted the disclosure requirements of SFAS No. 123 "Accounting for Stock Based Compensation" (See Note 7 - Stock Option Plan). EARNINGS PER SHARE - Earnings per share have been computed by dividing net earnings by the weighted average number of common shares outstanding. F-15 57 2. PROPOSED MERGER AGREEMENT On October 31, 1996, Cal Jockey and Bay Meadows entered into a merger agreement with Patriot American Hospitality, Inc. ("Patriot"). The acquisition 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 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, 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. 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 owned by Cal Jockey, including the land subject to the Franklin Agreement and the Iacocca Agreement, for a purchase price of $83,000,000. 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. New Patriot REIT would then sublease the Racecourse land and related improvements to New Patriot Operating Company. In connection with the Proposed PaineWebber Land Sale, New Patriot REIT would assign all of its rights and benefits under existing leases, contracts, permits and entitlements to the PaineWebber affiliate, and the PaineWebber affiliate would assume all of New Patriot REIT's development, lease and contract obligations. Pursuant to the Merger Agreement, Patriot loaned $2,900,000 to Cal Jockey (see Note 6) 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 and accept a higher unsolicited offer. All merger related costs have been expensed as incurred. Such amounts include the aforementioned breakup fee as well as legal and accounting costs related to the proposed merger agreements. These costs are shown as merger related costs for purposes of disclosure on the separate and combined statements of income (loss). 3. SECURITIES AVAILABLE FOR SALE The following table is a summary of securities available for sale at December 31, 1996 and 1995 (in thousands, except share amount):
1996 ------------------------------------------ UNREALIZED UNREALIZED MARKET COST GAIN LOSS VALUE Santa Anita Realty Enterprises (100,000 common shares) $1,398 $1,214 $2,612
F-16 58
1995 ------------------------------------------ UNREALIZED UNREALIZED MARKET COST GAIN LOSS VALUE Santa Anita Realty Enterprises (100,000 common shares) $1,398 $ (211) $ 1,187
These securities have no maturity. 4. SECURITIES HELD TO MATURITY The following table is a summary of securities held to maturity at December 31, 1996 and 1995 (in thousands):
1996 ------------------------------------------ UNREALIZED UNREALIZED MARKET COST GAIN LOSS VALUE Certificates of deposit $ 500 $ 500 U.S. Treasury obligations 3,963 $ 16 -- 3,979 -------- -------- -------- -------- Total $ 4,463 $ 16 -- $ 4,479 ======== ======== ======== ========
These securities mature in 1997.
1995 ------------------------------------------ UNREALIZED UNREALIZED MARKET COST GAIN LOSS VALUE Certificates of deposit $ 300 $ (1) $ 299 U.S. Treasury obligations 6,777 $ 1 (1) 6,777 -------- -------- -------- -------- Total $ 7,077 $ 1 $ (2) $ 7,076 ======== ======== ======== ========
These securities matured in 1996. 5. INCOME TAXES Cal Jockey intends to continue to qualify as a real estate investment trust as defined in the Internal Revenue Code and, as such, will not be taxed on that portion of its taxable income which is distributed to stockholders. Dividends to stockholders are determined by taxable income which may differ from financial accounting income. Dividends paid during the years ended December 31, 1996, 1995 and 1994, were taxable as ordinary income to stockholders. F-17 59 The income tax provision of Bay Meadows consists of the following (in thousands):
YEAR ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 Current: Federal $ 311 $ 482 $ 379 State 98 98 126 ----- ----- ----- Total Current 409 580 505 ----- ----- ----- Deferred: Federal (79) (99) 35 State (70) (22) 8 ----- ----- ----- Total Deferred (149) (121) 43 ----- ----- ----- Total $ 260 $ 459 $ 548 ===== ===== =====
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of Bay Meadows' deferred tax liabilities and assets, are as follows (in thousands):
DECEMBER 31, --------------- 1996 1995 Deferred tax assets: Book over tax depreciation $ 107 $ 167 Book over tax amortization 164 143 Book expenses not yet deductible 171 67 Other 37 25 ----- ----- Total deferred tax assets 479 402 Valuation allowance for deferred tax assets (120) (264) ----- ----- Net deferred tax assets 359 138 ----- ----- Deferred tax liabilities: Tax over book amortization 10 Other 132 50 ----- ----- Total deferred tax liabilities 132 60 ----- ----- Net deferred tax asset $ 227 $ 78 ===== =====
The change in the valuation allowance is due to a reassessment of various deferred tax assets as a result of continued earnings at Bay Meadows. F-18 60 The reasons for the difference between total tax expense and the amount computed by applying the statutory Federal income tax rate of 34% to income before income taxes, are as follows (in thousands):
YEAR ENDED DECEMBER 31, ---------------------------- 1996 1995 1994 Tax at statutory rate $ 243 $ 318 $ 388 State income taxes, net of Federal tax benefit 43 57 70 Non deductible expenses 61 189 Impact of rate change on deferred taxes 10 (113) Increase (decrease) in valuation allowance (144) 74 183 Other 47 (66) (93) ----- ----- ----- Total $ 260 $ 459 $ 548 ===== ===== =====
6. NOTES PAYABLE Pursuant to the Merger Agreement (see Note 2), Patriot provided Cal Jockey with a $2,900,000 million loan to be used in settlement of a termination fee to Hudson Bay as required by the agreement with Hudson Bay. At December 31, 1996, the note payable to Patriot is $2,900,000 million bearing interest of 5% per annum. Principal and accrued interest is due the earlier of June 30, 1997 or termination of the Merger Agreement. On March 10, 1997, Bay Meadows signed a loan agreement with a bank for a $2,500,000 line of credit with interest at the bank's reference rate. In connection with the execution of the credit agreement, Cal Jockey has agreed to provide collateral, and to continue to guarantee the line of credit. Bay Meadows has agreed to pay Cal Jockey a fee equal to .25% per annum of the value of the collateral that secures the line of credit. The line of credit agreement expires on February 1, 1998. During 1996 Bay Meadows had a similar line of credit in which Bay Meadows drew $4,000,000. That line of credit was canceled and repaid in full on October 29, 1996. 7. STOCK OPTION PLAN In May 1988, the stockholders of Bay Meadows approved the 1988 Stock Option Plan. The stock options have terms not exceeding ten years and exercise prices not less than the fair market value of the paired shares on the date the options were granted. Generally the right to exercise the options either vests immediately or over a three-year period on an annual basis, with the vesting date determined at the time of grant. The stock options are issued pursuant to option agreements providing that all options will become vested upon a change in control of Bay Meadows. Accordingly, all options will become exercisable when the Merger is consummated. 250,000 shares of the Companies' Common Stock have been reserved for issuance under the 1988 plan, with 180,000 available for future option grants at December 31, 1996. As additional consideration for Bay Meadows entering into the 1993 lease (see Note 8), Cal Jockey agreed to grant Bay Meadows options to acquire 51,000 unpaired shares of Cal Jockey unpaired Common Stock. Such options can be exercised by Bay Meadows only if and to the extent any employees of Bay Meadows to whom stock options have been granted as of December 31, 1992, exercise their respective options. The purchase price shall be 97% of the stock option price payable by the employee exercising his or her option and shall be payable only at such time the option is exercised. During 1993 and 1994 Bay Meadows issued options, outside the 1988 Plan, to purchase 50,000 shares at a weighted average exercise price of $12.98 per share to an officer of Bay Meadows that are exercisable at December 31, 1996. F-19 61 If Bay Meadows desires to grant additional options to its employees, Cal Jockey may grant additional options to Bay Meadows. Bay Meadows has agreed to a similar reciprocal agreement should Cal Jockey desire to grant stock options to its employees. As of December 31, 1996, Cal Jockey has granted options to Bay Meadows of which 107,500 are outstanding. Bay Meadows has granted options for 162,000 paired shares to persons who are or were Bay Meadows Officers and Employees. Bay Meadows maintains that Cal Jockey has agreed to and is obligated to provide stock options to Bay Meadows for the purchase of 162,000 shares of Cal Jockey stock to match the options granted by Bay Meadows. Cal Jockey has acknowledged agreement to provide options to purchase 107,500 shares of Cal Jockey stock to back up the option grants by Bay Meadows. The difference relates to options for paired shares which Bay Meadows granted to certain Bay Meadows Officers and Employees in 1996. In order to show the greatest possible dilution, the above disclosures assume that the options were granted by both Companies. However, there has been no resolution of this difference and no determination has been made as to the possible effects, which could be material, of the ultimate resolution of this uncertainty on the accompanying financial statements if is determined that the options for all or a portion of the difference were not granted in 1996 by Cal Jockey. Accordingly, no amounts have been recorded as of December 31, 1996 for any additional compensation expense or contingent liabilities that might result from the ultimate resolution of this matter. Option activity under the Plan is as follows:
WEIGHTED NUMBER AVERAGE OF EXERCISE SHARES PRICE Outstanding, January 1 and December 31, 1994 (24,668 exercisable at a weighted average price of $12.25) 51,000 12.59 Granted (Weighted average fair value of $4.10) 35,000 15.36 Exercised (10,000) 12.25 Canceled (14,000) 13.50 ------- Outstanding, December 31, 1995 (27,000 exercisable at a weighted average price of $12.25) 62,000 14.00 Granted (weighted average fair value of $3.53) 54,500 14.75 Canceled (4,500) 14.47 ------- Outstanding, December 31, 1996 (90,332 exercisable 112,000 14.35 at a weighted average price of $14.12) =======
The Companies' apply APB 25 and related interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for the plan. Had compensation cost for the plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method prescribed by SFAS 123, the Companies' combined net income (loss) and net income (loss) per share would have been reduced to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31, 1996 1995 ---- ---- Combined net income (loss) as reported $ (761) $ 4,200 Pro forma combined net income (loss) (903) 4,175 Combined net income (loss) per share as reported $ (0.13) $ 0.73 Pro forma combined net income (loss) per share (0.16) 0.72
For these disclosure purposes, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995 respectively; dividend yield of 3.31% (1996) and 3.18% (1995); expected volatility of 25.86% for both years; expected lives of five years for both years; and risk-free interest rates of 6.08% (1996) and 7.47% (1995). F-20 62 8. RENTAL 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 imported 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 substantiallly 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 for additional rent, if 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, if 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. Cal Jockey had rental income from Bay Meadows of $4,918,000, $4,743,000, and $4,777,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Bay Meadows had rental income from subleasing the facility and equipment to others. Rental income from other racing associations is based upon a percentage of the pari-mutuel handle of those respective associations. F-21 63 9. PARI-MUTUEL REVENUES The following summarizes information concerning the pari-mutuel revenues (in thousands):
YEAR ENDED DECEMBER 31, ----------------------------- 1996 1995 1994 On-track pari-mutuel handle $104,440 $103,276 $113,131 Intertrack/exported pari-mutuel handle 300,477 278,361 253,794 Out-of-state pari-mutuel handle 108,963 82,653 62,286 -------- -------- -------- Total pari-mutuel handle from annual racing meet 513,880 464,290 429,211 -------- -------- -------- Less: Patrons' winning tickets 204,637 196,305 209,051 Pari-mutuel license fees paid to State of California 9,977 9,671 10,543 Municipal racing fees 748 746 808 Handles paid to interstate pari-mutuel entities 113,624 89,395 68,039 Handles paid to co host tracks under intrastate racing 143,979 129,343 100,959 Equine research, vanning and stabling and Simulcast promotion fees 1,405 1,387 1,526 -------- -------- -------- Subtotal 39,510 37,443 38,285 Rights fees from exported races 272 167 388 -------- -------- -------- Total pari-mutuel revenues from annual racing meets 39,782 37,610 38,673 Pari-mutuel revenues from intertrack wagering 1,694 1,345 1,488 -------- -------- -------- Total pari-mutuel revenue $ 41,476 $ 38,955 $ 40,161 ======== ======== ========
Components of pari-mutuel revenues from annual racing meet are as follows (in thousands):
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 Commission paid to Bay Meadows $15,880 $14,916 $14,871 Simulcast expense reimbursement 4,234 4,399 4,334 Guest tracks commission 2,614 2,548 2,684 Purses and incentive awards 17,054 15,747 16,784 ------- ------- ------- Total $39,782 $37,610 $38,673 ======= ======= =======
10. PENSION PLAN Substantially all employees of Bay Meadows and its subsidiaries are covered by union or non-union multi-employer defined benefit pension plans. The allocated portion of non-union plan assets and accumulated plan benefits is not determinable. In the aggregate, the actuarial book value of non-union pension fund assets exceed vested benefits. Data as to accumulated plan benefits and plan assets for union plans are not available. F-22 64 Contributions charged to expense for these plans were as follows (in thousands): YEAR ENDED DECEMBER 31, ----------------------------------- 1996 1995 1994 Union $791 $623 $711 Non-union 179 147 253 ---- ---- ---- Total $970 $770 $964 ==== ==== ==== Upon the first anniversary of their employment, nonunion employees of Bay Meadows are eligible to participate in the California Race Track Pension Plan (the "CTRP Plan"), a defined benefit multiemployer pension plan, provided the employee is at least 21 years of age. An employee's benefits under the CRTP Plan are based on the employee's salary and length of service with Bay Meadows and other employers participating in the CRTP Plan. Accordingly, the amount of Bay Meadows contributions to the CRTP Plan may be expected to vary depending on the number of nonunion employees and their seniority. 11. PROPOSED LAND SALES 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 approximately 32 acres of Cal Jockey property which currently supports the barn and stable area ("Stable Area"). The Franklin Agreement contemplates the sale of the Stable Area for a purchase price of approximately $21,000,000. 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"). 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. 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. 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 Iacocca Agreement contemplates the sale of the Training Track Area to Airdial for a purchase price of $30,750,000. 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. Closing of the transactions are 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 the Franklin Agreement escrow will close 330 days following the date on which Cal Jockey obtains the Entitlements and the Iacocca Agreement escrow will close in Fall 1998. 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. Such amounts are classified as Land Held for Sale. F-23 65 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 or an adjustment to the purchase price under the Iacocca Agreement. 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 $279,000 for years 1 through 10, $362,000 for years 11 through 15, and $416,000 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. The land adjacent to the parking lot was purchased by Cal Jockey on January 24, 1997 for $1,300,000. 12. COMMITMENTS AND CONTINGENCIES Bay Meadows has contracted for computer and display equipment and services through August 1999. Fees are based on the daily average of on-track pari-mutuel wagers accepted during the racing meet. These fees charged to expense aggregated $766,000, $733,000, and $816,000 for the years ended December 31, 1996, 1995 and 1994, respectively. 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, and has prepared preliminary reports describing the proposed compliance measures including construction of supplemental treatment facilities. If the Stable Area is sold as proposed under the Franklin Agreement, the water run-off problem is expected to be eliminated. If the Franklin Agreement were terminated and the new barn construction not consummated, Cal Jockey would be financially responsible for the costs associated with compliance measures, which are estimated to cost approximately $1,500,000. These estimated costs are expected to be capitalized in property, plant and equipment. Final determinations and approvals have not been received nor has a schedule for implementation been established. In addition, this plan might be affected by the proposed land sales described in Note 11. On August 30, 1996, in the interest of encouraging the continuous employment of key management personnel, Bay Meadows entered into Severance Agreements with certain officers including F. Jack Liebau, President; Eugene F. Barsotti, Jr., Vice President - Racing; Sharon Kelly, Vice President Marketing; Michael Scalzo, Vice President - Operations; Frank Trigeiro, Chief Financial Officer and Vice President - Finance; and Nathaniel Wess, Vice President. These agreements, which expire on December 31, 1997, become effective if there is a change in control of Bay Meadows followed by a termination by the officer of his or her employment for Good Reason. In that event, officers other than Mr. Liebau and Mr. Barsotti become entitled to a lump sum payment equal to the sum of the officer's current annual base salary plus the officer's bonus received during the previous 12 months or during F-24 66 1996, whichever is greater; Mr. Liebau and Mr. Barsotti are instead entitled to twice the sum of their current annual base salary plus the bonus received during the previous 12 months or during 1996, whichever is greater. The Severance Agreements also provide that Bay Meadows will, at each officer's option, either continue to make contributions to the officer's retirement plan through January 1, 1998 or pay to the officer a lump sum equal to the actuarial equivalent of the additional retirement pension to which the officer would have been entitled had the officer continued service under such retirement plan for an additional two years. Bay Meadows and Cal Jockey are, in the ordinary course of business, involved in litigation and other legal matters. Such litigation includes lawsuits as follows: California Jockey Club v. Bay Meadows Operating Company et al. On August 13, 1996, Cal Jockey filed a complaint in the United States District Court for the Northern California District of California against Bay Meadows and its President, F. Jack Liebau and the numbers 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 management. The complaint alleged violations of the federal securities laws by reason of the defendants' failure to make required filings and disclosures in connection with the 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 the 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, the Cal Jockey and Bay Meadows filed their answer to the complaint. The answer denies the allegations of the complaint and asserts affirmative defenses against the Bay Meadows Foundation. Specifically, the 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 and the financial reporting instructions subsequently promulgated by the CHRB. The parties are currently engaged in civil discovery and the Cal Jockey and Bay Meadows plan to vigorously defend themselves against the lawsuit. F-25 67 Each of Bay Meadows and Cal Jockey management believes that other pending legal actions against their respective Companies will not have a material impact on the separate and combined financial statements, taken as a whole. 13. RELATED PARTY TRANSACTIONS In July 1992, Northern California Off-Track Wagering, Inc. ("N.C.O.T.W. Inc.") was formed to act as the guest associations' pari-mutuel manager for satellite wagering, and Bay Meadows became a 25% shareholder in N.C.O.T.W. Inc. Bay Meadows reimbursed N.C.O.T.W. Inc. $4,235,000, $3,742,000 and $3,671,000 in 1996, 1995 and 1994, respectively, for satellite wagering expenses N.C.O.T.W. Inc. incurred on behalf of Bay Meadows. These expenses are included in Bay Meadows' direct operating costs. Included in Bay Meadows' accounts receivable at December 31, 1996 is a receivable from N.C.O.T.W. Inc. for $81,000. At December 31, 1995, included in Bay Meadows' accounts payable and accrued liabilities was a payable to N.C.O.T.W. Inc. of $742,000. From time to time, Cal Jockey lends funds on a short-term basis to Bay Meadows to allow Bay Meadows to meet operational needs in the off-season. There were no borrowings as of December 31, 1996. As of December 31, 1995, the balance due to Cal Jockey was $600,000 which was reflected in the inter-company payable/receivable account. For the years ended December 31, 1996 and 1995, Bay Meadows paid Cal Jockey $8,000 and $45,000 in interest related to these borrowings. Because a director of Cal Jockey is also a director of Santa Anita Realty Enterprises, trading restrictions applicable to such director may be imputed to Cal Jockey. Consequently, there may be periods of time when Cal Jockey's investment in Santa Anita Realty Enterprises is illiquid. During 1996, Bay Meadows made purchases from Harris Ranch Beef Company in the amount of $72,000. John C. Harris is Owner and Chief Executive Officer of Harris Ranch Beef Company and is also a director of Bay Meadows Operating Company. 14. FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods were used by Cal Jockey and Bay Meadows in estimating the fair value of financial instruments: a. Cash and cash equivalents, amounts held on deposit for Thoroughbred owners, accounts receivable and accounts payable and accrued liabilities and securities held to maturity: The carrying amount reported in the balance sheet approximates their fair values. b. Securities available for sale: The fair values of securities available for sale are based on quoted market prices. F-26 68 c. Securities held to maturity: The fair values for government issued securities are based on quoted market prices. The fair values for certificates of deposit are estimated using projected cash flows present valued at replacement rates currently offered for instruments with similar characteristics. 15. QUARTERLY COMBINED RESULTS OF OPERATIONS (UNAUDITED) The unaudited quarterly combined results of operations for the years ended December 31, 1996 and 1995, are as follows (in thousands, except per share amounts and racing days).
QUARTERS ENDED 1996 ----------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, Number of live racing days 46 0 25 27 Revenues $ 26,814 $ 2,765 $ 12,195 $ 12,158 Combined net income (loss) $ 3,808 $ (739) $ (608) $ (3,222)(1) Combined net income (loss) per paired share $.66 ($.13) ($.11) ($.55)(1)
(1) Includes merger related costs of $3,995 and legal fees of $1,549.
QUARTERS ENDED 1995 ---------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, Number of live racing days 20 10 27 51 Revenues $ 9,687 $ 7,367 $13,144 $20,511 Combined net income $ 647 $ 260 $ 1,071 $ 2,222 Combined net income per paired share $ .11 $ .05 $ .19 $ .39
****** F-27 69 EXHIBIT INDEX
EXHIBIT EXHIBIT SEQUENTIALLY NUMBER NUMBERED PAGE 2.1 Ageement and Plan of Merger dated February 24, 1997, among Patriot American Hospitality, Inc., Patriot American Hospitality Partnership, L.P., California Jockey Club and Bay Meadows Operating Company (incorporated herein by reference to Exhibit 2.1 to the 8-K dated February 24, 1997 (filed March 3, 1997) (File No. 1-9319 and 1-9320). 3.1 Certificates of Incorporation of the Registrants (incorporated herein by reference to Exhibit 3.1 to the Annual Report on Form 10-K for the year ended December 31, 1987 (the "1987 10-K") (File No. 1-9319 and 1-9320)). 3.2 Agreement of Merger, dated March 24, 1983, between California Jockey Club and Bay Meadows Realty Enterprises, Inc., Article II of which changed the name of Bay Meadows Realty Enterprises, Inc. to California Jockey Club (incorporated herein by reference to Exhibit 2 to the Registration Statement of the registrants on Form S-2 as filed with the Securities and Exchange Commission on November 14, 1986 (the "Initial Registration Statement") (File No. 1-9319 and 1-9320)). 3.3 Bylaws of California Jockey Club, as amended (incorporated herein by reference to Exhibit 3.3 to the 1987 10-K and Exhibit 28.1 to the Quarterly Report on Form 10-Q of the registrants for the quarter ended September 30, 1989 (File No. 1-9319 and 1-9320)). 3.4 Bylaws of Bay Meadows Operating Company (incorporated herein by reference to Exhibit 3.4 to the 1987 10-K and Exhibit 28.2 to the Quarterly Report on Form 10-Q of the registrants for the quarter ended September 30, 1989 (File No. 1-9319 and 1-9320)). 3.5 Amendment to Bylaws of Bay Meadows Operating Company (incorporated herein by reference to Exhibit 3.5 of the 1995 10-K (File No. 1-9319 and 1-9320)). 3.6 Amendment to Bylaws of California Jockey Club (incorporated herein by reference to Exhibit 3.6 to the 1995 10-K (File No. 1-9319 and 1-9320)). 4.1 Pairing Agreement, dated February 15, 1983, between Bay Meadows Operating Company and California Jockey Club (formerly named Bay Meadows Realty Enterprises, Inc.) (incorporated herein by reference to Exhibit 4.3 to the Initial Registration Statement (File No. 1-9319 and 1-9320)). 4.2 Amendment to Pairing Agreement, dated as of February 18, 1988, between Bay Meadows Operating Company and California Jockey Club (incorporated herein by reference to Exhibit 4.2 to the 1987 10-K). 10.1 Lease Agreement, dated July 23, 1991, between Bay Meadows Operating Company and San Mateo County Fair Association (incorporated herein by reference to Exhibit 10.2 to the 1991 10-K (File No. 1-9319 and 1-9320)).
70
EXHIBIT EXHIBIT SEQUENTIALLY NUMBER NUMBERED PAGE 10.2 Standby Agreement, dated 1986, among Tanforan Racing Association, Bay Meadows Operating Company, Bay Meadows Racing Association and Pacific Racing Association (incorporated herein by reference to Exhibit 10.7 to Amendment No. 2 to the Registration Statement of the Companies on Form S-2, as filed with the SEC on December 18, 1986 (File No. 1-9319 and 1-9320)). 10.3 Amended and Restated Joint Venture Agreement between Bay Meadows Racing Association and Pacific Racing Association with respect to Simulcast Enterprises (incorporated herein by reference to Exhibit 10.6 to the 1988 10-K (File No. 1-9319 and 1-9320)). 10.4 Totalisator Services Agreement, dated July 30, 1988, among Autotote Limited, Bay Meadows Racing Association, and Bay Meadows Operating Company (incorporated herein by reference to Exhibit 10.7 to the 1988 10-K (File No. 1-9319 and 1-9320)). 10.5 Bay Meadows Operating Company 1988 Stock Option Plan (incorporated herein by reference to Exhibit 10.11 to the 1987 10-K (File No. 1-9319 and 1-9320)). 10.6 Lease and Agreement ReConduct of Quarter Horse Racing (1990 and 1991 Racing Seasons), dated February 7, 1990, between Bay Meadows Operating Company and Peninsula Horse Racing Association (incorporated herein by reference to Exhibit 10.15 to the 1989 10-K (File No. 1-9319 and 1-9320)). 10.7 Lease Agreement, dated May 31, 1992, between Bay Meadows Operating Company and San Mateo County Exposition and Fair Association (incorporated herein by reference to Exhibit 10.7 to the 1992 10-K). 10.8 Letter Agreement, dated March 29, 1993, between California Jockey Club and Bay Meadows Operating Company for Credit Enhancement for Line of Credit. Rescission of Sale of 20,000 Shares of Unpaired Cal Jockey Stock and Grant of Option to Purchase Unpaired Bay Meadows Stock (incorporated herein by reference to Exhibit 10.10 to the 1992 10-K (File No. 1-9319 and 1-9320)). 10.9 Lease Agreement, dated March 29, 1993, and First Amendment to Lease dated September 30, 1993, between California Jockey Club and Bay Meadows Operating Company (incorporated herein by reference to Exhibit 10.10 to the 1993 10-K (File No. 1-9319 and 1-9320)).
71
EXHIBIT SEQUENTIALLY NUMBER EXHIBIT NUMBERED PAGE 10.10 Stock Option Agreement, dated June 1, 1993, between Bay Meadows Operating Company and F. Jack Liebau (incorporated herein by reference to Exhibit 10.11 to the 1993 10-K (File No. 1-9319 and 1-9320)). 10.11 Settlement Agreement, dated June 15, 1993, between California Jockey Club, Prometheus Development Co. Inc. and Bay Meadows Partners (incorporated herein by reference to Exhibit 10.12 to the 1993 10-K (File No. 1-9319 and 1-9320)). 10.12 Lease Agreement, dated July 16, 1993, between Bay Meadows Operating Company and San Mateo County Exposition and Fair Association (incorporated herein by reference to Exhibit 10.13 to the 1993 10-K (File No. 1-9319 and 1-9320)). 10.13 Lease Agreement dated August 12, 1993, between Bay Meadows Operating Company and D.D.B. Inc. (d.b.a. Butler Catering) (incorporated herein by reference to Exhibit 10.14 to the 1993 10-K (File No. 1-9319 and 1-9320)). 10.14 Partners Program Agreement, dated August 16, 1993, between Daily Racing Form, Inc., and Bay Meadows Operating Company (incorporated herein by reference to Exhibit 10.15 to the 1993 10-K (File No. 1-9319 and 1-9320)). 10.15 Totalisator Services Amendment to the Agreement, dated August 18, 1993, between Autotote Limited, Bay Meadows Racing Association and Bay Meadows Operating Company (incorporated herein by reference to Exhibit 10.16 to the 1993 10-K (File No. 1-9319 and 1-9320)). 10.16 Business Loan Agreement dated August 1, 1994, between Bank of America National Trust & Savings and Bay Meadows Operating Company (incorporated herein by reference to Exhibit 10.16 to the 1994 10-K (File No. 1-9319 and 1-9320)). 10.17 Stock Option Agreement, dated March 1, 1994, between Bay Meadows Operating Company and F. Jack Liebau (incorporated herein by reference to Exhibit 10.18 to the 1994 10-K (File No. 1-9319 and 1-9320)). 10.18 Stock Option Agreement dated January 16, 1995 between Bay Meadows Operating Company and F. Jack Liebau (incorporated herein by reference to Exhibit 10.18 to the 1995 10-K (File No. 1-9319 and 1-9320)). 10.19 Agreement of Purchase and Sale dated December 21, 1995 between California Jockey Club and Lee Iacocca & Associates, Inc. (incorporated herein by reference to Exhibit 10.19 to the 1995 10-K (File No. 1-9319 and 1-9320)).
72
EXHIBIT SEQUENTIALLY NUMBER EXHIBIT NUMBERED PAGE 10.20 Agreement of Purchase and Sale dated May 31, 1995, First Amendment dated June 12, 1995, Second Amendment dated December __, 1995, Third Amendment dated January 31, 1996,and Fourth Amendment dated March 18, 1996, between California Jockey Club and Property Resources, Inc. ( incorporated herein by reference to Exhibit 10.20 to the 1995 10-K (File No. 1-9319 and 1-9320)). 10.21 Fifth Amendment to Agreement of Purchase and Sale dated April__, 1996 between California Jockey Club and Property Resources, Inc. (incorporated herein by reference to Exhibit 20.2 to the Quarterly Report on Form 10-Q of the registrants for the quarter ended September 30, 1996 (File No. 1-9319 and 1-9320)). 10.22 Sixth Amendment to Agreement of Purchase and Sale dated August 18,1996, between California Jockey Club and Property Resources, Inc. (incorporated herein by reference to Exhibit 20.1 to the Quarterly Report on Form 10-Q of the registrants for the quarter ended September 30, 1996 (File No. 1-9319 and 1-9320)). 10.23 Amendment No. 3 to Agreement of Purchase and Sale dated June 28, 1996, amending the Agreement of Purchase and Sale dated December 21, 1995 between California Jockey Club and Lee Iacocca & Associates, Inc. (incorporated herein by reference to Exhibit 20.3 to Quarterly Report on Form 10-Q of the reistrants for the quarter ended September 30, 1996 (File No.1-9319 and 1-9320)). 10.24 Amendment No. 2 to Agreement of Purchase and Sale dated May 31, 1996, amending the Agreement of Purchase and Sale dated December 21, 1995 between California Jockey Club and Lee Iacocca & Associates, Inc. (incorporated herein by reference to Exhibit 20.4 to the Quarterly Report on Form 10-Q of the registrants for the quarter ended September 30, 1996 (File No. 1-9319 and 1-9320)). 10.25 Amendment No. 1 to Agreement of Purchase and Sale dated March 5, 1996, amending the Agreement of Purchase and Sale dated December 21, 1995 between California Jockey Club and Lee Iacocca & Associates, Inc. (incorporated herein by reference to Exhibit 20.5 to the Quarterly Report on Form 10-Q of the registrants for the quarter ended September 30, 1996 ( File No. 1-9319 and 1-9320)). 10.26 Form of California Jockey Club Indemnification Agreement (incorporated herein by reference to Exhibit 10.14 to the Quarterly Report on Form 10-Q for the registrants for the quarter ended September 30, 1996 (File No. 1-9319 and 1-9320)). 10.27 Agreement for Purchase and Sale of Real Property and Joint Escrow Instructions dated July 18, 1996, between California Jockey Club and Public Storage, Inc. 10.28 Amendment to Agreement for Purchase and Sale of Real Property and Joint Escrow Instructions dated as of January 31, 1997, between California Jockey Club and Public Storage, Inc. 10.29 Ground Lease dated November 22, 1996, between California Jockey Club and Borders, Inc. 10.30 Severance Agreement between Bay Meadows Operating Company and Eugene F. Barstotti, Jr. dated August 30, 1996 (incorporated herein by reference to Exhibit 10.1 to the Report on Form 10-Q for the of the registrants for the quarter ended September 30, 1996 (File No. 1-9319 and 1-9320)). 10.31 Severance Agreement between Bay Meadows Operating Company and Sharon Kelly dated Ausgust 30, 1996 (incorporated herein by reference to Exhibit 10.2 to the Report on Form 10-Q for the of the registrants for the quarter ended September 30, 1996 (File No. 1-9319 and 1-9320)). 10.32 Severance Agreement between Bay Meadows Operating Company and F. Jack Liebau dated August 30, 1996 (incorporated by reference to Exhibit 10.3 to the Report on Form 10-Q for the of the registrants for the quarter ended September 30, 1996 (File No. 1-9319 and 1-9320)). 10.33 Severance Agreement between Bay Meadows Operating Company and Michael Scalzo dated August 30, 1996 (incorporated herein by reference to Exhibit 10.4 to the Report on Form 10-Q for the of the registrants for the quarter ended September 30, 1996 (File No. 1-9319 and 1-9320)). 10.34 Severance Agreement between Bay Meadows Operating Company and Frank Trigeiro dated August 30, 1996 (incorporated herein by reference to Exhibit 10.5 to the Report on Form 10-Q for the of the registrants for the quarter ended September 30, 1996 (File No. 1-9319 and 1-9320)). 10.35 Severance Agreement between Bay Meadows Operating Company and Nathaniel Wess dated August 30, 1996 (incorporated herein by reference to Exhibit 10.6 to the Report on Form 10-Q for the of the registrants for the quarter ended September 30, 1996 (File No. 1-9319 and 1-9320)). 10.36 Indemnification Agreement between Bay Meadows Operating Company and Eugene F. Barsotti, Jr. dated August 30, 1996 (incorporated herein by reference to Exhibit 10.7 to the Report on Form 10-Q for the of the registrants for the quarter ended September 30, 1996 (File No. 1-9319 and 1-9320)). 10.37 Indemnification Agreement between Bay Meadows Operating Company and Greg S. Gunderson dated August 30, 1996 (incorporated herein by reference to Exhibit 10.8 to the Report on Form 10-Q for the of the registrants for the quarter ended September 30, 1996 (File No. 1-9319 and 1-9320)). 10.38 Indemnification Agreement between Bay Meadow Operating Company and F. Jack Liebau dated August 30, 1996 (incorporated herein by refernece to Exhibit 10.9 to the Report on Form 10-Q for the of the registrants for the quarter ended September 30, 1996 (File No. 1-9319 and 1-9320)). 10.39 Indemnification Agreement between Bay Meadows Operating Company and John C. Harris dated August 30, 1996 (incorporated herein by refernece to Exhibit 10.10 to the Report on Form 10-Q for the of the registrants for the quarter ended September 30, 1996 (File No. 1-9319 and 1-9320)). 10.40 Indemnification Agreement between Bay Meadows Operating Company and Lee R. Tucker dated August 30, 1996 (incorporated herein by reference to Exhibit 10.11 to the Report on Form 10-Q for the of the registrants for the quarter ended September 30, 1996 (File No. 1-9319 and 1-9320)). 10.41 Indemnification Agreement between Bay Meadows Operating Company and Anthony J. Zidich dated August 30, 1996 (incorporated herein by reference to Exhibit 10.12 to the Report on Form 10-Q for the of the registrants for the quarter ended September 30, 1996 (File No. 1-9313 and 1-9320)). 10.42 Indemnification Agreement between Bay Meadows Operating Company and Frank Trigeiro dated August 30, 1996 (incorporated herein by reference to Exhibit 10.13 to the Report on Form 10-Q for the of the registrants for the quarter ended September 30, 1996 (File No. 1-9313 and 1-9320)). 22.1 Subsidiary of the registrants. 23.1 Consent of Deloitte & Touche LLP. 27.1 Combined Financial Data Schedule. 27.2 Bay Meadows Operating Company Financial Data Schedule. 27.3 California Jockey Club Financial Data Schedule.
EX-10.27 2 AGREEMENT FOR SALE & PURCHASE DATED JULY 18, 1996 1 Exhibit 10.27 AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY AND JOINT ESCROW INSTRUCTIONS Dated (for reference purposes only): July 18, 1996. PS#99781 Subject to the terms and conditions herein contained, "Seller" (as hereinafter defined) agrees to sell, and "Purchaser" (as hereinafter defined) agrees to purchase, the "Property" (as hereinafter defined). 1. Certain Definitions. The following are among the definitions which are applicable in this agreement. "Agreement" means this instrument. "Chicago Title" means Chicago Title Company, 388 Market Street, Suite 1300, San Francisco, California 94111. "Closing" means the consummation of the purchase and sale provided for herein which occurs when Seller delivers to Purchaser a deed conveying the Property as provided for herein and the Purchase Price is paid to Seller. "Closing Date" means the date on which the Closing actually occurs. "Deposit" shall have the meaning set forth in Section 3, as it may be increased pursuant to Section 8. "Effective Date" means the date on which each of Purchaser and Seller shall have received a counterpart of this Agreement executed by the other of them (unless Purchaser or Seller, as the case may be, shall receive such counterpart signed by the other after business hours on a business day, or on a non-business day, in which case the Effective Date shall be the next business day). This Agreement shall be deemed executed by Purchaser only when executed by a Vice President of Purchaser. "Environmental Defect" shall have the meaning set forth in Section 7. "Environmental Law" shall have the meaning set forth in Section 7. "Escrow Agent" means Chicago Title acting in its capacity hereunder as Escrow Agent. "Extension Deposit" shall have the meaning set forth in Section 10. "Hazardous Material" shall have the meaning set forth in Section 7. 2 "Instruction Copy" shall have the meaning set forth in Section 2. "Lease" means the lease affecting the Property and listed on EXHIBIT B attached hereto and incorporated herein by reference. "Project" shall have the meaning set forth in Section 8. "Property" means the real property located at 2222 South Delaware, San Mateo, California, also referred to as Assessors Parcel #035-321-080, and as more specifically described in EXHIBIT A attached hereto and incorporated herein by reference. "Purchase Price" shall have the meaning set forth in Section 3. "Purchaser" means Public Storage, Inc., a California corporation. "Seller" means California Jockey Club. "Survey" shall have the meaning set forth in Section 4. "Title Company" means Chicago Title Company acting as issuer of title insurance as provided herein. "Title Policy" shall have the meaning set forth in Section 9. "Title Report" shall have the meaning set forth in Section 5. 2. Escrow; Escrow Instructions. A copy of this Agreement as executed by both Seller and Purchaser (the "Instruction Copy") shall be delivered to Escrowholder by Purchaser within five business days after the Effective Date. By such deposit, Escrow Agent is hereby authorized and instructed to act in accordance with the provisions of this Agreement, which Agreement shall constitute Escrow Agent's escrow instructions. Purchaser and Seller shall each deposit such other instruments and funds as are necessary to close the escrow and consummate the sale and purchase of the Property in accordance with the terms hereof. If Escrow Agent requires any additional instructions, the parties agree to provide mutually acceptable additions or deletions that do not substantially alter this Agreement. 3. Purchase Price. Subject to adjustment provided for herein, the purchase price for the Property (the "Purchase Price") shall be Two Million Two Hundred Thousand and no/100 Dollars ($2,200,000). (a) Purchaser will transmit a check for an amount equal to $10,000 of the Purchase Price (the "Deposit") to Escrow Agent within five business days after the Effective Date. The Deposit (together with any "Extension Deposits" made in 2 3 accordance with Section 10(a) hereof) is to be held by Escrow Agent in accordance with this Agreement. (b) Buyer shall wire transfer an amount equal to the balance of the Purchase Price (the amount by which the Purchase Price exceeds the sum of the Deposit plus any Extension Deposits) plus or minus the net amount of any adjustments provided for herein to Escrow Agent immediately prior to the Closing. (c) The Purchase Price plus or minus the net amount of any adjustments provided for herein shall be paid to Seller by Escrow Holder at the Closing. 4. Survey. Purchaser shall have the right, but not the obligation, to obtain, and it is anticipated that Purchaser shall obtain, at Purchaser's sole cost and expense, a current boundary and topographical survey of the Property (the "Survey"). Seller shall have no obligation to provide or pay the cost of the Survey. However, Seller shall provide Purchaser and its engineers access as required to prepare as detailed a Survey as Purchaser shall require and shall otherwise cooperate with Purchaser and its engineers and furnish such information as is necessary for the Survey as required by Purchaser. It is acknowledged and anticipated that the Survey, as required by Purchaser, will provide all of the detail and information, and contain such certifications, as are generally required by institutional purchasers of real property. The requirements for the Survey may include a certification of the total number of square feet contained within the exterior boundaries of the Property minus the total number of square feet contained within the boundaries of all easements, roads, rights-of-way and encroachments situated in the Property (the "Net Square Feet") in the form specified for an American Land Title Association ("ALTA") survey. 5. Obtaining of Title Information. Within two (2) business days after receipt of the Instruction Copy, Escrow Holder, at Seller's sole cost and expense, shall order the issuance by Title Company of Title Company a current abstract of title or preliminary title report covering the Property (the "Title Report"). The Title Report shall set forth the state of title to the Property together with all exceptions or conditions to such title, including, but not limited to, all easements, restrictions, rights-of-way, covenants, reservations and all other encumbrances affecting the Property which would appear in an owner's policy of title insurance if issued. Escrow Holder shall also cause Purchaser to be furnished with true, correct and legible copies of all instruments referred to in the Title Report as conditions or exceptions to title to the Property, including liens and a map with all easements of record plotted. Seller is furnishing to Purchaser concurrently with its delivery of this Agreement the most recent copy of a title report or title insurance policy for the Property, if such document is in the possession of or available to Seller. 6. Review of Title; Resolution of Title Objections. Purchaser shall have a period of thirty (30) days after receipt of the last of the Title Report, any supplement 3 4 thereto and full and complete copies of the documents referred to therein as conditions, exceptions, or reservations to title to the Property, to review such items, and to deliver to Seller in writing such objections as Purchaser may have to anything contained or set forth in the documents or in the Title Report. If no written notice of disapproval, approval or approval subject to certain exceptions is delivered by Purchaser to Seller within the aforesaid thirty (30) days, such items may appear as exceptions in the owner's policy of title insurance described in Section 9(a) and in the deed described in Section 9(a) except that liens securing the payment of money (other than non delinquent taxes and assessments) shall be considered disapproved, whether or not a notice of disapproval is sent and whether or not they are specified in any such notice. Seller shall, at Seller's sole cost and expense, at or prior to the Closing, cause the removal of any liens securing the payment of money (except that the liens for non-delinquent taxes and non-delinquent assessments may remain of record, provided that Seller bears or pays to Purchaser Seller's pro rata share of any such taxes, and all of the amount of any such assessments, as provided in Section 10(b)). Also, Seller shall use its reasonable best efforts to cause the removal, prior to the Closing Date, of any other matters with respect to which Purchaser has delivered written objections. If Seller fails to cure such objections, Purchaser may, as its sole remedy, elect to (a) terminate this Agreement or (b) accept such title as Seller can deliver. AT ANY TIME PRIOR TO THE CLOSING, AND PRIOR TO THE REMOVAL OF ANY TITLE MATTERS TO WHICH PURCHASER HAS OBJECTED, PURCHASER MAY, BY NOTICE TO SELLER, REQUIRE A BINDING AND UNCONDITIONAL AGREEMENT FROM SELLER THAT IT WILL REMOVE ANY OBJECTIONS AS A CONDITION TO MAINTAIN THIS AGREEMENT IN EFFECT AND, IN THE ABSENCE OF RECEIPT OF SUCH AN AGREEMENT IN WRITING FROM SELLER WITHIN FIVE BUSINESS DAYS AFTER SUCH NOTICE, PURCHASER MAY TERMINATE THIS AGREEMENT AS ITS SOLE REMEDY. Upon a termination by Purchaser pursuant to this Section 6, the Deposit, and any Extension Deposits shall be returned to Purchaser. 7. Seller's Covenants, Warranties and Representations. Seller covenants, warrants and represents to Purchaser the following: (a) Seller has good, marketable and indefeasible fee simple title to the Property, free and clear of all liens, conditions, exceptions or reservations, except those specifically approved by Purchaser pursuant to this Agreement. (b) There are no adverse or other parties in possession of the Property, or of any part thereof, except Seller and the tenants under the Leases. No party has been granted any license, lease or other right relating to the use of possession of the Property or any part thereof except for the tenants under the Leases. Seller acknowledges that Purchaser cannot develop the "Project" (as defined in Section 8) unless the Leases have been terminated and the tenants under the Leases have vacated the Property. Seller agrees to terminate the Leases prior to the close of escrow and to deliver the Property to Purchaser free of all the Leases. After the date of this Agreement, Seller will not without 4 5 Purchaser's prior written approval, which shall not be unreasonably withheld, enter into any further leases, contracts or other obligations relating to the Property which will affect the Property or bind Purchaser after the Closing. (c) To the best of Seller's knowledge without inquiry, no facts or conditions exist which would result in the termination of the current access from the Property to any currently existing highways and roads adjoining or situated on the Property, or to any existing sewer or other utility facilities servicing, adjoining or situated on the Property. (d) The Property is currently zoned under the zoning classification of C-3. If requested by Purchaser, Seller will cooperate with and assist Purchaser in obtaining a use permit, if required for Purchaser's intended use, in accordance with the provisions of Section 8. (e) To the best of Seller's knowledge without inquiry, there is no pending or threatened litigation or governmental action which would adversely affect the value of the Property to the Purchaser or the right of the Purchaser to acquire the Property. (f) To the best of Seller's knowledge without inquiry, the Property has not been used for the generation, storage or disposal of any "Hazardous Material" (as defined below). Seller has no notice of any pending or threatened action or proceeding arising out of the condition of the Property or any alleged violation of federal, state or local environmental, health or safety statute, ordinance or regulation (collectively, "Environmental Laws"). As used in this Agreement, the term "Hazardous Material" shall include but not be limited to (i) asbestos, (ii) petroleum, (iii) any explosives, radioactive materials, wastes or substances, or (iv) any substances defined as "hazardous substances," "hazardous wastes," "extremely hazardous waste," "hazardous materials," "extremely hazardous waste," "hazardous materials," or "toxic substances" in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Sec. 9601, et seq. or in any other Environmental Law. To the best of Seller's knowledge without inquiry, there are no underground tanks contained in the Property [except as otherwise disclosed on EXHIBIT _____]. To the best of Seller's knowledge without inquiry, the Property is in compliance with all Environmental Laws [including, without limitation, all Environmental Laws requiring the registration of underground tanks with any governmental authority]. Seller agrees that if any environmental tests or investigations conducted pursuant to Subsection 8(i) below disclose the presence of any "Environmental Defect" (as defined below), Seller shall, prior to the close of escrow and at Seller's sole cost and expense, comply with the provisions in Subsection 8(I)(2), up to a cost of $25,000 or, if Seller declines to spend additional funds, Purchaser, as its sole remedy, may terminate this Agreement. As used in this Agreement, the term "Environmental Defect" shall mean (i) the presence of any Hazardous Material on or in the Property or in any groundwater within the Property in violation of any Environmental Law, (ii) the presence of any underground tank or (iii) any violation of any Environmental Law relating to the Property. 5 6 (g) To the best of Seller's knowledge without inquiry, there are no facts material to the use and development of the Property which are known to Seller and which Seller has not disclosed to Purchaser. (h) From and after the date of this Agreement, Seller shall keep the Property free and clear of all easements, liens or encumbrances not disclosed in the Title Report. Seller shall keep current all existing loans affecting the Property. (i) Seller is not a "foreign person" as that term is used in Section 1445(b)(2) of the Internal Revenue Code of 1986, as amended, and the related regulations. Seller agrees to execute and deliver a Certification That Seller Is Not a Foreign Person in the form of Exhibit C attached hereto on or prior to the Closing. (j) Prior to the Closing Seller shall remove all of Seller's personal property from the Property[, including, without limitation, any underground tanks], provided that the cost of such removal does not exceed $25,000. Such removal shall be accomplished in compliance with all applicable laws and regulations including, without limitation, all Environmental Laws. 8. Purchaser's Review; Conditions to Purchaser's Obligations. Seller acknowledges that Purchaser will be unable to use the Property for any purpose other than a mini-warehouse facility constructed according to certain plans and specifications of Purchaser (the "Project"). Therefore, Purchaser shall not be obligated to purchase the Property under this Agreement and shall have the right to terminate this Agreement and receive a return of the Deposit if, it determines, that it will not be able to make any of the following determinations to its sole satisfaction as of the Closing Date. (a) The Property is currently zoned or on the Closing Date will be zoned under a zoning classification that will permit Purchaser to construct, develop and operate the Project on the Property in full compliance with all applicable zoning regulations. (b) The Survey, soil tests, percolation tests, engineering studies and other information, studies and/or tests obtained by or conducted for Purchaser indicate that the Property is suitable for the construction of the Project. After the Effective Date, Seller agrees to allow Purchaser and its agents reasonable access to the Property for the purpose of conducting such geological tests and engineering studies. Purchaser shall indemnify and hold Seller harmless with respect to any damage done to the Property by reason of such tests or engineering studies. 6 7 (c) All utilities (including, but not limited to gas, sewer, water, electricity, telephone, drainage and other facilities) necessary for the development and operation of the Project are currently available to the boundary of the Property. (d) Purchaser is able to obtain a building permit which will allow Purchaser to construct, develop and operate the Project on the Property in full compliance with all applicable regulations, decrees, codes, ordinances, rules or laws of any city, county, state or federal government or governmental agency having jurisdiction. (e) The Property is properly platted and subdivided to permit Purchaser to construct, develop and operate the Project on the Property without the necessity of (i) donating or conveying a portion of the Property to any governmental authority, (ii) constructing or paying for off-site facilities or other improvements, (iii) paying any fees (other than normal building permit fees) to any governmental authority, or (iv) subdividing the Property. (f) Economic and market feasibility studies indicate a favorable probability of success for the development, marketing and management of the Project. (g) There is no applicable moratorium on construction existing or threatened to exist at the Closing Date. (h) Subdivision restrictions and setback lines and other applicable requirements and regulations do not restrict the gross square footage of the proposed improvements to the Project to less than 100,000 and are otherwise satisfactory to Purchaser. (i) Either the condition in Subsection (1) below or the condition is Subsection (2) below has been satisfied: (1) Environmental tests and investigations do not disclose the presence of any Environmental Defect; (2) If the environmental tests or investigations disclose the presence of any Environmental Defect, Seller shall have remedied the situation to the satisfaction of Purchaser and in accordance with all applicable Environmental Laws. (j) That Purchaser's Board of Director's will issue a conditional letter approving the proposed project within 90 days of the Effective Date. After the date this Agreement is fully executed, Seller agrees to allow Purchaser and its agents reasonable access to the Property for the purpose of conducting such environmental tests and investigations. Seller must approve any environmental test in advance, which shall not be unreasonably withheld, and Seller shall have the right to be present when any environmental test is being conducted. Purchaser shall indemnify and 7 8 hold Seller harmless with respect to any damage to the Property by reason of the environmental tests. Seller acknowledges and agrees that in the course of its investigations Purchaser and/or its agents may contact other parties including, without limitation, various governmental agencies, to obtain information abut the Property. Seller further acknowledges and agrees that Purchaser and/or its agents may comply with any reporting requirement contained in any Environmental Law. If Purchaser does not terminate the Agreement prior to the Closing Date and Purchaser elects to extend the closing by extensions provided for in Section 10(a)(ii), the Deposit shall be increased to the sum of $50,000. 9. Conditions Precedent. (a) The obligation of Purchaser under this Agreement to purchase the Property is subject to the satisfaction of the following: (1) Seller shall have delivered into escrow all of the following: (i) A grant deed in a form reasonably acceptable to Purchaser and Escrow Agent, conveying title to the Property to Purchaser, free and clear of all liens, encumbrances or other title exceptions, except those permitted in accordance with this Agreement. (ii) If not previously executed and delivered, a Certification That Seller Is Not A Foreign Person in the form of EXHIBIT C attached hereto. (iii) A duly executed assignment in form acceptable to Purchaser of all permits, licenses, governmental approvals and similar items relating to the use and development of the Property, together with the originals or copies of any such items in Seller's possession. (2) Purchaser shall not have disapproved the status of title to the Property in accordance with Section 4 & 6 (or any objections to title shall have been removed prior to a termination of this Agreement) and Title Company shall be in a position to issue an owner's policy of title insurance (the "Title Policy") which shall insure fee simple, indefeasible title to the Property in the name of Purchaser or its assignee for the amount of the Purchase Price. The Title Policy shall contain no exceptions to title to the Property other than those permitted in accordance with this Agreement and shall specifically insure against all mechanics liens. Purchaser may require as a condition to its obligations to purchase the Property that the Title Policy be an ALTA extended coverage policy rather than a standard coverage policy, and/or that it include such endorsements, including a survey endorsement, in such forms as are applicable and commonly required by institutional purchasers of real property. 8 9 (3) Purchaser shall not have disapproved the Property based upon its review of the matters referred to in Section 8 hereof. (4) The representations and warranties of Seller set forth in Section 7 shall be true and correct as of the Closing Date and Seller shall so represent in writing in a certificate satisfactory to Purchaser. (5) Seller shall not be in breach of any of its covenants hereunder. (6) The Board of Directors of Purchaser shall have authorized and approved the transaction provided for herein. (b) The obligation of the Seller under this Agreement to sell the Property is subject to the deposit into escrow with Escrow Agent of the Deposit and, if applicable, the Extension Deposits, as herein provided and of the balance of Purchase Price plus or minus, as the case may be, the net amount of any Closing adjustments provided for herein and Purchaser not being in default hereunder. 10. Closing; Expenses. (a) Subject to the provisions of Subsections (i) and (ii) below, the Closing Date shall be 150 days from the Effective Date; provided however, Purchaser may designate an earlier Closing Date by written notice delivered to Seller not less than three (3) business days prior to the originally scheduled Closing Date, provided that Seller may extend the Closing Date for up to 45 days for the purpose of effectively consummating a tax deferred exchange. The Closing shall be accomplished through, and with the assistance of, Escrow Holder, as herein provided. (i) If, on the Closing Date (as such date may have been accelerated or postponed by Purchaser in accordance with the provisions of Subsections 10(a) above or 10(a)(ii) below), or if Purchaser has made objections in accordance with Section 6 that have not been cured or waived, or if the Title Company is not able to confirm that it will issue the Title Policy as of the Closing in accordance with the applicable requirements described herein, then at Purchaser's sole option Purchaser may postpone the Closing not less than five (5) days or more than thirty (30) days to such date as may be designated by Purchaser in written notice to Seller, and such postponed date shall then be the Closing Date. (ii) In addition to Purchaser's right to postpone the Closing as provided in the previous sentence, on or before the Closing Date, at least ten (10) days before the Closing Date, Purchaser may postpone the Closing for one or more successive one-month periods by delivering written notices to Seller of such postponed Closing Date and contemporaneously depositing to Seller, Ten Thousand and no/100 Dollars ($10,000) 9 10 for each one-month postponement. Each such deposit (an "Extension Deposit") is to be paid to Seller as consideration for the extensions. Purchaser shall not without Seller's written consent extend the Closing Date more than three (3) months beyond the originally scheduled Closing Date. Said Extension Deposits are deemed to be non-refundable but applicable to the Purchase Price, except in the event of default by Seller. (b) Non delinquent rents (if any) and ad valorem taxes for the then current tax year shall be prorated as the Closing. If the Closing shall occur before the tax rate is fixed for the then current year, the apportionment of taxes shall be based upon the tax rate for the preceding year applied to the latest assessed valuation, and after the taxes are assessed for the then current year, Purchaser and Seller shall adjust the amount actually due by a new proration based on the new rate and upon demand the proper party shall promptly pay the differential in cash to the other party. The amount of any special assessments applicable to the Property, and not yet paid, shall be a credit against the Purchase Price. Notwithstanding anything to the contrary contained herein, the provisions of this Section 10(b) shall survive the Closing. (c) Except as otherwise specifically provided in this Agreement, all costs, fees and other expenses in connection with the transaction contemplated by this Agreement, other than the legal fees of each party's counsel in negotiating, preparing and consummating, this Agreement, which shall be paid by each respective party, shall be apportioned in accordance with accepted custom in the region where the Property is located. (d) Seller shall pay the cost of the Title Policy to the extent that such cost does not exceed the cost of a standard coverage policy. If Purchaser requires ALTA or extended coverage, Purchaser shall pay the incremental additional cost resulting from such requirement. 11. Termination; Default; Remedies. (a) In the event Seller has defaulted in the due and timely performance of its obligations under this Agreement, or in the event of a breach of Seller's representations and warranties in this Agreement (collectively "Seller's Default"), then (i) Purchaser may enforce specific performance of this Agreement, or may bring suit for damages against Seller, and may exercise any other right or remedy Purchaser may have at law or in equity by reason of such Seller's Default, and (ii) Escrow Agent shall return to Purchaser the Deposit, any additional deposits and any Extension Deposits held by Escrow Agent and Seller shall return to Purchaser every deposit of any kind (including, without limitation, the Deposit and any Extension Deposits) that was released to Seller. (b) In the event that this transaction fails to close by reason of a termination by Purchaser pursuant to Section 6 or 8 of this Agreement or any right of termination which Purchaser may have, or because any of the conditions to Purchaser's obligations. including those stated in Subsections 9(a)(1), (2) or (4) have not been 10 11 satisfied, then Escrow Agent shall return to Purchaser the Deposit (which shall include all deposits made other than Extension Deposits). (c) THE PARTIES ACKNOWLEDGE AND AGREE, BY INITIALING THIS SECTION IN THE SPACE PROVIDED, THAT ANYTHING IN THIS AGREEMENT TO THE CONTRARY NOTWITHSTANDING, IF THIS TRANSACTION FAILS TO CLOSE BECAUSE OF PURCHASER'S DEFAULT IN ITS OBLIGATIONS HEREUNDER, SELLER SHALL BE ENTITLED TO IMMEDIATE FULL CASH PAYMENT OF THE DEPOSIT, AND TO RETAIN ALL EXTENSION DEPOSITS, WHICH HAVE BEEN PAID TO SELLER, AS LIQUIDATED DAMAGES, WHICH SHALL BE SELLER'S SOLE REMEDY HEREUNDER IN THE EVENT OF SUCH DEFAULT BY PURCHASER. SELLER AND PURCHASER HEREBY AGREE THAT IT WOULD BE EXTREMELY DIFFICULT AT THIS TIME TO SET THE DAMAGES WHICH WOULD BE SUFFERED BY SELLER, AND THAT THE FOREGOING AMOUNTS ARE REASONABLE ESTIMATE OF THOSE DAMAGES. Seller's Initials: /s/ KH Purchaser's Initials: /s/ DR 12. Notices. All notices, demands and requests and other communication s required or permitted hereunder shall be in writing, and shall be deemed to be delivered, when received, if delivered personally, by private messenger or courier service or by facsimile, or whether actually received or not seventy-two (72) hours after the Deposit thereof in a regularly maintained receptacle for the United States mail, registered or certified, return receipt requested, postage prepaid, addressed to the parties at the following addresses: PURCHASER: Public Storage, Inc. P. O. Box 25050 Glendale, California 91221-5050 or 701 Western Ave., Suite 200 Glendale, CA 91201-2397 Attention: Evelyn L. Hubel, Escrow Manager Telephone: (818) 244-8080, Extension 162 Facsimile: (818) 244-0581 11 12 with copy to: David Ristig Acquisition Representative Public Storage, Inc. P. O. Box 25050 Glendale, California 91221-5050 or 701 Western Ave., Suite 200 Glendale, CA 91201-2397 Telephone: (818) 244-8080, Extension 168 Facsimile: (818) 244-0581 SELLER: California Jockey Club Attention: Ray Kuratek P.O. Box 5050 San Mateo, California 94402 Telephone: (415) 573-4669 Facsimile: (__) __________________ 13. As Is Purchase. Subject to the warranties and representations contained herein, Purchaser is buying the Property based upon its own inspection thereof, in its "As Is" condition, without warranty, express or implied. 14. Complete Agreement. This Agreement embodies the complete agreement between the parties hereto and cannot be modified, amended or terminated except by the written agreement of the parties. 15. Parties Bound. This Agreement shall be binding upon and inure to the benefit of Seller and Purchaser, and their respective heirs, personal representatives, successors and assigns. Purchaser may, prior to, at or after the Closing, assign its rights and obligations under this Agreement to any party with the prior written consent of Seller which shall not be unreasonably withheld. 16. Survival of Representations and Warranties. The representations and warranties set forth in this Agreement shall be continuing and shall survive the Closing for a period of one (1) year. 12 13 17. Commissions. Purchaser and Seller each represent and covenant to the other that they have not entered into any agreement, incurred any obligation or know of any facts which might result in an obligation for any party to pay a sales or brokerage commission or finder's fee for this transaction except for a commission to be paid to KTW Properties, Inc., which is to be paid only if this transaction closes and which commission shall be three percent (3%) of the Purchase Price and is the sole responsibility of Seller. Purchaser and Seller each agree to indemnify and hold the other harmless from any loss, liability, cost of expense, including reasonable attorneys' fees, arising from a breach of this representation and warranty, and Seller agrees to indemnify and hold Purchaser harmless from any loss, liability or expense, including reasonable attorneys' fees, arising from Seller's failure to pay the commission described above. 18. Attorneys' Fees. In any litigation between the parties to enforce any provision or right under this Agreement, the unsuccessful party covenants and agrees to pay to the successful party all costs and expenses incurred by the prevailing party in connection with the litigation including, but not limited to, reasonable attorneys' fees. 19. Purchaser's Approvals and Disapprovals. Purchaser's rights to approve or disapprove matters as provided for in this Agreement shall be in the sole discretion of Purchaser. No such approval or disapproval shall affect Seller's representations and warranties herein or waive any rights of Purchaser to rely upon any of the representations and warranties of Seller. 20. Time. Time is of the essence of this Agreement. 21. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 22. Governing Law. This Agreement is to be governed by and construed in accordance with the laws of the state where the Property is located. 23. Possession of Property, Risk of Loss. Possession of the Property shall be transferred on the Closing Date, as of the Closing. All risks of loss with respect to the Property shall be borne by Seller until the later of the transfer of title or the transfer of possession to Purchaser. 24. Restrictions on Other Property. Seller will not develop or operate as a "Self Storage Project" any real property presently owned by Seller and located within a five mile radius of the Property for a period of ten years commencing on the Effective Date. The term "Self Storage Project" means improvements containing more than 10,000 rentable square feet of individual storage rental units, partitioned for the exclusive use of individual tenants, with separate secure access. This shall not be intended to restrict the right of the California Jockey Club to provide storage for the exclusive use by the California Jockey Club, its members, employees, or its patrons. The foregoing restriction 13 14 shall be personal to the California Jockey Club and shall not bind future owners which are not affiliated with the California Jockey Club. 25. Further Assurances. From time to time, at Purchaser's request, whether on or after the close of escrow, and without further consideration, Seller shall execute and deliver any further instruments of conveyance and take such other actions as Purchaser may reasonably require to complete more effectively the transfer to Purchaser of the Property acquired under this Agreement. 26. Time for Signing. This Agreement shall be of no force and effect if not executed on behalf of Seller and delivered to Purchaser as so executed on or before June 26, 1996, or if not executed on behalf of Purchaser by a Vice President of Purchaser and delivered to Seller as so executed on or before the fifth business date after Purchaser's receipt of the Agreement executed on behalf of Seller. 27. Exchange. Purchaser shall cooperate with Seller in structuring this transaction as a tax-deferred exchange provided that any additional cost or liability thereby shall be borne by Seller. 14 15 28. Signatures of Parties. SELLER: (name of entity, if applicable) By: /s/ Kjell H. Qvale ------------------------------------- Name: Kjell Qvale Title: Chairman of the Board Date Executed: August 19, 1996 PURCHASER: PUBLIC STORAGE, INC. By: /s/ David Ristig ------------------------------------- Name: David Ristig Title: Acquisition Representative Date Executed: July 18, 1996 By: /s/ Hugh W. Horne ------------------------------------- Hugh W. Horne Vice President Date Executed: 7/18/96 15 16 EXHIBIT A Legal Description and Parcel Map A parcel of approximately 2.235 acres (97,357 square feet) including a building of approximately 50,000 square feet currently used as a Tennis Club located at 2222 South Delaware Street, San Mateo, California. AKA AP#035-321-080. [map here] 16 17 EXHIBIT B This is Exhibit B to the AGREEMENT FOR THE PURCHASE AND SALE OF REAL PROPERTY AND JOINT ESCROW INSTRUCTIONS by and between PUBLIC STORAGE, INC., as Purchaser and as Seller. The Lease affecting the Property is listed below: LEASE: 17 18 EXHIBIT C Certification That Seller Is Not A Foreign Person _________________________________________________________________________ ______________________________________________________________________________, is the Seller of certain real property under an Agreement for the Purchase and Sale of Real Property and Joint Escrow Instructions dated ___________________, 19__, involving Seller's real property located in ________, ________ Section 1445 of the Internal Revenue Code of 1986, as amended, provides that a buyer of a U.S. real property interest must withhold tax from its payments to the seller if the seller is a foreign person. To inform the buyer that withholding of tax is not required upon the sale of the property pursuant to the above-described agreement, the undersigned certifies [on behalf of Seller if an entity]: 1. Seller is not a foreign person as that term is used in Section 1445(b)(2) of the Internal Revenue Code of 1986, as amended, and the related regulations. 2. Seller's United States taxpayer identification number (social security number for individuals, employer identification number for others) is ______________________________________. 3. Seller's address is ___________________________________________ ___________________________ (home address for individuals, office address for entities). 4. Seller understands that this Certification may be disclosed to the Internal Revenue Service by the buyer and that any false statement included in this Certification could be punished by fine, imprisonment or both. Under penalty of perjury we declare that we have examined this certificate and to the best of our knowledge and belief it is true, correct, and complete and we further declare that we have authority to sign this document on behalf of Seller. Dated: __________, 1996 Name: Title: Name: Title: 18 EX-10.28 3 AMENDMENT TO AGREEMENT DATED JANUARY 31, 1997 1 EXHIBIT 10.28 AMENDMENT TO AGREEMENT FOR PURCHASE AND SALE OF REAL PROPERTY AND JOINT ESCROW INSTRUCTIONS This Amendment (the "Amendment") is made as of January 31, 1997 to that certain Agreement for Purchase and Sale of Real Property and Joint Escrow Instructions dated (for reference purposes only) July 18, 1996 (the "Agreement"). The terms of this Amendment are amended as follows: 1. The first sentence of Section 3(a), which reads as follows: "Purchasers will transmit a check for an amount equal to $10,000 of the Purchase Price (the "Deposit") to Escrow Agent within five business days after the Effective Date." shall be deleted and replaced by the following: "Purchaser will transmit to Escrow Agent a check for an amount equal to $10,000 within five business days after the Effective Date and a check for $40,000 on or before April 30, 1997. This $50,000 (the "Deposit") shall be applied to the Purchase Price." 2. The last two words of the first paragraph of Section 8 shall be deleted and the following language substituted therefore: "no later than the "Final Contingency Date" (which shall be June 1, 1997 unless extended as hereinafter provided), or such earlier dates as are specified below as the final date for certain determinations. If Seller is not notified on or before the applicable date that any of such determinations is negative, such 2 determination shall be deemed positive. If any of the determinations are negative, the Agreement will terminate in the absence of mutual agreement to the contrary." 3. Purchaser agrees that any soil tests, percolation tests and other studies and tests referred to in Section 8(b) shall be performed on or before April 30, 1997 and Purchaser shall make its determination with respect to all matters covered by Sections 8(b), 8(c), 8(e) and 8(f) by said date, provided, however, that an affirmative determination as of April 30, 1997 under Section 8(b), (c) or (f) shall not preclude a later termination of the Agreement by Purchaser prior to the Closing pursuant to any of such provisions if, on or after April 26, 1997, there occurs a natural event directly affecting the Property (e.g. flooding, earthquake) outside of the control of Purchaser which would have a material adverse effect on relevant factors initially taken into account by Purchaser in such affirmative determination. 4. With regard to Section 8(i), if the environmental tests disclose any Environmental Defect which will cost more than $25,000 to remedy but Seller does not elect to pay the portion of such cost in excess of $25,000 ($25,000 being the maximum amount which Seller may be required to expend), Purchaser may either pay the incremental cost in excess of $25,000 or terminate the Agreement in which event the Deposit shall be refunded. Seller acknowledges its obligation to credit up to the first $25,000 of any such cost against the Purchase Price. Purchaser agrees, notwithstanding anything to the contrary in Section 8(f), that Seller, apart from allowing a credit against the Purchase Price as of the Closing for remediation costs incurred or to be incurred by Purchaser, up to a maximum of $25,000, shall have no obligation to remedy any Environmental 2 3 Defect. It is further acknowledged that if Purchaser's environmental tests or investigations disclose an Environmental Defect, Purchaser may terminate this Agreement by virtue thereof on or before the Final Contingency Date if it cannot reasonably conclude with reasonable certainty, in Purchaser's discretion, that the cost of remediation will be less than $25,000. 5. The last sentence of Section 8 shall be deleted. 6. The first clauses of Section 9(a)(2) ending with the word "and" on line 3(a) is hereby deleted. 7. Section 9(a)(3) is hereby deleted. 8. Section 10(a) of the Agreement shall be amended in its entirety to read as follows: "(a) The Closing Date shall be the date which is 45 days after the Final Contingency Date, provided, however, that Seller may establish an earlier Closing Date by notice to Purchaser on or after the Final Contingency Date and at least 10 days prior to the Closing Date as specified therein. If, on the Closing Date (as otherwise established pursuant to the preceding paragraph) Purchaser has made timely objections in accordance with Section 6 which have not been cured or waived, or if the title Company is not able to confirm that it will issue the Title Policy as of the Closing in accordance with the applicable requirements described herein, then at Purchaser's sole option Purchaser may postpone the Closing not less than 3 4 five (5) days or more than thirty (30) days to such date as may be designated by Purchaser in written notice to Seller, and such postponed date shall then be the Closing Date. Purchaser may postpone the Final Contingency Date for three (3) successive one-month periods by delivering to Seller at least ten (10) days prior to the then scheduled Final Contingency Date written notice of such postponed Final Contingency Date and contemporaneously paying through escrow, for concurrent release to Seller, Ten Thousand and No/100 Dollars ($10,000) for each one-month postponement. Each such payment (an "Extension Deposit") is to be paid to Seller as consideration for the extensions. Said Extension Deposits are deemed to be non-refundable but applicable to the Purchase Price, except in the event of default by Seller." 9. A new Section 28 shall be added to the Agreement as follows: 28. "Copies of Survey Reports to Sellers. Purchaser shall transmit to Seller on or before February 7, 1997, a copy of the Survey obtained in accordance with Section 4. If this Agreement is terminated without Purchaser acquiring the Property, other than by reason of a default by Seller in the performance of its obligations hereunder, or a misrepresentation by Seller contained herein, then Purchaser, upon request by Seller, shall deliver to Seller copies of any further surveys of the Property and any reports concerning the environmental, soil or other conditions of the 4 5 Property, obtained by Purchaser, but only to the extent that such delivery will not breach any agreement entered into in good faith with the preparer of such surveys and/or reports." 10. It is agreed that the Title Report referred to in Section 6 has been approved by Purchaser to the extent provided in Purchaser's counsel's letter to Seller dated January 21, 1996. Purchaser shall either approve or disapprove the items not approved in such letter on or before February 28, 1997. If it disapproves any of such items on or before such date this Agreement will terminate (in the absence of mutual agreement to the contrary). Failure to disapprove such items on or before such date shall be deemed approval. 11. It is agreed that Section 24 of the Agreement shall be of no effect unless and until the Closing occurs. 12. Subject to the amendments herein contained, the Agreement shall remain in full force and effect. 13. It is acknowledged that Seller expects to accept reservations for scheduled events at the Property through June 30, 1997. 14. This Agreement any be executed simultaneously in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instruments. 5 6 15. Subject to the Amendment herein contained, the Agreement shall remain in full force and effect. CALIFORNIA JOCKEY CLUB By: /s/ Kjell H. Qvale -------------------- Its: Chair -------------------- PUBLIC STORAGE, INC. By: /s/ David Ristig ------------------- Its: Acq. Representative ------------------------- 6 EX-10.29 4 GROUND LEASE DATED NOVEMBER 22, 1996 1 Exhibit 10.29 GROUND LEASE Between CALIFORNIA JOCKEY CLUB, A REAL ESTATE INVESTMENT TRUST, as Landlord and BORDERS, INC., as Tenant Property: 2900 Block of El Camino Real San Mateo, California 2 TABLE OF CONTENTS
SECTION PAGE ---- 1. DEMISED PREMISES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2. TERM AND OPTIONS TO EXTEND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3. ANNUAL RENT - ADDITIONAL RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 4. REAL ESTATE TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 5. LANDLORD'S WORK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 6. TENANT'S WORK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 7. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 8. RENT COMMENCEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 9. LANDLORD'S REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 10. MAINTENANCE OF PROPERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 11. ALTERATIONS AND ADDITIONAL CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 12. UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 13. GOVERNMENTAL REGULATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 14. EXCULPATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 15. DAMAGE AND DESTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 16. EMINENT DOMAIN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 17. USE, ASSIGNMENT AND SUBLETTING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 18. INTENTIONALLY DELETED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 19. LANDLORD'S REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 20. BANKRUPTCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 21. COVENANT OF TITLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 22. LEASEHOLD MORTGAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 23. FEE MORTGAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 24. INDEMNIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 25. TENANT'S RIGHT TO CURE LANDLORD'S DEFAULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 25A. LANDLORD'S RIGHT TO CURE TENANT'S DEFAULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 26. HAZARDOUS MATERIAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 27. CONDITION OF PREMISES AT TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 28. HOLDING OVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 29. RIGHT OF FIRST REFUSAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 30. SIGNAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 31. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 32. PARTIAL INVALIDITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 33. ENTIRE AGREEMENT - APPLICABLE LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 34. SUCCESSORS AND ASSIGNS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 35. MEMORANDUM OF LEASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 36. BROKER'S REPRESENTATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 37. ESTOPPEL CERTIFICATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 38. CAPTIONS AND DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 39. SURVIVAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
i 3 40. DUE DILIGENCE CONTINGENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 41. SITE PLAN APPROVAL/PERMIT CONTINGENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 42. ADJACENT PROPERTY ACQUISITION CONTINGENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 43. FINANCING CONTINGENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 44. QUIET TITLE CONTINGENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 45. TIME OF ESSENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
EXHIBITS Exhibit A-1 Legal Description of Jockey Club Parcel Exhibit A-2 Legal Description of Williams Parcel Exhibit B Site Plan Showing Proposed Location of Tenant's Building and Improvements Exhibit C Annual Rent Exhibit D Criteria for Tenant Improvements Exhibit E Form of Assignment to Developer Exhibit F Permitted Title Exceptions ii 4 GROUND LEASE THIS GROUND LEASE ("Lease") is made and entered into as of this 22nd day of November, 1996 by and between CALIFORNIA JOCKEY CLUB, A REAL ESTATE INVESTMENT TRUST, having its principal office at 2600 Delaware Street, San Mateo, California 94403 (herein referred to as "Landlord") and BORDERS, INC., a Delaware corporation, having its principal office at 311 Maynard Street, Ann Arbor, Michigan 48104 (herein referred to as "Tenant"). W I T N E S S E T H : That in consideration of the rents, covenants and conditions herein set forth, Landlord and Tenant do hereby covenant, promise and agree as follows: 1. DEMISED PREMISES. Effective upon satisfaction or waiver of the contingencies set forth in Articles 40 through 43 inclusive hereof, Landlord hereby demises unto Tenant and Tenant rents from Landlord a certain parcel of land containing approximately two and one-half (2 1/2) acres (the "demised premises") which premises are located in the 2900 Block of El Camino Real in San Mateo, California. The demised premises consist of certain real property presently owned by Landlord and described in Exhibit A-1 attached hereto (the "Jockey Club Parcel") and certain real property presently owned by another party and described on Exhibit A-2 attached hereto (the "Williams Parcel"). Landlord will exercise its reasonable best efforts to acquire the Williams Parcel prior to this Lease becoming effective, in accordance with the provisions of Article 42 hereof. Tenant shall demolish any existing structures located on the demised premises, and construct thereon a building containing approximately twenty-five thousand (25,000) square feet of floor area ("Tenant's Building") together with a loading dock, trash compactor, dumpster pad, parking lot and other site improvements as generally depicted on the site plan attached hereto as Exhibit B (Tenant's Building and all other improvements on the demised premises being collectively referred to herein as the "Improvements"). Tenant shall have the right to change the configuration and/or location of Tenant's Building so long as Tenant's Building substantially conforms to the depiction on Exhibit B. Upon expiration or sooner termination of this Lease, title to the Improvements shall automatically vest in Landlord. The demised premises and the Improvements are collectively referred to herein as the "Property". 2. TERM AND OPTIONS TO EXTEND. (a) Initial Term. The term of this Lease shall commence upon the "Rent Commencement Date," as that term is defined in Article 8 hereof, and shall terminate on the 31st day of January following the twentieth (20th) anniversary of the Rent Commencement Date (the "Initial Term"). 1 5 (b) Option Periods. Tenant shall have eight (8) successive options to extend the term of this Lease for an additional period of five (5) years (hereinafter called "Option Period") on each such option, such extended term to begin respectively upon the expiration of the term of this Lease or of this Lease as extended and the same terms and conditions as herein set forth shall apply to each such extended term, except for the Annual Rent which shall be adjusted as set forth on Exhibit C. Upon the expiration of the eighth (8th) Option Period, Tenant shall have no further option to extend the term of this Lease. (c) Exercise of Option Periods. Tenant shall not have the right to exercise an Option Period at any time while Tenant is in default of this Lease. If Tenant shall elect to exercise an Option Period, it shall do so by giving written notice to Landlord not less than six (6) months prior to the expiration of the term of this Lease or of this Lease as extended; notwithstanding the foregoing, if Tenant does not exercise any Option Period in the time period or in the manner provided in this Article, such Option Period shall nevertheless continue in full force and effect and shall not lapse until fifteen (15) days after Tenant (and Tenant's Leasehold Mortgagee (as defined in Article 22), if any) has received written notice from Landlord that such deadline has passed and that Landlord has not received such notice. (d) Definition of "Lease term". The phrase "Lease term," as used in this Lease, shall mean the Initial Term of this Lease and any extension thereof pursuant to this Article 2. (e) Restrictions on Exercise of Options. Landlord acknowledges that following the mutual execution and delivery of this Lease, Tenant intends to assign this Lease to a limited liability company (the "Developer") which will construct Tenant's Building and thereafter lease Tenant's Building and the demised premises to Tenant. In connection with such assignment Tenant, Developer and Tenant will execute and deliver an Assignment of Ground Lease (the "Assignment") substantially in the form attached hereto as Exhibit E, which Assignment contains restrictions on the Developer's and any subsequent assignee's exercise of Option Periods. Landlord agrees to execute and deliver the Acknowledgement and Consent to the Assignment to Tenant and Developer within ten (10) days following full execution of the Assignment and written request and to be bound by the terms thereof, including but not limited to the restrictions on exercise of the Option Periods set forth therein. 3. ANNUAL RENT - ADDITIONAL RENT. (a) Annual Rent. Tenant shall, during the Lease term, pay to Landlord, at such place as Landlord shall designate in writing, from time to time, without demand therefor, and without deduction or offset except as specifically permitted in this Lease, the amounts set forth on Exhibit C ("Annual Rent"), unless abated or diminished as hereinafter 2 6 provided. Annual Rent shall be paid in equal monthly installments on the first day of each month, in advance, commencing upon the first day of the Lease term; provided, however, in the event the first day of the Lease term shall not be the first day of a calendar month, then the Annual Rent for such month shall be prorated on a daily basis. (b) Additional Rent. All amounts which Tenant is required to pay pursuant to this Lease (other than Annual Rent), together with any fine, penalty, interest and costs which may be added for nonpayment or late payment thereof, shall constitute additional rent (referred to herein as "Additional Rent"). If Tenant fails to pay any Additional Rent due under this Lease, then Landlord shall have the right to pay the same and shall have all of the rights, powers and remedies with respect thereto as are provided herein or by law in the case of nonpayment of Annual Rent. (c) Net Lease. Except as otherwise set forth in this Lease, Landlord shall not be required to make any payment of any kind with respect to the Property nor shall Landlord be required to incur any obligation or liability with respect to this Lease or the ownership, construction, operation, maintenance or repair of the Property. 4. REAL ESTATE TAXES. (a) Payment. Commencing on the Rent Commencement Date, Tenant shall pay all Taxes (as defined below) not later than ten (10) days prior to the date upon which such Taxes become delinquent. Landlord shall cooperate with Tenant to cause all tax bills to be sent directly to Tenant from the assessing agency; provided, that until such change has been effected, Landlord shall forward all tax bills for the Property to Tenant promptly following receipt thereof. Upon Landlord's written request, Tenant shall provide Landlord with proof of payment of Taxes. For purposes of this paragraph, if any assessment is payable in installments, Tenant shall have the right to pay any installment as and when such installment becomes due and payable. Tenant's liability for Taxes shall be prorated for the years in which this Lease commences and terminates. (b) "Taxes" Defined. "Taxes" shall mean all real and personal property taxes, general and special assessments, and other charges of every description levied on or against the Property, the leasehold estate created hereunder, any subleasehold estate in the Property, any portion thereof, and any rent and other charges payable hereunder or under any sublease of the Property. Notwithstanding the foregoing, "Taxes" shall not include any franchise, excise, gift, estate, inheritance, succession, or transfer tax of Landlord in connection with this Lease or Landlord's rights in the Property. (c) Challenge. Should either Landlord or Tenant initiate proceedings to contest the validity or amount of any Taxes levied against the Property, the other party will cooperate in such proceedings and should such proceedings be successful, Tenant shall 3 7 be entitled to any tax refund or future abatement, after deducting therefrom payment of all reasonable out-of-pocket expenses incurred by Landlord in any such proceeding. Neither party shall initiate proceedings to contest the validity or amount of any Taxes without first paying the disputed Taxes or otherwise taking all actions reasonably required to protect the other party's interest in the Property. 5. LANDLORD'S WORK. The parties acknowledge the demised premises will be delivered in an "as is" condition, except for the following items which shall be Landlord's obligation to perform at its sole cost and expense ("Landlord's Work"): Following the satisfaction or waiver of the contingencies set forth in Articles 40 through 44 inclusive below, Landlord shall remove all then-existing Hazardous Materials (as defined in Article 26 below) as shown in the Phase II Environmental Report to be prepared by Landlord from the demised premises and restore the surface of the demised premises to its condition existing prior to such removal, and shall provide Tenant with a certification from the party performing the remediation of Hazardous Materials showing that all Hazardous Materials required to be removed or abated pursuant to this Section 5 have been removed or abated in accordance with applicable law. Landlord shall deliver the demised premises to Tenant, with all of Landlord's Work completed, on or before March 1, 1997. Notwithstanding anything to the contrary set forth herein, Landlord shall not be obligated to remove any such Hazardous Materials which are in compliance with applicable law and whose presence would not in any manner interfere with Tenant's ability to secure all permits and authorizations required to develop and use the Property for Tenant's intended use or materially interfere with Tenant's use and enjoyment of the Property; provided, Landlord shall remain liable for removal of any such Hazardous Materials should the presence of any such Hazardous Materials materially interfere with Tenant's use and enjoyment of the Property. Further, if the estimated cost of Landlord's Work shall exceed Two Hundred Thousand Dollars ($200,000), Landlord shall have the right to terminate this Lease in lieu of performing Landlord's Work unless Tenant shall agree to pay all costs of Landlord's Work in excess of Two Hundred Thousand Dollars ($200,000). Further notwithstanding anything to the contrary set forth herein, Landlord shall not be obligated to remove or abate any asbestos or asbestos containing materials contained within the buildings located on the Williams Parcel. 6. TENANT'S WORK. (a) Definition. Tenant shall at its sole cost and expense construct the Improvements, install such trade fixtures, and perform such other work as may be necessary for Tenant to open for business at the demised premises or to provide improvements for sublease to subtenants ("Tenant's Work"). (b) Plans and Specifications. Prior to commencement of Tenant's Work, Tenant shall submit plans and specifications for the Improvements to Landlord for its approval, which shall not be withheld or delayed so long as such plans and specifications generally conform to the Criteria for Tenant Improvements attached hereto as Exhibit D. Landlord shall have a period of fifteen (15) business days within which to either approve 4 8 such plans and specifications or to make comments and changes thereon. If Landlord does not respond to Tenant's submission of plans and specifications within such fifteen (15) day period, then Landlord shall be deemed to have approved the same. If Landlord responds by making reasonable comments to the proposed plans and specifications for the Improvements, then Tenant shall revise the plans and specifications in accordance with Landlord's comments and resubmit them to Landlord for approval within fifteen (15) business days from the date of receipt of written comments from Landlord. Landlord shall then have ten (10) business days to approve such revised plans and specifications. (c) Liens. Tenant agrees to keep the Property free and clear of all liens arising out of, or claimed by reason of, any work performed, material furnished or obligations incurred by or at the insistence of Tenant, and to indemnify and save Landlord harmless from all such liens or claims of lien and all attorneys' fees or other costs and expenses incurred by reason thereof. Should Tenant fail to fully discharge any lien or claim of lien within thirty (30) days after written notice from Landlord, Landlord may, at its option, pay the same or any part thereof, and the amount of such payment shall be due and owing to Landlord from Tenant as of the date of such payment. No liens of any character whatsoever created or suffered by Tenant shall in any way extend, attach to or affect the rights of Landlord in the demised premises, or the Property. 7. INSURANCE. (a) Liability Insurance. Tenant shall maintain, or shall cause to be maintained by its subtenant, during the entire term of this Lease and any extension thereof, a policy of public liability and property damage insurance insuring the Property against any and all claims for personal injury, including property damage in, on or about the demised premises in which aggregate limits of public liability and property damage coverage shall not be less than Two Million ($2,000,000.00) Dollars. Such policy shall name Landlord and Landlord's mortgagee (and any Leasehold Mortgagee at its request) as additional insured, and shall contain a clause that the insurer will not cancel or change the insurance without first giving Landlord, or any Leasehold Mortgagee, thirty (30) days prior written notice. (b) All-Risk Insurance. Tenant shall maintain, or shall cause to be maintained by its subtenant, during the entire term of this Lease and any extension thereof, a policy of all-risk property damage insurance upon Tenant's Building in an amount equal to the replacement value of Tenant's Building above the foundation walls. The policy of insurance pursuant to this Article 7(b) shall insure and be payable to Tenant and shall provide for release of insurance proceeds to Tenant for restoration of loss. Such policy shall name Landlord as additional insured and may also name any Leasehold Mortgagee, upon its request, as an additional insured as its interest may appear, by standard mortgagee clause if obtainable. Such policy or policies shall provide that the policy will 5 9 not be cancelled except after thirty (30) days written notice to the Landlord and any Leasehold Mortgagee. To the extent that Tenant is obligated to rebuild Tenant's Building following damage or destruction thereof, and subject to any superior rights of the Leasehold Mortgagee, any proceeds of the insurance described herein shall be deposited into a construction disbursement escrow mutually acceptable to the parties and shall be disbursed on a progress payment basis during the course of construction in accordance with standard industry practice. (c) Worker's Compensation Insurance. Tenant shall maintain, or cause to be maintained by its subtenant, during the entire term of this Lease and any extension thereof, a policy of worker's compensation insurance as required by law. (d) Builder's Risk Insurance. Before commencement of any demolition or construction, Tenant shall procure, and shall maintain in force until completion and acceptance of the work, "all risks" builder's risk insurance including vandalism and malicious mischief, in form and with a company reasonably acceptable to Landlord, covering improvements in place and all materials and equipment at the job site furnished under contract, but excluding contractor's, subcontractor's, and construction manager's tools and equipment and property owned by contractor's or subcontractor's employees. (e) General. (1) The insurance coverages required hereunder shall be primary insurance as to all claims thereunder and shall be carried with an insurance company or companies licensed to do business in the state in which the demised premises are located and having a Best's Insurance Reports rating of A-X or better. Such insurance may be carried under a blanket policy or policies covering other liabilities and locations of the Tenant. From time to time, but not less frequently than annually, Tenant shall furnish Landlord such evidence as Landlord may require to indicate that the foregoing insurance is in full force and effect and that the premiums therefor have been paid and all renewal policies shall be delivered to Landlord no less than thirty (30) days prior to the date of expiration of the then existing policy. Notwithstanding the above, Tenant (or its subtenant, if applicable) may self-insure any of the insurance obligations hereunder during any period of time in which the net worth of the insuring party (or a guarantor thereof) exceeds One Hundred Million Dollars ($100,000,000.00). (2) Landlord and Tenant hereby release and discharge each other and any officer, agent, employee or representative of such party, of and from any liability whatsoever arising from loss, damage or injury for which insurance (providing waiver of liability and containing waiver of subrogation) is carried, or for which a program of self-insurance is maintained as allowed in this Lease, by 6 10 the party at the time of such loss, damage, or injury to the extent of any recovery by the injured party under such insurance or to the extent of the insurance that would otherwise have been required hereunder if Tenant self-insures. 8. RENT COMMENCEMENT. The Rent Commencement Date shall be the earlier of (a) the date Tenant (or its subtenant) opens for business at the demised premises, or (b) the date which is two hundred ten (210) days after Landlord has delivered possession of the demised premises to Tenant with all of Landlord's Work (except any ongoing monitoring of Hazardous Materials conditions) completed. 9. LANDLORD'S REPRESENTATIONS AND WARRANTIES. Landlord represents, warrants and covenants that: (a) Prior to the Rent Commencement Date, Landlord shall not make any further additions or modifications to the demised premises or to the buildings located thereon other than normal maintenance and repair. (b) Intentionally deleted. (c) Landlord is a duly constituted and validly existing real estate investment trust under the laws of the State of Delaware, duly qualified to do business in the state in which the demised premises are located, and has the full power to carry out the transactions contemplated by this Lease. (d) All partnership or corporate and other proceedings required to be taken on the part of Landlord to authorize Landlord to execute and deliver this Lease and to consummate the transaction contemplated have been duly and validly taken. (e) Intentionally deleted. (f) The execution, delivery and performance of the Lease will not conflict in any way with Landlord's partnership or corporate documents, and will not conflict or result in a breach or default under any note, lease, mortgage, indenture, contract or commitment to which Landlord is a party or by which Landlord may be bound. (g) The demised premises are not located in a flood hazard zone or wetland area. (h) There are no pending or threatened lawsuits of any nature which in any way affect title to the demised premises, affect the organization or solvency of Landlord, affect the validity and enforceability of this Lease, or affect the rights of the Tenant under the terms of this Lease. 7 11 (i) Intentionally deleted. (j) There is no other lease applicable to any portion of the demised premises, nor are the demised premises subject to any reciprocal operating agreement, cross easement agreement, restrictive covenants, or any other similar document except as set forth on Exhibit F attached hereto. 10. MAINTENANCE OF PROPERTY. Tenant shall make and pay for (or cause its subtenant to make and pay for) all maintenance, replacement and repair necessary to keep the Property in a good state of repair and in tenantable condition. Upon advance written notice to Tenant and any subtenant of Tenant, and during normal business hours, Landlord shall have the right to inspect the structural, mechanical and roofing components of Tenant's Building. Tenant shall not commit or permit waste on the Property. Tenant waives the provisions of Sections 1932(1), 1941 and 1942 of the California Civil Code or any amendments thereto or any similar law, statute or ordinance now or hereafter in effect. 11. ALTERATIONS AND ADDITIONAL CONSTRUCTION. Tenant, or any subtenant, may at any time and from time to time, at its expense, make alterations to Tenant's Building provided that (i) the fair market value of Tenant's Building shall not be lessened thereby, (ii) the structural integrity of Tenant's Building shall not be adversely affected thereby, (iii) the character of Tenant's Building shall remain primarily retail and/or office in nature unless Landlord otherwise approves (such approval not to be unreasonably withheld or delayed) and (iv) such work shall be expeditiously performed and completed in a good and workmanlike manner and in compliance with all applicable legal requirements. Tenant agrees to keep the Property free and clear of all liens arising out of, or claimed by reason of, any work performed, material furnished or obligations incurred by or at the insistence of Tenant, and to indemnify and save Landlord harmless from all such liens or claims of lien and all attorneys' fees or other costs and expenses incurred by reason thereof. Should Tenant fail to fully discharge any lien or claim of lien within thirty (30) days after written notice from Landlord, Landlord may, at its option, pay the same or any part thereof, and the amount of such payment shall be due and owing to Landlord from Tenant as of the date of such payment. No liens of any character whatsoever created or suffered by Tenant shall in any way extend, attach to or affect the rights of Landlord in the demised premises, or the Property. 12. UTILITIES. Landlord covenants and agrees that, as of date hereof, gas, electric, telephone, water, sewer and other utilities are available at the property line of the demised premises. 13. GOVERNMENTAL REGULATIONS. Tenant shall observe and comply with all requirements, rules, orders and regulations of the federal, state and municipal governments or other duly constituted public authority affecting the Property or Tenant's use thereof, including but not limited to compliance with the Americans with Disabilities Act. Tenant shall have the right, however, to contest, without cost to Landlord, the validity or application of any such rule, 8 12 order or regulation required to be complied with by Tenant in accordance with the foregoing, and may postpone compliance therewith so long as such contest does not subject Landlord to criminal prosecution or civil penalty or liability, or adversely affect Landlord's revisionary interest in the Property for non-compliance therewith and further provided Tenant pays all fines, penalties and other costs imposed on Landlord as a result of such non-compliance by Tenant. 14. EXCULPATION. The liability of Landlord for Landlord's obligations under this Lease shall be limited to Landlord's interest in the Property, and Tenant shall look solely to the interest of Landlord, its successors and assigns, in the Property, for the satisfaction of each and every remedy of Tenant against Landlord. Tenant shall not look to any of Landlord's other assets seeking either to enforce Landlord's obligations under this Lease, or to satisfy any money or deficiency judgment for Landlord's failure to perform such obligations. From and after the date of this Lease, if Landlord shall fail to perform any covenant, term or condition of this Lease upon Landlord's part to be performed, and as a consequence of such default, Tenant shall recover a money judgment against Landlord, such judgment shall be satisfied solely out of (i) the proceeds of sale received upon execution of such judgment and levy thereon against the right, title and interest of Landlord and the buildings and improvements from time to time on the Property, (ii) the rents or other income from the Property receivable by Landlord, and/or (iii) any condemnation awards or insurance proceeds received by Landlord in connection with all or any portion of the Property. The provisions contained in the preceding sentence are not intended to, and shall not, (a) limit any right that Tenant might otherwise have to obtain injunctive relief against Landlord or Landlord's successors-in-interest, or with respect to any other action or remedy which may be accorded Tenant under the terms of this Lease, subject to the limitations contained in the preceding sentence, (b) excuse any default or other breach on Landlord's part under this Lease, or (c) render Tenant liable for the obligations or other liabilities of Landlord to others. 15. DAMAGE AND DESTRUCTION. (a) Obligation to Rebuild. In the event that, at any time during the Lease term, Tenant's Building shall be damaged or destroyed (partially or totally) Tenant shall, at its expense, promptly and with due diligence, either (i) repair, rebuild and restore the same, as nearly as practicable, to the condition existing just prior to such damage or destruction, or (ii) at Tenant's option, repair, rebuild and restore the same for the same use and purposes or any other use permitted under this Lease, but in accordance with such plans and specifications as are then generally in use by any existing or proposed tenant or tenants in Tenant's Building; provided, however (i) the Improvements as repaired, rebuilt or replaced will have a value not less than their value just prior to said loss, and (ii) the character of the repaired, rebuilt or replaced premises shall be primarily retail and/or office in nature unless Landlord otherwise approves (such approval not to be unreasonably withheld or delayed). 9 13 (b) Option to Terminate. It is understood and agreed that if Tenant's Building is damaged or destroyed within two (2) years of the then scheduled expiration date of the Lease term (including any extension thereof), and if the extent of such damage or destruction is such that the cost of restoration would exceed fifty percent (50%) of the amount it would have cost to replace Tenant's Building on the Property in its entirety at the time such damage or destruction took place, then, and in either of such event, Tenant may terminate this Lease as of the date of such damage or destruction by giving written notice to Landlord within ninety (90) days after the date of the casualty, specifying a date of termination within ninety (90) days after the date of such notice. If Tenant so elects to terminate, then Tenant shall utilize insurance proceeds to pay off and discharge any Leasehold Mortgage and any remaining insurance proceeds shall be paid to Landlord. Upon such termination, and at the request of Landlord, Tenant will clear the Improvements from the demised premises at Tenant's expense. 16. EMINENT DOMAIN. (a) Tenant's Building/Ingress and Egress. In the event that the points of ingress and egress to the public roadways, substantially as depicted on Exhibit B, shall be materially impaired by a public or quasi-public authority, so as to render, in Tenant's sole and reasonable opinion, the demised premises unsuitable for its intended purpose, Tenant shall have the option to terminate this Lease as of the date Tenant shall be deprived or denied thereof. In the event that more than ten percent (10%) of Tenant's Building or the parking areas on the demised premises shall be expropriated by public or quasi-public authority, Tenant shall have the option to terminate this Lease as of the date Tenant shall be dispossessed from the part so expropriated by giving written notice to Landlord of such election so to terminate within ninety (90) days from the date of such dispossession. (b) Restoration. In the event of an expropriation of any portion of Tenant's Building or the parking areas on the demised premises, and if this Lease shall not be terminated as provided above, this Lease shall continue as to that portion of the demised premises which shall not have been expropriated or taken, and Tenant shall, subject to available condemnation proceeds, promptly and with due diligence, restore Tenant's Building, as nearly as practicable, to a complete unit of like quality and character as existed just prior to such expropriation. To the extent Tenant is required to restore Tenant's Building hereunder, and subject to any superior rights of the Leasehold Mortgagee as to proceeds allocable to the Improvements, any proceeds of the condemnation shall be deposited into a construction disbursement escrow mutually acceptable to the parties and shall be disbursed on a progress payment basis during the course of construction in accordance with standard industry practice. Annual Rent shall be reduced in the proportion that the value of the portion of the demised premises so expropriated shall bear to the value of the demised premises prior to such expropriation, such reduction to be effective as of the date of expropriation. For a period of thirty (30) 10 14 days following any such expropriation, Landlord and Tenant shall negotiate in good faith to determine the amount of any reduction in Annual Rent. If Landlord and Tenant are unable to agree upon the amount of any reduction in Annual Rent, such reduction shall be determined as follows: Within ten (10) business days after written demand by one party on the other, Landlord and Tenant shall each appoint, and notify the other in writing of the appointment of, an MAI appraiser having not less than five (5) years experience appraising commercial properties in the San Francisco Bay Area. The two appraisers shall promptly meet and attempt to agree upon a rent reduction, and the determination of such appraisers shall be binding upon Landlord and Tenant. If either party shall fail to appoint an appraiser, the decision of the single appraiser appointed by the other party shall be binding upon Landlord and Tenant. If the appraisers are unable to agree upon a rent reduction within thirty (30) days after the end of the ten (10) business day period set forth above, they shall jointly select a third appraiser meeting the qualifications set forth above and they shall each submit to such appraiser their final determinations ("Final Determinations") of an appropriate rent reduction. If the two appraisers shall fail to appoint a third appraiser, the third appraiser shall be appointed by the presiding judge of the Superior Court in which the demised premises are located upon application of either Landlord or Tenant. The third appraiser shall then independently determine the appropriate rent reduction, which shall in no event be less than the smallest reduction set forth in the Final Determinations or greater than the largest reduction set forth in the Final Determinations, and such determination shall be binding upon Landlord and Tenant. Each party shall pay the cost of its own appraiser, and the parties shall share equally the cost of the third appraiser. (c) Termination. In the event this Lease shall be terminated pursuant to this Article 16, any Annual Rent, Additional Rent and any other charges paid in advance shall be refunded to Tenant and Tenant shall have an additional thirty (30) days, rent free, within which to remove its personal property, inventory and trade fixtures from the demised premises. Tenant shall repair any damage to the demised premises caused by removal of its trade fixtures. Nothing herein contained shall be construed as preventing Tenant from being entitled to any separate award made to Tenant for the taking of any personal property, inventory or trade fixtures of Tenant, or from claiming its award directly against the condemnor. (d) Condemnation Award - Lease Not Terminated. In the event of a condemnation of any portion of the Tenant's Building or the Improvements and if this Lease is not terminated, the award paid by the condemning authority (after payment of expenses incurred in connection with collecting the same) shall be allocated as follows: (1) First, Tenant shall receive so much of the award allocable to the Improvements as is necessary to restore the Improvements and, (i) during the first twenty (20) years of the term of this Lease, for the value of the Improvements taken not to exceed the outstanding principal balance of any note secured by the 11 15 Leasehold Mortgage, and (ii) during any Option Period, for the unamortized cost of any improvements or alterations to the Property constructed after the completion of the initial Improvements contemplated by Article 1 of this Lease; (2) Second, Tenant shall receive one-half (1/2) of any portion of the award allocable to the value of the leasehold estate created hereunder; and (3) Third, Landlord shall receive the balance of the award. (e) Condemnation Award - Lease Terminated. In the event of a condemnation and this Lease is terminated as herein provided, the award paid by the condemning authority (after payment of expenses incurred in connection with collecting the same) shall be allocated as follows: (1) First, to the extent the award is allocable to the Improvements, an amount shall be paid to the Leasehold Mortgagee, such amount not to exceed the balance due on any note secured by the Leasehold Mortgage; and (2) Second, to the extent that the award is rendered during the Initial Term of this Lease and is allocable to the Improvements, the Tenant shall receive that proportion of the amount of the award remaining after the payment under subparagraph (1) that the number of months remaining in the Initial Term bears to two hundred forty (240); (3) Third, to the extent that the award is rendered during any Option Period and is allocable to the Improvements, the Tenant shall receive the amount of the award equal to the unamortized cost of any improvements or alterations to the Property constructed after completion of the initial Improvements contemplated by Article 1 of this Lease, to the extent such amount remains after payment under subparagraph (1); (4) Fourth, Tenant shall receive one-half (1/2) of any portion of the award allocable to the value of the leasehold estate created hereunder; and (5) Fifth, the Landlord shall receive the balance of the award. (f) In the event of any dispute between Landlord and Tenant concerning any matters set forth in this Article 16, Landlord and Tenant agree to negotiate in good faith for a period of thirty (30) days from the date either party notifies the other in writing of the existence of such dispute, in order to attempt to resolve such dispute. If the parties are unable to resolve the dispute through negotiation, the matter shall be submitted to arbitration upon the written request of one party and the service of that request on the other party within ten (10) days following the end of such thirty (30) day period. The 12 16 parties may agree on one arbitrator. If they cannot agree on one arbitrator, there shall be three: one named in writing by each of the parties within five (5) days after demand for arbitration is given, and a third chosen by the two appointed. Should either party refuse or neglect to join in the appointment of the arbitrator(s) or to furnish the arbitrator(s) with any papers or information demanded, the arbitrator(s) may proceed ex parte. A hearing on the matter to be arbitrated shall take place before the arbitrator(s) in the County of San Mateo, State of California, at the time and place selected by the arbitrator(s). The arbitrator(s) shall select the time and place promptly and shall give each party written notice of the time and place at least thirty (30) days before the date selected. At the hearing, any relevant evidence may be presented by either party, and the formal rules of evidence applicable to judicial proceedings shall not govern. Evidence may be admitted or excluded in the sole discretion of the arbitrator(s). The arbitrator(s) shall hear and determine the matter and shall execute and acknowledge the award in writing and cause a copy of the writing to be delivered to each of the parties. If there is only one arbitrator, his or her decision shall be binding and conclusive on the parties, and if there are three arbitrators, the decision of any two shall be binding and conclusive. The submission of a dispute to the arbitrator(s) and the rendering of a decision by the arbitrator(s) shall be a condition precedent to any right of legal action on the dispute. A judgment confirming the award may be given by any Superior Court having jurisdiction, or that Court may vacate, modify, or correct the award in accordance with the prevailing provisions of the California Arbitration Act. The costs of the arbitration shall be borne equally by the parties. 17. USE, ASSIGNMENT AND SUBLETTING. (a) Use. The demised premises may be used for any lawful purpose; provided, however, that for the first twelve (12) months of the Initial Term the demised premises shall be used for a Borders Books & Music store and for the balance of the Initial Term the demised premises shall be used only for retail use and any office or other use incidental to such retail use. (b) Assignment and Subleasing. Tenant may assign this Lease, or sublet the whole or any part of the demised premises, for any use which is not prohibited or limited by the terms hereof, but if it does so, Tenant shall remain liable and responsible under this Lease. Further, no assignment shall be effective until and unless the assignee has assumed the obligations of Tenant under this Lease which accrue from and after the effective date of assignment. Tenant shall notify Landlord of the identity of any assignee or sublessee, but Tenant's failure to so notify the Landlord shall not be deemed a default under this Lease. Any assignment of this Lease or subletting of the demised premises without notification to Landlord shall not be effective as to Landlord and Landlord shall not be bound thereby until receipt of such notification and, in the case of an assignment, a copy of the assignment and assumption has been furnished to Landlord. Nothing in this Lease shall require Tenant to open or operate in the demised premises. 13 17 (c) Non-Disturbance of Sublessee. Upon request of Tenant, Landlord shall execute and deliver to a sublessee under an Approved Sublease (as defined below) an agreement to the effect that notwithstanding any termination of this Lease, such sublease and the rights of the sublessee thereunder shall not be disturbed by Landlord but shall continue in full force and effect so long as such sublessee shall continue to observe and perform all of its obligations under such sublease and shall attorn to Landlord in writing. A sublease shall be considered an "Approved Sublease" if it (1) obligates the sublessee to pay basic or minimum rent in an amount not less than the Annual Rent payable under this Lease, (2) obligates such sublessee to pay the Additional Rent payable hereunder, and (3) demises and subleases the entirety of the demised premises. (d) Performance by Sublessee. Landlord acknowledges and agrees to accept performance of Tenant's obligations under this Lease by a sublessee of Tenant. 18. TENANT'S DEFAULT. The occurrence of any of the following shall be a default on the part of Tenant hereunder: (a) Failure to pay Annual Rent or Additional Rent at the times or in the manner herein provided, when such failure shall continue for a period of ten (10) days after written notice thereof from Landlord to Tenant; any such notice shall be deemed to be the notice required under California Code of Civil Procedure Section 1161. No such notice shall be deemed a forfeiture or a termination of this Lease unless Landlord expressly so elects in such notice; (b) Failure to perform any non-monetary provision of this Lease when such failure shall continue for a period of thirty (30) days, or such other period as is expressly set forth herein, after written notice thereof from Landlord to Tenant; any such notice shall be deemed to be the notice required under California Code of Civil Procedure Section 1161; provided that if the nature of the default is such that it will reasonably take more than thirty (30) days to cure, Tenant shall not be in default so long as it promptly commences and diligently prosecutes such cure to completion. No notice of default shall be deemed a forfeiture or a termination of this Lease unless Landlord expressly so elects in such notice; or (c) The abandonment of the demised premises. 19. LANDLORD'S REMEDIES. If Tenant is in default under any provision of this Lease, Landlord shall have the following rights and remedies: (a) terminate this Lease, and all of the rights of Tenant under this Lease, and Tenant shall surrender the demised premises to Landlord in accordance with Article 27 hereof; 14 18 (b) cure the default for the account of and at the expense of Tenant, and Tenant shall reimburse Landlord upon demand for the reasonable cost of curing Tenant's default, plus interest at the Default Rate (as such term is defined in Article 25 hereof); (c) re-enter the demised premises by summary proceedings or otherwise, expel Tenant and remove all property therefrom, use commercially reasonable efforts to relet said premises and receive the rent therefrom; provided, however, Tenant shall remain liable for Annual Rent and Additional Rent less any avails of reletting, after deducting from such avails the reasonable cost of obtaining possession of the demised premises and the reasonable cost of any repairs and alterations necessary to prepare it for reletting, and other costs incurred by landlord in connection therewith. Any and all monthly deficiencies so payable by Tenant shall be paid monthly on the date herein provided for the payment of rent; (d) pursue the remedy described in California Civil Code Section 1951.4 (Lessor may continue lease in effect after Lessee's breach and abandonment and recover rent as it becomes due, and acts of maintenance or preservation and efforts to relet shall not constitute a termination of Tenant's right of possession). Accordingly, if Landlord does not elect to terminate this Lease on account of any default by Tenant, Landlord may, from time to time, without terminating this Lease, enforce all of its rights and remedies under this Lease, including the right to recover all rent as it becomes due; (e) even though Landlord may have re-entered the demised premises, Landlord may thereafter elect to terminate this Lease and all of the rights of Tenant in or to this Lease and the demised premises; or (f) pursue any and all other rights or remedies available at law or equity. Any notices of default by Landlord to Tenant shall constitute the notice required by Section 1161 of the California Code of Civil Procedure. Should Landlord elect to terminate this Lease under any of the provisions above, Landlord shall be entitled to recover from Tenant as damages any and all of the following: (w) the worth at the time of award of any unpaid Annual Rent, Additional Rent and other sums due hereunder (collectively, "Rent") that had been earned at the time of such termination; plus (x) the worth at the time of award of the amount by which the unpaid Rent that would have been earned after termination until the time of award exceeds the amount of rental loss Tenant proves could have been reasonably avoided; plus (y) the worth at the time of award of the amount by which the unpaid Rent for the balance of the term after the time of award exceeds the amount of such rental loss Tenant proves could be reasonably avoided; plus (z) such other reasonable amounts in addition to or in lieu of the foregoing as may be permitted from time to time by the laws of the State of California. 15 19 As used in Subparagraphs (w) and (x) above, the "worth at the time of award" is computed by allowing interest at the Default Rate. As used in Subparagraph (y) above, the "worth at the time of award" is computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). 20. BANKRUPTCY. If a petition of bankruptcy shall be filed by or against Tenant, Tenant shall become bankrupt, Tenant shall make a general assignment for the benefit of creditors, or in any proceeding based upon the insolvency of Tenant, a receiver or trustee of all or a substantial portion of the property of Tenant shall be appointed and shall not be discharged within ninety (90) days after such appointment, then Landlord may terminate this Lease by giving written notice to Tenant of its intention to do so; provided, however, neither bankruptcy, insolvency, an assignment for the benefit of creditors nor the appointment of a receiver or trustee shall affect this Lease or permit its termination so long as the covenants on the part of Tenant to be performed shall be timely performed by Tenant, or someone claiming under it. 21. COVENANT OF TITLE. (a) Quiet Enjoyment. Landlord covenants, represents and warrants that it has full right and power to execute and perform this Lease and to grant the estate demised herein and that subject to the terms hereof Tenant, on payment of the Annual and Additional Rent and performance of the covenants and agreements hereof, shall peaceably and quietly have, hold and enjoy the demised premises and all rights, easements, appurtenances and privileges belonging or in any way appertaining thereto during the Lease term without molestation or hindrance of any person whomsoever, and if, at any time during the term hereby demised the title of Landlord shall fail or it be discovered that its title shall not enable Landlord to grant the term hereby demised, Tenant shall have the option, at Landlord's expense, to correct such defect or to annul and void this Lease with full reservation of its right to damages, if any. (b) Evidence of Title. Landlord further covenants, represents and warrants that, with respect to the Jockey Club Parcel, it is presently seized, and with respect to the Williams Parcel, will following its acquisition thereof be seized, of an indefeasible estate in fee simple to the demised premises free and clear of any liens, encumbrances, restrictions and violations (or claims or notices thereof), except public utility easements and covenants and restrictions of record not impairing Tenant's use of the demised premises, real estate taxes and special assessments not yet due and payable, and the items set forth on Exhibit F attached hereto. Landlord further covenants, represents and warrants that the demised premises are not presently encumbered by, and prior to the recordation of the Leasehold Mortgage (as defined in Article 22 hereof) will not be encumbered by, the lien of any mortgage, deed of trust or other security interest. Landlord shall, without expense to Tenant and within fifteen (15) days after Landlord's acquisition of the Williams Parcel, furnish to Tenant a copy of a title policy evidencing that Landlord's title to the Williams Parcel is as herein represented. 16 20 22. LEASEHOLD MORTGAGE. (a) Tenant shall have the unrestricted right at any time and from time to time to mortgage the demised premises, including the Improvements, and its leasehold interest under this Lease (but not Landlord's fee interest) for the purposes of financing or refinancing the Improvements which have been built or are to be built pursuant to the terms hereof, subject however to the limitations hereinafter set forth. Any such mortgage shall be subject and subordinate to the rights of Landlord hereunder. A mortgage of the Property and/or Tenant's leasehold interest under this Lease is herein referred to as a "Leasehold Mortgage," and the party holding the Leasehold Mortgage the "Leasehold Mortgagee." (b) No Leasehold Mortgagee shall be entitled to enjoy the rights or benefits mentioned herein, nor shall the provisions of this Lease pertaining to Leasehold Mortgages be binding upon Landlord, unless Landlord shall have been given written notice of the name and address of the Leasehold Mortgagee together with a true and correct copy of the Leasehold Mortgage and the note secured thereby. (c) So long as such Leasehold Mortgage shall remain in effect, the following provisions shall apply: (1) Landlord shall serve a copy of any notice, including a notice of default, required to be served on Tenant under this Lease upon such Leasehold Mortgagee at the address provided in the notice referred to in subsection (b) hereof, and no notice by Landlord to Tenant hereunder shall be deemed to have been duly given unless and until a copy thereof has been served on the Leasehold Mortgagee. (2) In the event of a default by Tenant hereunder, any Leasehold Mortgagee (or its agents) shall, within the period allowed Tenant to cure such default and otherwise as herein provided, have the right to cure such default, or cause the same to be cured, and Landlord shall accept such performance by or on behalf of such Leasehold Mortgagee as if the same had been made by Tenant. (3) For the purposes of this subsection, no event of default shall be deemed to exist for a default which cannot be cured within the permitted cure period as long as (i) such default is curable, (ii) action to cure the default shall in good faith have been commenced within the time permitted therefor to cure the same and shall be prosecuted to completion with diligence and continuity, and (iii) during such extended cure period there shall occur no monetary default hereunder on the part of Tenant which is not cured within twenty (20) days after written notice of such default is given to the Leasehold Mortgagee. 17 21 (4) Notwithstanding the foregoing, upon the occurrence of an event of default, Landlord shall take no action to terminate this Lease without first giving to the Leasehold Mortgagee written notice thereof and, in the event of a monetary default, a period of fifteen (15) business days after written notice to cure such default, or in the case of a non-monetary default, a reasonable time thereafter (not to exceed sixty (60) days) within which either (i) to obtain possession of the demised premises (including possession by a receiver) or (ii) to institute and thereafter diligently prosecute foreclosure proceedings or otherwise acquire Tenant's interest under this Lease, or (iii) to cure such default. Such Leasehold Mortgagee, within sixty (60) days after obtaining possession or acquiring Tenant's interest under this Lease, (the "Leasehold Mortgage Cure Period"), shall be required to cure all non-monetary defaults reasonably susceptible of being cured by such Leasehold Mortgagee; provided, however, that: (A) such Leasehold Mortgagee shall not be obligated to continue such possession or to continue such foreclosure proceedings after such defaults shall have been cured; (B) nothing herein contained shall preclude Landlord, subject to the provisions of this Article, from exercising any rights or remedies under this Lease with respect to any other default by Tenant; (C) such Leasehold Mortgagee shall agree with Landlord in writing to comply during the period of such forbearance with such of the terms, conditions and covenants of this Lease as are reasonably susceptible of being complied with by such Leasehold Mortgagee; and (D) if a non-monetary default which the Leasehold Mortgagee is otherwise required to cure pursuant to the provisions of this subparagraph (c)(4) is not reasonably susceptible to cure within the Leasehold Mortgagee Cure Period, the Leasehold Mortgagee shall be deemed to be in compliance with the requirements hereof as long as (i) such default is curable, (ii) it has commenced action to cure such default within the Leasehold Mortgagee Cure Period, and diligently pursues such cure to completion, and (iii) during such extended cure period there shall occur no monetary default hereunder on the part of Tenant which is not cured within twenty (20) days after written notice of such default is given to the Leasehold Mortgagee. Any non-monetary default by Tenant not reasonably susceptible of being cured by such Leasehold Mortgagee shall be deemed to have been waived by Landlord upon completion of such foreclosure proceedings or upon such acquisition of Tenant's interest under this Lease, except that any of such events of default which are reasonably susceptible of being cured after such completion and acquisition shall then be cured with reasonable diligence. Such Leasehold Mortgagee or other purchaser in foreclosure proceedings may become the legal owner and holder of Tenant's interest under this Lease by foreclosure or assignment in lieu of foreclosure. (d) In the event of termination of this Lease prior to the expiration of the term, except by reason of condemnation or casualty as provided in Articles 15 and 16 herein or the default of Tenant and the failure to cure such default by the Leasehold 18 22 Mortgagee after having notice thereof as provided in subparagraph (c)(4) above, Landlord shall serve upon the Leasehold Mortgagee written notice that the Lease has been terminated together with a statement of any and all sums which would at that time be due under this Lease but for such termination, and of all other defaults, if any, under this Lease then known to Landlord. Such Leasehold Mortgagee shall thereupon have the option to obtain a new lease in accordance with and upon the following terms and conditions: (1) Upon written request of the Leasehold Mortgagee within thirty (30) days after service of such notice that the Lease has been terminated, Landlord shall enter into a new lease of the demised premises with such Leasehold Mortgagee, or his designee, as set forth in clause (2) below. (2) Such new lease shall be effective on the date of termination of this Lease and shall be for the remainder of the term of this Lease, at the rent and upon all the agreements, terms, covenants and conditions hereof, including any applicable rights of renewal. Such new lease shall require the tenant thereunder to perform all unfulfilled obligations of Tenant under this Lease except those obligations which are reasonably susceptible of being performed only by the original Tenant under this Lease. Upon the execution of such new lease, the tenant named therein shall pay all sums which would at the time of the execution thereof be due under this Lease but for such termination and shall pay the reasonable expenses and damages incurred by Landlord in connection with such defaults and termination, the recovery of possession of said demised premises and the preparation, execution and delivery of such new lease. Upon execution and delivery of such new lease, such tenant shall be entitled to an adjustment in the amount otherwise owed pursuant to the terms of this paragraph, such adjustment to be equal to the net income, if any, derived by Landlord from the demised premises during the period from the date of termination of this Lease to the date of execution of the new lease. (e) Effective upon the commencement of the term of any new lease executed pursuant to subsection (d) above, all subleases shall be assigned and transferred without recourse by Landlord to the tenant under such new lease and all monies on deposit with Landlord which Tenant would have been entitled to use but for the termination or expiration of this Lease may be used by the tenant under such new lease for the purposes of and in accordance with the provisions of such new lease. (f) This Lease may not be modified, amended, or cancelled by the mutual agreement of Landlord and Tenant or surrendered without the express written consent of the Leasehold Mortgagee. Nothing contained in this subsection (f) shall prevent Landlord's termination of this Lease as a result of a default by Tenant, subject to the rights and protections afforded the Leasehold Mortgagee under this Lease. 19 23 (g) If Landlord and Tenant shall acquire the interest of the other hereunder, this Lease shall remain outstanding and no merger of the leasehold into the fee interest shall be deemed to have occurred. (h) If any Leasehold Mortgagee shall acquire title to Tenant's interest under this Lease by foreclosure, assignment in lieu of foreclosure or otherwise, or under a new lease pursuant to subsection (d) above, such Leasehold Mortgagee may assign such interest under this Lease or in such new lease and shall thereupon be released from all liability for the performance or observance of the covenants and conditions in this Lease or in such new lease contained on Tenant's or Tenant's part to be performed and observed from and after the date of such assignment; provided, however, that the assignee of such Leasehold Mortgagee shall have expressly assumed this Lease or such new lease and written evidence thereof shall have been submitted to Landlord; and provided further that the Landlord has approved the assignee of the Leasehold Mortgagee, such approval not to be unreasonably withheld or delayed. (i) Landlord agrees to make reasonable modifications to the terms and conditions of this Lease that do not affect or alter the economic obligations of the parties hereto and that do not have any material adverse effect on the rights of Landlord hereunder, to the extent that a Leasehold Mortgagee shall require that such modifications be made in order to make the Lease acceptable to the Leasehold Mortgagee for the making of its loan. 23. FEE MORTGAGE. Landlord may mortgage its interest in the demised premises provided such mortgage expressly provides that the rights and interest of the mortgagee thereunder are subject and subordinate to the rights and interest of Tenant hereunder and any Leasehold Mortgagee under any Leasehold Mortgage then or thereafter existing. Notwithstanding the foregoing, upon written request by Landlord, Tenant shall execute and deliver an agreement in form satisfactory to Tenant subordinating this Lease to any first mortgage encumbering the fee interest in the demised premises; provided, however, such subordination shall be upon the express condition that the validity of this Lease shall be recognized by such mortgagee and that, notwithstanding any default by Landlord with respect to the mortgage, or any foreclosure or termination thereof, Tenant's possession of the demised premises and its rights under this Lease shall not be disturbed by such mortgagee unless and until the occurrence of an event of default and the expiration of the cure period, if any, with respect thereto, and this Lease and Tenant's right to possession hereunder shall have been terminated in accordance with the provisions of this Lease. Provided the holder of a properly recorded first mortgage shall have notified Tenant, in writing, that it is the holder of such lien on the demised premises and shall so request, Tenant shall provide such holder with a duplicate copy of any notice sent to Landlord covering a default of Landlord hereunder and such holder shall be granted sixty (60) days after receipt thereof to correct or remedy such default (provided however, that such holder shall provide written notice 20 24 to Tenant on or before the thirty-first (31st) day after receipt of Tenant's notice of default as to whether such holder intends to cure said default, except that if such default is not reasonably susceptible of being cured within such sixty (60) day period, then Landlord shall not be deemed to be in default under this Lease so long as (i) such default is curable, (ii) such holder commences action to cure such default within such sixty (60) day period and thereafter diligently pursues such cure to completion, and (iii) during such extended cure period there shall occur no monetary default hereunder on the part of Landlord which is not cured within twenty (20) days after written notice of such default is given to such holder. 24. INDEMNIFICATIONS. (a) Tenant's Obligation. During the Lease term, Tenant shall indemnify and save Landlord, and its agents, employees, successors and assigns, harmless against all penalties, loss, damage, cost, expense (including attorneys' fees), claims or demands of whatsoever nature arising from use or occupancy of the Property by Tenant, its agents, contractors, employees, tenants or concessionaires, except to the extent the same shall result, in whole or in part, directly or indirectly, from the default or negligence of Landlord, its agents, employees, successors and assigns, or from Landlord's default under this Lease. Tenant waives all claims against Landlord for damage or injury to person or property except to the extent arising from Landlord's negligence. (b) Landlord's Obligation. During the Lease term, Landlord shall indemnify and save Tenant, and its agents, employees, assignees and sublessees, harmless against all penalties,loss, damage, cost, expense (including attorneys' fees), claims or demands of whatsoever nature arising from all areas of the Property except to the extent the same shall result, in whole or in part, directly or indirectly from the default or negligence of Landlord, its agents, employees, assignees or successors. (c) Survival. The indemnifications set forth in this Article 24 shall survive the expiration, cancellation or termination of this Lease. 25. TENANT'S RIGHT TO CURE LANDLORD'S DEFAULTS. In the event Landlord shall neglect to pay when due any obligations on any mortgage or encumbrance affecting title to the demised premises and to which this Lease shall be subordinate and with respect to which Tenant does not have an existing non-disturbance agreement, or in the event Landlord shall fail to perform any obligation specified in this Lease, or if Landlord shall be in default of any representation, warranty, or covenant of Landlord, then Tenant may, after the continuance of any such default for fifteen (15) days (in the case of a monetary default) or thirty (30) days (in the case of a non-monetary default) after written notice thereof by Tenant to Landlord, pay said principal, interest or other charges or cure such default, all on behalf of and at the expense of Landlord and do all necessary work and make all necessary payments in connection therewith and Landlord shall, on demand, pay Tenant, forthwith, the amount so paid by Tenant together with interest thereon at the rate of two percent (2%) in excess of the prime rate of Citibank N.A. 21 25 (the "Default Rate") or the highest rate permitted by law, whichever is the lower, from the date of payment until re-payment. Tenant may, to the extent necessary, after an additional ten (10) days notice to Landlord, withhold any and all payments of Annual and Additional Rent payments thereafter due to Landlord and apply the same to the payment of such indebtedness. 25A. LANDLORD'S RIGHT TO CURE TENANT'S DEFAULTS. If Tenant shall fail to perform any act herein required by it to be performed and such failure shall not be cured within any applicable grace period provided in Article 18 of this Lease, then Landlord shall have the right, but not the obligation, to perform or cause to be performed such act (entering upon the Property for such purpose, if Landlord shall so elect), and Tenant shall repay to Landlord the entire reasonable cost and expense thereof, together with interest at the Default Rate (as defined in Article 25 of this Lease) or the highest rate permitted by law, whichever is the lower, from the date of payment until repayment. 26. HAZARDOUS MATERIAL. (a) Landlord's Representations. Tenant has provided to Landlord a copy of a Phase One Environmental Audit dated May 6, 1996, and prepared by Hygienetics Environmental Services, Inc. (the "Environmental Report"). Except as disclosed in the Environmental Report, Landlord represents that, to the best of its knowledge, there are not now nor have there been any Hazardous Materials (as defined below) used, generated, stored, treated or disposed of on the Property. Landlord further represents that there are no underground storage tanks located upon the Property. Landlord's representations to Tenant under this Article shall survive the cancellation or termination of this Lease. Landlord further represents and warrants that except as noted in the Environmental Report, to the best of its knowledge it is, and shall remain during the term of this Lease, in compliance with all local, state and federal environmental laws imposing obligations on the Landlord as owner of the Property except to the extent non-compliance is the result of actions or omissions of Tenant, its subtenants, agents, employees, contractors, assignees or successors; provided that nothing herein shall relieve Tenant of its obligations under subparagraph (c) below. (b) Indemnification by Landlord. Notwithstanding any investigation made by Landlord or Tenant, Landlord hereby indemnifies Tenant, and Tenant's subtenants, from and against any loss, liability, claim or expense, including, without limitation, cleanup, engineering and attorneys fees and expenses that Tenant may incur by reason of the above representation being false, by reason of the presence of any Hazardous Materials in and upon the Property or by reason of any investigation or claim of any governmental agency or third party, except for (i) any Hazardous Materials used, generated, stored, treated or disposed of on the Property by the Tenant, its agents, licensees, concessionaires, contractors or employees, or (ii) any Hazardous Materials placed upon the surface of the Property by any party other than Landlord or its agents, licensees, concessionaires, contractors or employees during the term of this Lease. Landlord's representations and indemnity to Tenant under this paragraph shall survive the cancellation or termination of this Lease. 22 26 (c) Tenant's Representations. Tenant warrants and agrees that it will not use, maintain, generate, store, treat or dispose of any Hazardous Materials in or on the Property in violation of applicable governmental regulations. Tenant hereby indemnifies Landlord from and against any loss, liability, claim or expense, including, without limitation, cleanup, engineering and attorneys fees and expenses that Landlord may incur by reason of any investigation or claim of any governmental agency or third party for any actions taken by or omissions of Tenant, its agents, licensees, concessionaires, contractors or employees at the Property during the term of this Lease in violation of the above covenant. Tenant's indemnity to Landlord under this paragraph shall survive the cancellation or termination of this Lease. (d) Affirmative Obligations. At any time prior to the Rent Commencement Date, Tenant (or Tenant's contractor) may inspect the Property for the presence of Hazardous Materials. If Hazardous Materials are discovered on the Property beyond the levels which require investigation and/or remediation under applicable environmental laws, Landlord shall be required, subject to the provisions of Article 5 above, at its sole cost and expense, to remedy and cleanup such problem in accordance with all applicable governmental regulations. If Landlord is unable to, or does not remediate, such Hazardous Materials prior to the Rent Commencement Date, Tenant may, within thirty (30) days thereafter, and without waiving any other rights it may have at law or in equity arising out of Landlord's breach of this Lease, cancel this Lease by giving notice to Landlord and returning possession of the demised premises to Landlord and, in such event, Tenant will thereafter be relieved of all further liability under this Lease. If, after the Rent Commencement Date, Hazardous Materials are discovered on the Property beyond the amounts which require investigation, remediation or other action under applicable environmental laws, and which were not caused as a result of the acts or omissions of Tenant or its agents, licensees, concessionaires, contractors or employees or by the placement of Hazardous Materials onto the surface of the Property by any party other than Landlord or its agents, licensees, concessionaires, contractors or employees, Landlord shall be required, at its sole cost and expense, to remedy and cleanup such conditions in accordance with all applicable governmental regulations, and in the event such remedy and/or cleanup requires the vacation of ten percent (10%) or more of the Property for a period exceeding ninety (90) days, Tenant may, and without waiving any other rights it may have at law or in equity arising out of Landlord's breach of this Lease, with thirty (30) days notice, cancel this Lease by giving notice to Landlord and returning the demised premises to the Landlord and, in such event, Tenant and Landlord will thereafter be relieved of all further liability under this Lease (except that Landlord shall remain liable with respect to the representations contained in Article 26(a) above. In the event that Tenant does not elect to cancel this Lease in accordance with the foregoing, (i) the Annual Rent, and any Additional Rent payable hereunder, shall be equitably abated in accordance with the proportion of the demised premises which are rendered unusable as a result of such environmental conditions, (ii) Landlord shall promptly commence to remedy and cleanup the Hazardous Materials conditions and 23 27 thereafter diligently and continuously prosecute the same to completion, and (iii) if Landlord does not so commence and diligently and continuously prosecute such remedy and cleanup, Tenant shall have the right, upon ten (10) days prior written notice to Landlord, to undertake the same on Landlord's behalf and at Landlord's expense, and all costs and expenses incurred by Tenant in connection with such remedy and cleanup shall be payable by Landlord to Tenant and/or may be recovered by Tenant withholding payments of Annual Rent and Additional Rent, all in accordance with Article 25 of this Lease. (e) Definition. For purposes of this Article, the term "Hazardous Materials" shall mean any toxic or hazardous waste or substances (including asbestos and petroleum products) which are regulated by applicable local, state or federal environmental laws or regulations. 27. CONDITION OF PREMISES AT TERMINATION. At the expiration or earlier termination of the Lease term Tenant shall surrender the demised premises, together with alterations, additions and improvements then a part thereof, in good order and condition, except for the following: (a) ordinary wear and tear, (b) repairs required to be made by Landlord, (c) subject to Tenant's obligation to clear Tenant's Building from the demised premises in accordance with the last sentence of Article 15(b) hereof, loss or damage by fire, the elements and other casualty, (d) subject to Tenant's obligations under Article 16(c) hereof, loss or damage by condemnation, and (e) any Hazardous Materials conditions not caused by the actions of Tenant or its agents, licensees, concessionaires, subtenants, contractors or employees. All furniture and trade fixtures installed in Tenant's Building at the expense of Tenant, or other occupant, shall remain the property of Tenant, or such other occupant; provided, however, Tenant shall, at any time and from time to time, during the Lease term, have the option to relinquish its property rights with respect to such trade fixtures, which option shall be exercised by written notice of such relinquishment to Landlord and, from and after the exercise of said option, the property specified in said notice shall be the property of Landlord. 28. HOLDING OVER. In the absence of any written agreement to the contrary, if Tenant should remain in occupancy of the demised premises after the expiration of the Lease term, it shall so remain as a tenant from month-to-month and all provisions of this Lease applicable to such tenancy shall remain in full force and effect, except that Annual Rent payable during such holdover tenancy shall be one hundred twenty-five percent (125%) of the Annual Rent payable at the end of the Lease term. 29. RIGHT OF FIRST OFFER. In the event Landlord desires to sell the Property at any time during the Lease term, Landlord shall first offer to sell the Property to Tenant upon and subject to all of the following terms, covenants, and conditions: (a) Initial Offer. Landlord shall deliver to Tenant a written offer to sell which shall set forth all of the terms and conditions upon which Landlord is willing to sell the 24 28 Property to Tenant. Such offer shall specifically state the purchase price for the Property and the proposed closing date. The purchase price shall be payable in cash and the sale shall be without representation or warranty, unless stated otherwise in the offer. (b) Acceptance by Tenant. Tenant shall have thirty (30) days following delivery of Landlord's offer within which to accept such offer. During such thirty (30) day period, Landlord shall not offer the Property to any other person or entity, subject, nevertheless, to the provisions of Article 29(p). During such thirty (30) day period Landlord and Tenant may negotiate Landlord's offer (but nothing herein requires Landlord to change Landlord's offer) and Landlord may, in Landlord's sole discretion, agree to make additional offers to Tenant which may differ from the terms and conditions of Landlord's original offer including the purchase price. Such additional offers shall be set forth in writing. However, the thirty (30) day period shall not be extended as a result of any additional offers made by Landlord. Tenant may accept any of the offers made by Landlord during said thirty (30) day period. (c) Tenant's Rejection of Offer. If Tenant does not accept any of Landlord's offers, in a writing signed by Tenant, within said thirty (30) day period, such failure shall constitute a rejection of all of Landlord's offers, and all such offers shall be deemed terminated. (d) Landlord's Right to Sell to Third Party. If Tenant rejects all of Landlord's offers within said thirty (30) day period, Landlord shall have the right to offer the Property for sale to third parties upon any terms, covenants, and conditions desired by Landlord. Landlord shall have the right to contract to sell and convey the Property free and clear of any rights of Tenant to purchase the Property provided that: (1) the contract for the sale of the Property is entered into within six (6) months following (X) the expiration of the thirty (30) day period set forth in Article 29(b) above; or (Y) the expiration of the period or periods referred to in Article 29(g) below, whichever shall later occur; and (2) the purchase price for the Property (the "Outside Purchase Price") is "Substantially Similar" to the best purchase price offered to Tenant, as such term is hereinafter defined. (e) Substantially Similar Purchase Price. The Outside Purchase Price shall be deemed to be "Substantially Similar" to the best purchase price offered to Tenant if the total Outside Purchase Price is not less than ninety-five percent (95%) of the lowest total purchase price offered to Tenant (whether pursuant to Article 29(a) or Article 29(g). An Outside Purchase Price which is equal to or greater than ninety-five percent (95%) of the best purchase price offered to Tenant shall be deemed "Substantially Similar" under this Subsection (e). 25 29 (f) Obligations of Tenant. Within three (3) business days after request by Landlord, which request shall set forth the terms of a proposed Outside Purchase Price, Tenant shall certify, in writing, addressed to Landlord and to any third parties designated by Landlord, that the proposed Outside Purchase Price is Substantially Similar to the best purchase price offered to Tenant. (g) Re-Offer to Tenant at Lower Price. If Landlord desires to sell the Property for a more favorable purchase price which is not Substantially Similar to the best purchase price previously offered to Tenant, Landlord shall offer to sell the Property, in writing, to Tenant at such more favorable purchase price. Tenant shall have five (5) business days within which to accept, in a writing signed by Tenant, the more favorable purchase price. If Tenant fails to accept such purchase price within said five (5) business day period, such offer shall be deemed rejected and shall terminate. From and after such rejection, such more favorable purchase price offered to Tenant shall be used as the best purchase price offered to Tenant, under Articles 29(d) and 29(e), to determine whether the Outside Purchase Price offered to third parties is Substantially Similar to the best purchase price offered to Tenant. (h) Acceptance of Offer by Tenant. If Tenant accepts any of the offers made by Landlord during the initial thirty (30) day period referred to in Article 29(b), the Property shall be sold and conveyed to Tenant in accordance with the terms and conditions of the offer so accepted by Tenant. If Tenant accepts the more favorable purchase price offered by Landlord pursuant to Article 29(g), the Property shall be sold and conveyed to Tenant in accordance with the terms and conditions of the offer accepted by Tenant. As a condition to the effectiveness of the acceptance by Tenant of any offer made by Landlord, Tenant shall deliver to Landlord, concurrently with Tenant's written acceptance, cash in a sum equal to ten percent (10%) of the purchase price, which shall constitute a deposit under the agreement between Landlord and Tenant for the sale of the Property and such deposit shall constitute liquidated damages to Landlord in the event of a default by Tenant and Tenant shall, as a further condition to the effectiveness of Tenant's acceptance of Landlord's offer, sign and initial a provision complying with all California statutory requisites for the enforcement of liquidated damages provision. Such provision for liquidated damages shall be Landlord's sole remedy and Landlord shall not seek specific performance. (i) Re-Offer to Tenant if Property Not Sold. If Landlord has not executed a contract to sell the Property within the time period set forth in Article 29(d), Landlord shall be required to comply with all of the provisions of this Article 29 before again offering the Property for sale to third parties subsequent to such period. (j) Re-Offer to Tenant if Outside Purchase Price Not Substantially Similar. If Landlord enters into a contract to sell the Property for an Outside Purchase Price which is not Substantially Similar to the best purchase price offered to Tenant, such 26 30 contract shall be and remain subject to Tenant's rights hereunder. Landlord shall have the obligation to offer such Outside Purchase Price to Tenant pursuant to Article 29(a) and if Tenant accepts same, Tenant's rights under Article 29(h) shall be superior to the rights of the purchaser under such contract; provided that if Tenant rejects such offer pursuant to Article 29(a), Tenant's rights to purchase the Property shall automatically terminate and such purchaser shall take title to the Property free and clear of Tenant's rights to purchase the Property. (k) Sale of Property to Third Party. If Landlord sells and conveys the Property to a third party pursuant to Article 29(d) or pursuant to Article 29(j) (after Tenant has rejected Landlord's offer to Tenant as therein specified), such third party purchaser shall take title to the Property free and clear of Tenant's rights to purchase the Property. Such third party purchaser and all parties thereafter claiming under such third party purchaser shall have the right to thereafter sell and convey the Property unencumbered by the provisions of this Article 29 and without offering the Property for sale to Tenant. Upon such sale by Landlord pursuant to Article 29(d) or Article 29(j), Tenant shall execute and deliver to Landlord and/or such purchaser any and all documents and instruments reasonably requested by Landlord and/or such purchaser terminating Tenant's rights under this Article 29. (l) Right of First Offer Not Applicable. The provisions of this Article 29 are not applicable, and Tenant shall have no right to purchase the Property under this Article 29 and Landlord shall have no obligation to offer to sell the Property to Tenant (i) upon or with respect to one or more mortgages or deeds of trust given by Landlord covering or affecting the Property or any other transfer, hypothecation, assignment or other conveyance in the nature of security for the repayment of indebtedness, or (ii) upon or with respect to a contribution of the Property to the capital of an entity in which Landlord will immediately following such contribution own at least a twenty percent (20%) equity interest, or (iii) to a sale or transfer of the Property as part of a transaction involving the sale or transfer of all or a substantial portion of Landlord's assets except where the Property and Landlord's leasehold interest hereunder are the only assets of substantial value being sold in such transaction. (m) Rights Not Separately Assignable. Tenant's rights under this Article 29 may not be assigned, transferred or conveyed separately from the Lease. (n) Tenant's Obligation to Make Claims. In the event Tenant has notice of an intended sale by Landlord to a third party, Tenant shall have the obligation, upon inquiry by either Landlord or any proposed purchaser, to deliver, in a writing signed by Tenant, a certificate stating that: (i) Landlord has complied with the provisions of this Article 29 and such sale may be consummated free and clear of Tenant's rights under this Article 29; or (ii) this Article 29 is not applicable to such sale; or (iii) Landlord has not complied with this Article 29, this Article 29 is applicable to such sale and that Tenant 27 31 intends to make a claim to enforce its rights under this Article 29, as the case may be. Such certificate shall be delivered promptly after request therefor but in any event within five (5) days after request therefor. (o) Termination. The rights granted under this Article 29 shall terminate and shall have no further force or effect (i) on the date of the expiration or earlier termination of the Lease, (ii) upon assignment of this Lease to any entity other than the Developer (as defined in Article 2(e) of this Lease), Tenant or any parent or subsidiary of Tenant (by way of reassignment from Developer), or any holder of a Leasehold Mortgage where the assignment to such holder is solely for security purposes, or (iii) as otherwise expressly provided in this Article 29, whichever first occurs. (p) Miscellaneous. (1) Notwithstanding the provisions of Article 29(b), Landlord may offer the Property for sale and negotiate with other third parties concerning the sale of the Property during the thirty (30) day period referred to therein provided that any contract of sale entered into by Landlord during such thirty (30) day period shall be subject and subordinate to Tenant's rights to accept Landlord's offer during such thirty (30) day period, and purchase the Property pursuant thereto. (2) As used in this Article 29, a contract for the sale of the Property is "entered into" when Landlord and the contract vendee have executed and delivered an agreement for the sale of the Property. 30. SIGNAGE. Tenant shall have the right to place the maximum amount of exterior signage on Tenant's Building and on the Property as may be permitted by applicable governmental laws or ordinances, including but not limited to the right to construct freestanding signs. 31. NOTICES. All notices, demands and other communications required or permitted to be given under this Lease shall be in writing and shall be deemed to be given when delivered (or, if delivery is refused, on the date delivery was attempted) if sent by recognized overnight courier, or upon three (3) business days after deposit in the U.S. Mail if sent by certified or registered mail, postage prepaid. All notices shall be addressed to Landlord or to Tenant at the following addresses: Tenant: Borders, Inc. 311 Maynard Street Ann Arbor, Michigan 48104 Attention: Vice President - Development
28 32 with a copy to: Rosenfeld & Wolff 2049 Century Park East Suite 600 Los Angeles, California 90067 Attention: Alan D. Aronson, Esq. Landlord: California Jockey Club 2600 Delaware Street San Mateo, California 94403 with a copy to: Carr, McClellan, Ingersoll, Thompson & Horn 216 Park Road P.O. Box 513 Burlingame, California 94011 Attention: Norman I. Book, Jr., Esq.
or to any subsequent address which Landlord or Tenant shall designate for such purpose. 32. PARTIAL INVALIDITY. If any term, covenant or condition of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease or the application of such term, covenant or condition to persons or circumstances other than those as to which it is held invalid or unenforceable shall not be affected thereby and each term, covenant or condition of this Lease shall be valid and be enforced to the fullest extent permitted by law. 33. ENTIRE AGREEMENT - APPLICABLE LAW. This Lease, the exhibits and amendments or addenda, if any, attached hereto and forming a part hereof, set forth all the covenants, promises, agreements, conditions, provisions and understandings between Landlord and Tenant concerning the demised premises and there are no covenants, promises, agreements, conditions, provisions or understandings, either oral or written, between them other than are herein set forth. No alteration, amendment, change or addition to this Lease shall be binding upon Landlord or Tenant unless reduced to writing and signed by each party. This Lease shall be governed by and construed in accordance with the laws of the State in which the demised premises are located. 34. SUCCESSORS AND ASSIGNS. Subject to the provisions on assignment set forth in this Lease, the conditions, covenants and agreements contained in this Lease shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, successors and assigns. The covenants contained herein shall be deemed to be covenants running with the demised premises and shall be binding upon all owners, users and occupants of such land for so long as this Lease remains in effect. The restrictions, benefits and obligations under this Lease shall be deemed to create mutual and reciprocal benefits and servitudes 29 33 upon the demised premises, which shall run with and against said property and be a benefit and burden thereon, except that said restrictions, benefits and obligations shall cease and be of no further force or effect after the termination of this Lease. 35. MEMORANDUM OF LEASE. The parties shall, concurrently with the execution and delivery of this Lease, execute and deliver a memorandum of lease which Landlord shall, at its sole expense, cause to be recorded as an encumbrance against the demised premises within ten (10) days following the date upon which the last of all contingencies to the effectiveness of this Lease has been satisfied or waived. Upon the expiration or sooner termination of this Lease, Tenant will execute a document for recordation confirming that this Lease has terminated. 36. BROKER'S REPRESENTATION. Landlord represents that it dealt with no broker or brokers and Tenant represents that it dealt with no broker or brokers in connection with the negotiation, execution and delivery of this Lease. Landlord and Tenant shall, and do hereby, indemnify and save the other harmless from and against any losses, damages, penalties, claims or demands of whatsoever nature arising from a breach of its foregoing representation including, without limitation, reasonable attorneys' fees and expenses. The representations and indemnifications set forth in this Article shall survive the cancellation or termination of this Lease. 37. ESTOPPEL CERTIFICATES. Within twenty (20) days after request by either party, the other party shall execute and deliver to the requesting party a written certificate as to the status of this Lease, any existing defaults, the status of the payments and performance of the parties required hereunder and such other information that may be reasonably requested. 38. CAPTIONS AND DEFINITIONS. Marginal captions of this Lease are solely for convenience of reference and shall not in any way limit or amplify the terms and provisions thereof. The necessary grammatical changes which shall be required to make the provision of this Lease apply (a) in the plural sense if there shall be more than one Landlord or Tenant and (b) to any landlord or tenant, which shall be either a corporation, an association, a partnership or an individual, male or female, shall in all instances be assumed as though in each case fully expressed. 39. SURVIVAL. Unless otherwise provided, upon the termination of this Lease under any of the Articles hereof, the parties hereto shall be relieved of any further liability hereunder except as to acts, omissions or defaults occurring prior to such termination. 40. DUE DILIGENCE CONTINGENCY. Tenant's obligations under this Lease are contingent upon Tenant's approval of the suitability of the demised premises for Tenant's intended development and use thereof. Tenant, and its agents, employees and contractors, at Tenant's expense and at reasonable times, shall have a period of sixty (60) days from the date of this Lease (the "Due Diligence Period") to enter upon the demised premises for the purpose of making a diligent, prudent and confidential inspection to explore the potential development of the demised premises, by examining, testing and surveying the demised premises. The 30 34 inspections relating to the demised premises may include, but shall not be limited to, examination of title, site survey, availability of a building permit for construction of Tenant's Work, zoning or use restrictions, present and future access, geological or environmental testing, drainage conditions on the demised premises, excessive levels of radon, toxic waste, hazardous substances including, but not limited to asbestos or other undesirable substances, and any other condition or circumstance which may adversely affect the demised premises or Tenant's operations thereon. Landlord agrees to cooperate with Tenant during the Due Diligence Period in providing and allowing Tenant to photocopy all related documents which Landlord may possess relating to the demised premises and in executing any applications required to be submitted to the City or County, any planning commission, or government agency or authority presiding over the demised premises affecting the Tenant's intended use of the demised premises and which are consistent with the intent and purpose of this Lease. In the event Tenant's due diligence with respect to the demised premises produces results that are unsatisfactory to Tenant for any reason, Tenant may, at its sole option, and without specifying the matters which are unsatisfactory to Tenant, within ten (10) days after the end of the Due Diligence Period, terminate this Lease, upon which termination neither party shall have any further rights, duties or obligations hereunder. Upon satisfaction or waiver of the contingency set forth herein, and subject to Landlord's obligations, covenants, representations and warranties under this Lease, Tenant shall accept the demised premises in their "as-is" condition. Tenant shall conduct no drilling on the demised premises except solely for the purpose of determining the adequacy of the soils condition to support construction of the Improvements. 41. SITE PLAN APPROVAL/PERMIT CONTINGENCY. Tenant's obligations under this Lease are contingent upon the receipt by Tenant of (or assurance satisfactory to Tenant in its sole and absolute discretion that Tenant shall receive) (i) site plan approval and all required permits and licenses for the construction of the Improvements as generally shown on the attached Exhibit B, (ii) written assurance from the City of San Mateo and any other governmental authorities exercising jurisdiction that the demised premises are properly zoned for use as a retail store selling books, periodicals, newspapers, music and video products, CD-ROM's and other computer software, and the operation of a coffee bar selling food and beverage items (the "Intended Use"), and (iii) all required permits and licenses for the Intended Use (other than permits and licenses which are conditioned upon completion of Tenant's Work or store opening) within one hundred eighty (180) days from the date hereof. Landlord agrees that upon the request of Tenant and at Tenant's sole cost and expense, Landlord shall execute and deliver such instruments and perform such other acts as shall be required for Tenant to secure any such approvals, permits, licenses or assurances, including but not limited to instruments creating a single legal parcel out of the multiple parcels comprising the demised premises or covenants to hold such parcels as a single parcel. In the event that the foregoing contingency is not satisfied or waived in writing by Tenant within the time period specified, then this Lease shall terminate and neither party shall have any further rights, duties or obligations hereunder. 42. ADJACENT PROPERTY ACQUISITION CONTINGENCY. This Lease is contingent upon the acquisition by Landlord of fee title to the Williams Parcel within one hundred eighty 31 35 (180) days from the date of this Lease. Promptly following mutual execution and delivery of this Lease, Tenant shall assign to Landlord all of Tenant's rights and obligations under its agreement (the "Purchase Agreement") to purchase the Williams Parcel. Landlord agrees to use its reasonable best efforts to complete the purchase of the Williams Parcel in accordance with the terms of such Purchase Agreement. In the event that the foregoing contingency is not removed within the time period specified, then this Lease shall terminate and neither party shall have any further rights, duties or obligations hereunder; provided, if such contingency fails due to Landlord's failure to use its best reasonable efforts to complete the purchase of the Williams Parcel or Landlord's default under the Purchase Agreement, Landlord shall be liable to Tenant and Developer for all out of pocket costs incurred by Tenant and Developer in connection with this Lease. In no event shall Landlord have any obligation to complete such purchase prior to satisfaction or waiver by Tenant of the contingencies described in Articles 40, 41 and 43 hereof and satisfaction of the contingency set forth in Article 44 hereof. Landlord acknowledges that Tenant will attempt to obtain a credit against the purchase price for the Williams Parcel in order to compensate Tenant for the costs Tenant will occur in abating asbestos containing materials from the buildings located on the Williams Parcel. Landlord agrees that if Tenant succeeds in obtaining such a credit, Landlord shall pay an amount equal to such credit to Tenant within ten (10) days following Landlord's acquisition of the Williams Parcel; provided, that if Landlord shall fail to pay such amount to Tenant, then Tenant, in addition to its other remedies hereunder, shall have the right to offset such amount against its Annual Rent hereunder. 43. FINANCING CONTINGENCY. Tenant's obligations under this Lease are contingent upon Tenant securing financing for construction of the Improvements upon terms and conditions acceptable to Tenant in its sole and absolute discretion within sixty (60) days following satisfaction or waiver of the contingencies set forth in Articles 41 and 42 hereof. In the event that the foregoing contingency is not satisfied or waived in writing by Tenant within the time period specified, then this Lease shall terminate and neither party shall have any further rights, duties or obligations hereunder. 44. QUIET TITLE CONTINGENCY. This Lease is contingent upon Landlord successfully quieting title to the demised premises as against any rights in third parties to cross over the demised premises between El Camino Real and areas to the west of the demised premises, within sixty (60) days from the date of this Lease. Landlord agrees to diligently pursue such quiet title action during such sixty (60) day period. In the event the foregoing contingency is not satisfied or waived in writing by Tenant within the time period specified, then this Lease shall terminate and neither party shall have any further rights, duties or obligations hereunder. 32 36 45. TIME OF ESSENCE. Time is of the essence of this Lease and the provisions hereof. IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day and year first above written. WITNESSES: BORDERS, INC. - ------------------------- By: /s/ Richard Flanagan ------------------------ - ------------------------- Its: President and COO CALIFORNIA JOCKEY CLUB, A REAL ESTATE INVESTMENT TRUST - ------------------------- By: /s/ James M. Harris ------------------------ - ------------------------- Its: President
33 EX-22.1 5 SUBSIDIARY OF THE REGISTRANTS 1 EXHIBIT 22.1 SUBSIDIARY OF THE REGISTRANTS Bay Meadows Catering, a California corporation, is the only subsidiary of Bay Meadows Operating Company. California Jockey Club has no subsidiaries. EX-23.1 6 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.1 INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in Registration Statement No. 33-20315 of California Jockey Club and Bay Meadows Operating Company on Form S-8 of our report dated March 28, 1997 (which expresses an unqualified opinion and includes an explanatory paragraph relating to a proposed merger and certain disagreements between the Companies), appearing in this Annual Report on Form 10-K of California Jockey Club and of Bay Meadows Operating Company for the year ended December 31, 1996. /s/ Deloitte & Touche LLP March 28, 1997 San Francisco, California EX-27.1 7 COMBINED FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 1,000 9-MOS YEAR DEC-31-1996 DEC-31-1996 JUL-01-1996 JAN-01-1996 SEP-30-1996 DEC-31-1996 10,533 2,027 6,758 2,612 870 527 (77) 77 0 0 21,105 10,154 39,362 39,291 (21,967) (22,092) 38,694 27,676 14,793 6,211 0 0 0 0 0 0 116 116 23,785 21,344 38,694 27,349 2,205 3,038 41,774 53,932 729 926 38,675 54,434 0 0 0 0 0 0 (501) (501) 260 260 (761) (761) 0 0 0 0 0 0 (761) (761) (.13) (.13) (.13) (.13)
EX-27.2 8 FINANCIAL DATA SCHEDULE - BAY MEADOWS WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 889 0 491 77 0 1,902 10,572 (61,637) 6,634 4,950 0 0 0 58 1,626 6,634 3,038 53,472 926 52,757 0 0 0 715 260 455 0 0 0 455 .08 .08
EX-27.3 9 FINANCIAL DATA SCHEDULE - CALIFORNIA JOCKEY CLUB WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1,138 2,612 2,368 0 0 10,584 28,719 (15,929) 23,374 3,593 0 0 0 58 19,723 23,374 0 5,412 0 6,628 0 0 0 (1,216) 0 0 0 0 0 (1,216) (.21) (.21)
-----END PRIVACY-ENHANCED MESSAGE-----