Assessment - Track Operators

Another large component of the industry that has proven itself to be inept in the marketing, presentation and operation of the sport. They live in 1965,
when it really was the sport of kings and it could support the Santa Anita’s and Hialeah’s of the world. But it is not 1965, it is 2008 and that racket you
hear is what the medical world calls Cheyne Stokes respiration, the death rattle. They have the government bloodsuckers on one side, the horsemen
on the other and the horseplayers circling them like a pissed off group of Indians at a Custer rally.

Their primary contribution to the puzzle is a place to keep and race horses. They make their money by taking a rake on the handle, from admission
fees, and ancillary products. Now they see casino gambling as their salvation. I have been to a bunch of the racinos and the feeling is always the
same, it is a casino that tolerates horse racing because it was their ticket in. Nothing like building a competitor for gambling dollars under your own
roof. At some point the government will ask the racinos – gee how much would we make WITHOUT horse racing?

Who is profitable? The truth is for the most part we don’t know. I think Del Mar has been, Saratoga as well, and most of the European tracks.
Absolutely need to do some research to see who fits the bill.
Then we need to look at and dissect the successful (profitable) operations like Del Mar (which is ironic in that I think Del Mar is actually a non-profit
organization) and the European tracks to get a clue as to where to next. It is worth noting that the two short season tracks, Del Mar and Saratoga
make money – and most of the European tracks are short season as well. Maybe because they are only available for a limited time and they are really
an event rather than just racing. If you say that you are going to Del Mar or Saratoga, you are really going to Del Mar or Saratoga for more than a
single card of racing. It’s almost like a pilgrimage (see Ray and Travers this last summer).

The aggregation of tracks under Magna and CDI in my mind has been a disaster, accelerating the decline of tracks and leading to major confrontations
with everybody. Once they took over the majority of major tracks they decided to get into the online wagering business, doing their best to shove the
early entrants (YouBet, TVG, etc.) off the cliff by monkeying with the ADW agreements. They also provided a target of opportunity for the horsemen,
who could now leverage their agreements against more than a single track. The track operators see the horsemen as wanting more than their fair
share; the horsemen see the same thing. The reality is that the pie is shrinking fast, which means both are headed for a fall. The impact of the track
operator/horsemen squabble have been devastating, making a number of tracks disappear from the horse players radar (Calder is the poster child
here). Just before the Breeders Cup, the list of tracks with “NW” (non wagering) on TwinSpires was staggering – no Southern California, Kentucky,
Florida, Ohio or Pennsylvania tracks.

My trip to the Breeders Cup (and the days before) was pretty revealing – the age of the crowd was probably mid to late 50’s with a smattering of 40
something’s. Missing were the 20’s and 30’s crowds and the kids brought to the track by their parents or grandparents. Did everybody just stop liking
horses? No, they don’t understand horse racing and there is nobody who can teach them. They do understand poker and dog racing. Why the hell
aren’t we out there ASKING them??? From talking to my kids and their friends, who certainly heard enough about horse racing growing up, they say
they like going to the track or OTB with me but that it is “old school” and too hard to learn. Poker on the other hand is their sport – they buy $2,000
tables and play 2-3 times per week with all of their buddies. I (rather my wallet) can attest to the fact that they are very good. Have we brought this
on ourselves with complex past performances and race conditions that have to be run through “Deep Blue” to decipher? The greyhound world eats
us alive here with easily identifiable class and conditions, programs that a fifth grader can understand, all without a bunch of aging, drunken
curmudgeons spewing epitaphs at the monitor. It’s pretty sad when they tell you there is no way they would take their girlfriend with them to the
horse track or OTB, but would take them to the greyhound track. I once took my youngest son and his girlfriend to Santa Anita to show them that their
perceptions were wrong and one of the track drunks was barfing into/around the trash can and a stooper tried to look up his girlfriend’s dress…

There is one group worth targeting and that is women. In the “good old days” there just weren’t a lot of Annie’s, Laura’s, Sharon’s or Katie’s at the
track. There are now. Yet we have Neanderthals like Dutrow spewing about “girl trainers” and “girl horses” (can’t we send him to Cabo with an all
you can drink coupon?). Why in the world don’t Carla Gaines, Kathy Walsh, Helen Pitts, et al get (and keep) good horses? Why is all the promotion
around the colts? And why do we do condescending sh*t like rename the BC Distaff the “Ladie’s Classic” and start using pink saddlecloths? If I was
a woman (I know, very scary thought) I would be really offended. Never mind that the two best horses on the PLANET are fillies. Now, using my
superior intellect, I am going to offer up this harebrained idea – what is the best bait for men? Uhh, women? Trust me, if more women show up at the
races it’s gonna bring the boys. Poker showcases women – Jennifer Harmon, Evelyn Ng, Chloe Gowen, Jennifer Tilly, Shannon Elizabeth (major
bait!). There is even a magazine dedicated to the women players, “Woman Poker Player” (http://www.womanpokerplayer.com/).

Part of the issue may well be that there are too many tracks, horses, races, and sires to support the sport in 2008. The infrastructure was built for
the most part in the 1930’s and 40’s when horse racing was THE sport. We may have to pay to play if we want tracks like Santa Anita or Belmont.
The cost of operating these tracks has to be off the charts – how would you like to receive the landscaping bill for Santa Anita?? YOW. Maybe we
charge an online admission fee to the premium tracks, with the money split between the track operator and the horsemen. I am not going to squawk if
I have to pay $5 or $10 to play at one of the major tracks, I understand they have to stay solvent or else I need to become real good at ‘capping
Yavapai Downs…

The obvious area for growth is online, yet we are doing our damnedest to kill it before it can grow. The laws surrounding tracks, signal and ADW’s is
a ragtag collection of 60 year old laws and a whole bunch of folks who proudly announce to the world “never touched a computer, never will”. The
piecemeal approach to solving this issue is obviously not working. We ran into the same thing when we had 50 sets of state business laws, hence
the Uniform Commercial Code. We need the same thing in the horse world, a uniform law that states the price for a signal, the process for gaining
access to the signal, and the revenue split. The issue of track operators has come to the forefront since the aggregation and conglomeration of
tracks by Magna Entertainment and Churchill Downs, Inc. They have since proven that bigger is not better, and that using standard business
practices makes for a lessened customer experience. But there is a HUGE difference between the operations - CDI continues to operate in the black,
with little debt on the books. Magna on the other hand is bleeding like a stuck pig, their margins are a third of CDI's, their cash flow is in the red, they
have almost $600M in debt and their earnings per share is a catastrophic negative 29.21 per share. Let's see how the two track monsters shake out
financially:

Churchill Downs, Inc. (NASDAQ - CHDN)

Tracks
Arlington Park (Arlington Heights, IL)
Calder Race Course (Miami Gardens, FL)
Churchill Downs (Louisville, KY)
Fair Grounds (New Orleans, LA)

Financial Statements
Income $437.98M
Gross Profit $84.33M
EBIDTA $62.88M
Gross Margin 20.60%
Operating Margin 8.21%
EPS $1.77 per share
Total Cash $18.63M
Total Debt $24.44M
Book Value $29.24 per share
Operating Cash Flow $83.57M
Current Share Price $39.31 (11-03-2008)
Market Capitalization $537.49M