Thoroughbred Racing in New York State
NYRA Update
Charles E. Hayward Charles E. Hayward - President & CEO, NYRA

Ogden Mills Phipps: Charlie Hayward will provide us with a comprehensive report on New York racing, and Charlie, we look forward to it.

Charles E. Hayward: Thank you, Dinny.

Good morning, everybody, and welcome to Saratoga.

What I'm going to do this morning is quickly review some organizational changes and reform at NYRA. I'd like to have a little bit of discussion on purse structures, not just at NYRA but really throughout the country. I want to talk about the status of the VLTs because I think that's very important. And also talk a little bit about NYRA's not-for-profit model.

First, I'd like to turn to our NYRA board, which is very active today and has been significantly reconstructed. In the last 18 months, we have a new chairman, Steve Duncker. But it's important to point out before Steve became chairman, he was very actively involved with Peter Karches as the vice chair and co-COOs. And it was the work that Peter and Steve had accomplished and the vision that they had that convinced me to come to NYRA.

One thing I also want to point out is we have two new vice chairmen — Michael Del Guidice and Stuart Subotnick — and something a lot of people don't realize is our board is large-28 folks. But eight of those people are government appointees, and I can tell you we get as much work out of the government appointees as we do from the rest of the board.

An important governance issue for NYRA was that the CEO was no longer chairman of the board. I'm president and CEO. I report to the board. And I think that's a much more appropriate governance rule.

We also have a very new active committee structure — we have finance, audit, RFP, legislation, pension that meet on a regular basis. And in fact, the RFP committee, headed by Jim Heffernan, put in hundreds of hours of work that I think will result in a very good document.

Also importantly, we've had the opportunity to add some really significant national leaders — industry leaders — to our board.

Dennis Dammerman was the former vice chair and COO of GE. He recently came on the board at the same time as Leonard Riggio, who is the chairman and founder of Barnes & Noble. And we just recently announced the addition of Barry Ostrager. Barry is a senior litigation partner at Simpson Thatcher and president of the New York Breeders. Not only are these distinguished business executives but they're all very actively involved in owning and breeding here in New York.

Turning to some of the management changes that have occurred here in the last couple of years, given the indictment and all the things we went through, it was really necessary to dramatically change how NYRA conducted business.

I came on in November 2004 as the president and CEO. We recently announced a promotion for Bill Nader and created the position of senior VP and chief operating officer. We've also just created the new position of senior vice president and chief administrative officer. We've hired John Ryan for that position. I think that's an important position. NYRA has been behind the curve in terms of facilities, IT and a lot of logistical and technical infrastructure issues that we really need to improve upon to move racing forward in New York.

We also hired a senior VP of human resources and labor relations-Dave Smukler. Unions are a very important part of our life, as obviously the rest of our employee base is. We have a new VP and CFO in Irene Posio. And on the racing side, as you know, we made some significant changes-promoted P.J. Campo to racing secretary, recently promoted Braulio Baeza Jr. as the NYRA steward and promoted Dr. Anthony Verderosa as our chief examining vet.

Three years ago NYRA was in deep water. As you know, in 2003 NYRA was indicted for facilitating tax fraud and money laundering by its mutuel clerks. As you can see right here [slide] Alan Hevesi couldn't have said it better: "Serious reform and monitoring of NYRA are required."

But [by] a year ago, things had changed. NYRA had been subject to a deferred prosecution agreement that called for the appointment of a federal monitor — Getnick & Getnick. That was a tough and difficult 18 months. Getnick & Getnick wasn't just one individual-it was a group of about 15 folks that were everything from investigators to forensic accountants. But I truly believe it has transformed the association. We've changed the culture dramatically. We've changed the management as you just saw and we've improved the business practices substantially.

So much so that one year ago today— or just about today — as you can see the quote [slide]. This is lifted right from Neil Getnick's report, and just the last line: "We believe the government at every level should support NYRA's integrity-based actions."

Similarly, Alan Hevesi, the comptroller who had beaten up on NYRA on a pretty regular occasion with a number of audit reports, comes out and says [slide], "I thank the Office of the U.S. Attorney for the Eastern District, and the new leadership of NYRA for their important and effective efforts."

We're now going to turn to purses and I think perhaps the best metric to really judge quality of racing is average purses paid out per day. And what you have here-we're going to go through '03, '04 and '05 — this is the average purse distribution ranked from 1 to 10 for 2003. Oak Tree as you can see is No. 1 and baked in my numbers are the Breeders' Cup purses so it tends to increase that one. But Oak Tree is No. 1; Saratoga, 2; Keeneland, 3; and Belmont, 4.

What's interesting to note is seven of the 10 average purses per day paid out are not-for-profit associations. I think that's a very important thing to understand. You can pay out more money to purses if you don't have to pay money to shareholders.

Going to the next page, again you can see the top three are not-for-profits — Saratoga, Keeneland and Belmont — and you'll notice if you add up all three NYRA tracks — and all three NYRA tracks are in the top 10 each year — you'll see that purses continue to increase in what's been a pretty difficult time in the racing industry.

Going to 2005, Belmont, Saratoga and Keeneland. Again, increases in purses at Saratoga. And I think we'll have a pretty dramatic increase in the purses paid out in 2006. I predict we'll be somewhere in the neighborhood of $670,000 per day. I believe the ranking will be Saratoga, 1; Belmont, 2; and Keeneland, 3.

I think it's also interesting to note if you noticed the slide that Dr. Waterman put up about people that contributed to the RMTC, there were five racetracks there. Four of the five were non-profit — Keeneland, Oak Tree, Del Mar and even broke old NYRA had some money that they could put forward. There was only one for-profit track that contributed to the RMTC and that was Los Alamitos. I would suggest to you that there were some significant for-profits that were noticeable by their absence.

Another metric to consider is the number of Grade 1 stakes run in this country in 2005. That's obviously very important for the owners, the trainers, and the breeders. In 2005, we ran 103 Grade 1 stakes in the U.S. Forty-six of those Grade 1 stakes-or 45%-were run at NYRA tracks.

I'd like to move on and talk a little bit about VLT's contributions to purses and breeders. I've put up this chart, and this is based on the fact when we get the VLTs operating at Aqueduct we'll have 4,500 machines and we're assuming $400 in net win per day. So based on that, payments to purses will be just under $50 million in the first year. It escalates up after the fifth year to 10%. The reason for that is we'll pay off the $180 million loan that we got from MGM to build out the VLTs. And also significant payments to breeders as you can see going from 1.25% to 1.5%.

Something that we learned very importantly recently is that after we submitted our indications of interest to the RFP committee, all the people who expressed interest were all allowed to ask questions. The RFP then answered those questions to the extent they felt it was appropriate. And one of the questions was, "What contracts does NYRA have that will survive a franchise transfer?"

And the only contract that will survive, according to the RFP committee, is the legislative contract between MGM and NYRA. The splits that you see in the deal here [slide] is a result of NYRA working with NYTHA and with the New York Breeders to develop these splits. And it's the view of the RFP committee and the view of NYRA-if NYRA does not go forward as the new franchisee-we're back to square one in terms of those splits.

Let's talk about the current status of Aqueduct VLTs. We had new legislation in March 2005 that confirmed and changed the law to allow the VLTs to be constitutional. At the same time it confirmed that MGM had been properly selected by NYRA in a transfer of the oversight of the VLTs to the New York Lottery.

That legislation was signed in June 2005, and when I was up here at Saratoga last year and people asked me when are the VLTs going to start construction, I said, "Boy, I hope by the time we get back to Belmont we'll be under construction."

We got back to Belmont, we got back to Aqueduct and it wasn't until we were considering our alternatives financially and were seriously looking at the possibility of bankruptcy as many of you probably know in December, we reached an agreement with the state and only after we reached that agreement did Lottery go forward and approve MGM and approve that relationship.

Well that was December 30. We're here in the middle of August. What do we need to get going? Well NYRA has done everything that it has been asked of by the state. We have reached a management agreement with Lottery. We've reached it with MGM-that's waiting for approval from the Lottery who reports to the governor. We need the approval of the Pension Benefit Guaranty Corporation (PBGC) subordination agreement by the oversight board. That was a lengthy negotiation as a result of some of our pension shortfalls. We had to get the PBGC to subordinate their interest so that MGM could go forward and get paid back. That document has been prepared and been waiting and has still not been approved.

What's the net result of that?

Well, the net result of that is every day we don't have the VLTs up and operating here in the state of New York we lose $1.2 million per day. And it's interesting when Governor Corzine shut down Atlantic City there was a hue and cry because the gaming industry was generating $1.2 million per day for the state of New Jersey, which shows you how valuable and how good that VLT operation is for the state if our $1.2 million per day is equivalent to the New Jersey monies. The only difference is theirs are operating and ours aren't.

Yonkers Raceway is under construction and we're told it's going to be operating this fall. So if you're a taxpayer I think you should be pretty upset about what's going on in regard to the VLTs. If you're a taxpayer and a horse owner here in New York, or if you're going to run horses in New York, the loss of monies to purses is $190,000 per day.

You saw in an earlier chart almost $50 million in revenues to purses from VLTs in the first year. That $50 million is on top of the $118 million or so we're going to pay. So we're going to go from $118 million to $168 million as soon as we can get these going. And believe me, NYRA would love to get this going and remarkably MGM has still stood by us. They're still very committed to this. If we go forward at Belmont, they'd like to be involved there. But all I can say is the second floor at Aqueduct is waiting to heard from the second floor in Albany.

Turning to the state-bred program, there's a quote here from Barry Ostrager, the president of the New York Thoroughbred Breeders, and just summing it up it says, "...but the much maligned NYRA has carded an unprecedented number of New York-bred races, which have generated for New York breeders and New York horsemen astonishing purses, breeder awards, owner awards, and stallion awards."

These New York breds are not just your father's New York breds. If you go across the street with us you'll see A.P. Indys, Seeking the Golds, Point Givens, Distorted Humors. It's a very robust and flourishing New York state-bred program.

So what model is best for industry stakeholders in the state of New York? Well, not surprisingly, we believe a not-for-profit model to preserve and protect the racing program for the benefit of all stakeholders is far superior than a for-profit model.

The good news here: with a VLT revenue split and bringing in a strategic partner, NYRA would still continue to run racing, it would be a non-profit company, and we'd have a strategic partner operating the gaming operation that would provide, obviously, expertise in gaming but would provide significant monies for much needed capital improvements.

We would have over $250 million in our plan that would be available for racing facility improvements, backstretch improvements, racing surface improvements, and we have in our plans right now — based on the RFP that we'll be submitting — that we will be putting Polytrack on at least two of our dirt surfaces.

In addition, the strategic partner will provide capital for payment to the state, which obviously is going to be a significant part of any bid. But NYRA is uniquely positioned to also amicably resolve the land issue.

So as far as the foundation for the future, I don't think it can be disputed that NYRA has the best year-round racing in the country. NYRA has become a leader in racing integrity in America. We're the leader in average purse distribution in the country. You just saw about the amount of money that's being paid out in breeders' purses and awards for state breds.

One can disagree with how we operate the tracks. There are a lot of different management philosophies and a different way of doing business. But one cannot dispute why we run the tracks. NYRA is a not-for-profit and will give its dividends to the industry and not to financial shareholders.

Thank you for your time and I hope you'll be able to join us for a great day of racing.

Thanks.

Ogden Mills Phipps: Thank you, Charlie.


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