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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
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 NO. 000-30578
MAGNA ENTERTAINMENT CORP.
(Exact Name of Registrant as Specified in Its Charter)
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DELAWARE
(State or Other Jurisdiction 98-0208374
of Incorporation or Organization) (I.R.S. Employer Identification Number)
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285 WEST HUNTINGTON DRIVE
ARCADIA, CALIFORNIA 91007
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (626) 574-7233
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Subordinate Voting Stock
(Title of Class)
Indicate by check mark whether the registrant: (1) has 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
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
--- ---
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
---
As of March 28, 2000, the aggregate Market Value of the Class A Subordinate
Voting Stock held by non-affiliates of the registrant was approximately
$24,220,319.63. As of March 28, 2000, the aggregate Market Value of the
Exchangeable Shares
of MEC Holdings (Canada) Inc., each of which is exchangeable into one share
of Class A Subordinate Voting Stock of the registrant, held by non-affiliates
of the registrant was approximately $35,985,354.96.
The number of shares of Class A Subordinate Voting Stock of the registrant
outstanding as of March 28, 2000 was 7,176,391.
The number of shares of Class B Stock of the registrant outstanding as of
March 28, 2000 was 58,466,056.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's Registration Statement on Form S-1 originally filed on
January 14, 2000 (File number 333-94791) and documents previously filed by
the registrant with The Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended, are incorporated by reference in
Part III of this Form 10-K to the extent stated herein. Except with respect
to information specifically incorporated by reference in this Form 10-K, the
documents incorporated by reference are not deemed to be filed as a part
hereof.
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ITEM 1. BUSINESS
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements included herein constitute "forward-looking
statements" within the meaning of the United States Private Securities
Litigation Reform Act of 1995. These forward-looking statements are based on
assumptions and analyses made by us in light of our experience and our
perception of historical trends, current conditions and expected future
developments as well as other factors we believe are appropriate in the
circumstances. However, whether actual results and developments will conform
with our expectations and predictions is subject to a number of risks and
uncertainties, including but not limited to those described below under "Risk
Factors". Consequently, all the forward-looking statements made in this
report are fully qualified by this special note, and there can be no
assurance that the actual results or developments anticipated by us will be
realized, or even if realized, that they will have the expected consequences
to, or effects on, us. See "Risk Factors" below for a description of the most
significant risks and uncertainties of our business.
INCORPORATION AND CORPORATE STRUCTURE
We were incorporated on March 4, 1999 under the laws of the State of
Delaware as MI Venture Inc. Our certificate of incorporation was amended by
certificate of amendment on August 30, 1999 to reclassify our Common Stock
into Class A Common Stock and to add a new class of stock designated as Class
C Common Stock. Our certificate of incorporation was further amended on
November 4, 1999 to change our name to MI Entertainment Corp., add share
provisions for our Class A Subordinate Voting Stock and Class B Stock and
reclassify and further subdivide our outstanding stock into shares of Class B
Stock. Our certificate of incorporation was further amended on January 26,
2000 to change our name to Magna Entertainment Corp. Our certificate of
incorporation was further amended on February 29, 2000 to broaden our
corporate purpose, clarify the attributes of our Class A Subordinate Voting
Stock and Class B Stock and implement our Corporate Constitution.
Subsequently, our certificate of incorporation was restated on March 1, 2000
to consolidate all prior amendments.
Our registered office is located at 1209 Orange Street, Wilmington,
Delaware, 19801 and our principal executive office is located at 285 West
Huntington Drive, Arcadia, California 91007.
The following chart shows our organizational structure and that of
our material subsidiaries, each of which is directly or indirectly
wholly-owned, together with the jurisdiction of incorporation of each of the
entities shown thereon as of March 29, 2000.
[CHART]
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OUR BUSINESS
We acquire, develop and operate horse racetracks and related
pari-mutuel wagering operations. As a complement to our horse racing
business, we are exploring the development of media sports wagering
operations, including telephone account, interactive television and
Internet-based wagering, as well as leisure and real estate projects on the
land surrounding some of our racetracks, possibly in conjunction with
business partners and subject to regulatory requirements. In addition, we own
a real estate portfolio which includes a gated residential project under
development, a golf course and related recreational facilities, another golf
course under development and other real estate. We are currently considering
a variety of options with respect to the golf courses, including direct
operation or leasing to third party operators, as well as sale and leaseback
transactions (which would require that Magna International Inc. ("Magna") not
exercise its right of first refusal) or outright sale. We intend gradually to
sell the balance of our real estate portfolio in order to provide capital to
be used in our business. Accordingly, we will take steps including servicing
our land and obtaining zoning and other approvals to enhance the value of the
properties and increase the revenues from resale. A brief description of our
horse racing business and real estate portfolio follows.
Pari-mutuel wagering on horse racing is pooled betting in which
individuals bet against each other on the outcome of a horse race. The
racetrack operator has no interest in the order of finish in any given race
and therefore has no risk in the outcome. A percentage of the pooled wagers
is retained by the operator of the wagering facility, a portion is paid to
the regulatory or taxing authorities and a portion is paid to the racetrack's
horsemen in the form of purses which encourage owners and trainers to enter
their horses in that track's live races. The balance of the pooled wagers is
paid to bettors as winnings. A racetrack's share of pari-mutuel revenues is
based on pre-determined percentages of various categories of the pooled
wagers at that racetrack and its in-state "off-track" wagering network. The
pre-determined percentages are set by state regulators. Pari-mutuel wagering
on horse racing occurs on the live races being conducted at racetracks as
well as on televised racing signals or simulcasts received or imported by the
simulcast wagering facilities located at such racetracks. This type of
wagering is known as on-track wagering. Pari-mutuel wagering on horse racing
also occurs at wagering establishments on horse races being conducted at
racetracks elsewhere. This type of wagering is known as off-track wagering.
HORSE RACING AND PARI-MUTUEL WAGERING
We currently operate six horse racetracks, each of which includes a
simulcast facility that accepts wagers on races conducted at other
racetracks. We also broadcast, or export, simulcasts of our horse races to a
number of locations across the United States, Canada, Mexico, the Caribbean
region and Australia. Our horse racing and related wagering operations
include: Santa Anita Park near Los Angeles, California; Gulfstream Park near
Miami, Florida; Golden Gate Fields, near San Francisco, California;
Thistledown near Cleveland, Ohio; Remington Park in Oklahoma City, Oklahoma;
and Great Lakes Downs in
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Muskegon Michigan. We also own San Luis Rey Downs, a horse training track
located outside of San Diego, California. We have acquired all these
racetracks since December 1998.
We own and operate some of the premier horse racing facilities in
North America and one of the horse racing industry's best simulcast products.
For example, Santa Anita Park has hosted the Breeders' Cup twice since the
inception of the Breeders' Cup in 1984 and Gulfstream Park has hosted it
three times, the most recent being on November 6, 1999. Furthermore, by many
standard industry measures including total handle or total amount wagered,
average daily attendance, average daily handle, average daily on-track handle
and average daily off-track handle, we believe that Santa Anita Park,
Gulfstream Park and Golden Gate Fields are three of the top racetracks in
North America.
SANTA ANITA PARK
Santa Anita Park is one of the premier horse racing and pari-mutuel
wagering facilities in North America. Santa Anita Park was the site of the
Breeders' Cup in both 1986 and 1993. Santa Anita Park is situated on
approximately 305 acres of land, located in the City of Arcadia, California,
approximately 14 miles northeast of Los Angeles. Over 10 million people are
located within a 30 mile radius of Santa Anita Park, providing us with one of
North America's largest target populations for live and simulcast horse
racing. Santa Anita Park was opened for thoroughbred horse racing in 1934 and
The Santa Anita Meet has been held at Santa Anita Park each year since its
founding, except for three years during World War II. The Santa Anita Meet
runs through the prime winter racing season, commencing December 26 and
running into late April each year. In addition, we lease Santa Anita Park to
Oak Tree Racing Association which hosts The Oak Tree Meet from the end of
September through early November of each year. As a result, Santa Anita Park
has one of the longest racing schedules of the top North American tracks,
totaling approximately 115 days each year. There are generally eight races
scheduled per live racing day during the week and nine or ten races per live
racing day on the weekends. Santa Anita Park's average daily attendance in
1999 was approximately 12,400 patrons per live racing day, representing one
of the highest average daily attendance figures of all North American
racetracks during that year.
Santa Anita Park had one of the highest total handles of all North
American racetracks in 1999, generating approximately $1.1 billion in wagers
in that year. In addition, Santa Anita Park's simulcast program generates
significant demand from other racetracks and off-track wagering
establishments, generating an average of approximately $9.2 million in
off-track handle during each racing day in 1999. Santa Anita Park exports its
simulcast signal to approximately 1,000 off-track wagering facilities in 23
countries, including the United States, Canada and Mexico. During periods in
which there is no live racing, Santa Anita Park operates as an off-track
wagering facility where customers can attend and wager on races via
television from other California racetracks as well as two racing programs
from other nationally recognized racing circuits.
Santa Anita Park's facilities currently include a large art deco
style grandstand structure with seating for approximately 19,000 patrons as
well as standing room for additional patrons, a one-mile oval dirt track
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as well as a natural turf course, stalls for approximately 2,000 horses and
parking facilities sufficient to accommodate approximately 20,000 cars. The
grandstand facilities include a clubhouse, a general admission area, and food
and beverage facilities, which range from fast food stands to restaurants,
both at outdoor terrace tables and indoor dining areas. The grounds
surrounding the grandstand are extensively landscaped and contain a
European-style paddock and infield accommodations, including picnic
facilities for special groups and the general public.
In December 1999, we completed an extensive capital renovation
program at Santa Anita Park in order to enhance our patrons' entertainment
experience. The improvements to Santa Anita Park include: the construction of
a fully enclosed 750 seat restaurant and bar that will be used for racing and
group functions throughout the year; the installation of a large format LED
screen in the infield track area for racing patrons and for use by the
restaurant and bar to promote non-racing events, such as the Super Bowl, the
World Cup and other similar events; improvements to the Winners' Circle and
trackside apron to provide patrons with better views of the track; upgrades
to the grandstand to current seismic code requirements; completion of fire
safety installations as required by the Fire Marshall; and the initiation of
improvements to the entrance way and parking lot of the racetrack. These
renovations cost approximately $45.0 million. We are also considering a
number of other upgrades to further strengthen Santa Anita Park's ability to
attract top horses, trainers and jockeys and to enable us to expand the
market for Santa Anita Park's simulcast signal.
We are also currently considering a variety of themed entertainment
and retail-based development proposals for approximately 85 acres of
available land at Santa Anita Park, some of which could be developed in
conjunction with business partners. This development would be intended to
further enhance the total entertainment experience at Santa Anita Park,
attract new patrons from diverse demographic backgrounds and strengthen the
loyalty of existing patrons. These proposals are only in their preliminary
stages, as any development of this nature would require the preparation of
detailed feasibility studies and business plans and extensive consideration
by our management of all relevant issues. If any proposal turns out to be
commercially viable after a detailed review, additional time would be
required to obtain the necessary regulatory approvals, negotiate with
potential business partners and obtain the necessary financing.
GULFSTREAM PARK
Gulfstream Park is also one of the premier horse racing and
pari-mutuel wagering facilities in North America. Gulfstream Park is located
on approximately 255 acres of land in the cities of Hallandale and Aventura,
between Miami and Ft. Lauderdale in Florida. The Miami/Ft. Lauderdale area is
home to approximately 3.3 million people, thus providing Gulfstream Park with
a sizeable target market for live racing and off-track wagering. Gulfstream
Park first opened in February 1939 and has operated each year since except
for the four years from 1940 to 1943. The annual meet at Gulfstream Park
lasts for approximately 63 days each year and is held between early January
and mid-March in each year. In addition, the Breeders' Cup has been held at
Gulfstream Park three times--in 1989 and 1992, and most
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recently on November 6, 1999. There are generally eleven races scheduled on
each racing day during the week and 11 or 12 races scheduled on each racing
day during the weekend. In 1999, Gulfstream Park's average daily attendance
was approximately 10,800 patrons per live racing day.
Gulfstream Park ranked as one of the five highest North American
racetracks in average daily off-track handle in 1999, generating an average
daily off-track handle of approximately $9.0 million on each live racing day
in that year. Gulfstream Park also had one of the highest total handles of
all North American racetracks in 1999, generating approximately $700 million
in wagers in that year. Gulfstream Park exports its simulcast program to
approximately 11 million people at approximately 800 off-track wagering
facilities in the United States, Canada, the Caribbean region and Mexico.
Total weekly viewership of Gulfstream Park's major racing events, including
through cable shows and satellite feeds, is estimated by us to be
approximately 55 million.
Gulfstream Park's facilities currently include a grandstand with
seating for approximately 14,500 patrons, a clubhouse with seating for an
additional 5,800 patrons, a one-mile main track, a seven-eighths mile turf
track, stalls for approximately 1,450 horses and parking for approximately
14,000 cars. The grandstand consists of three levels of seating, a rooftop
restaurant, casual restaurants, snack bars and liquor bars. There are also
three gourmet dining rooms in the clubhouse. Gulfstream Park includes
approximately 50 acres of land which we are considering developing.
The owners of Hialeah Park have entered into a three-month lease
agreement with us to conduct Hialeah's 2000 race meet at Gulfstream Park. Our
management and employees will be actively involved in operating the Spring
racing at Gulfstream Park conducted by Hialeah.
GOLDEN GATE FIELDS
Golden Gate Fields racetrack is one of the premier horse racing and
pari-mutuel wagering facilities in North America in terms of total handle.
Golden Gate Fields is located on approximately 181 acres of land in the
Cities of Albany and Berkeley, California, approximately 8 miles from Oakland
and approximately 11 miles from San Francisco. Over 2.5 million people are
located within a 30 mile radius of Golden Gate Fields, thus providing a large
target market for live and simulcast horse racing. Golden Gate Fields' racing
season consists of two meets, one of which runs for 60 days from late March
to mid-June each year and the other of which runs for approximately 45 days
from mid-November of each year to mid-January of the following year. This
racing schedule complements Santa Anita Park's racing schedule by adding
racing days between the end of The Oak Tree Meet and the beginning of The
Santa Anita Meet. Golden Gate Fields had one of the ten highest total handles
of all North American racetracks in 1999, generating approximately $525
million in wagers in that year. Golden Gate Fields' simulcast program also
generates strong demand from other racetracks and off-track wagering
facilities, generating approximately $160 million in off-track handle in
1999. Golden Gate Fields exports its simulcast program to approximately 560
sites in the United States, Canada, Mexico, Jamaica and Panama. In addition,
we
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recently commenced exporting Golden Gate Fields' simulcast program to
Australia and the Dominican Republic.
Golden Gate Fields' facilities currently consist of a one-mile main
track and a nine-tenths mile turf course, stalls for over 1,400 horses, a
main grandstand with seating for approximately 8,000 patrons, a clubhouse
with seating for approximately 5,250 patrons and a turf club with seating for
approximately 1,500 patrons and parking for over 8,500 cars. Golden Gate
Fields also has over 700 closed-circuit television monitors to show races,
odds, probable payoffs, results and the previous day's races.
THISTLEDOWN
Thistledown is located on approximately 125 acres in North Randall,
Ohio, approximately 10 miles southeast of downtown Cleveland. Thistledown has
one of the longest racing seasons of all North American racetracks,
consisting of 187 racing days each year between mid-March and early December,
encompassing the Summit, Thistledown, Randall and Cranwood meets. In 1999
Thistledown generated a total handle of approximately $238 million.
Simulcasts from Thistledown are exported to approximately 45 other racetracks
in the United States and one race each year is simulcast to Canada. Annually,
Thistledown hosts the Ohio Derby, which is the premier graded stakes race in
Ohio and is one of the top three-year old horse races in the United States.
Prior to our acquisition of Thistledown, the simulcast product from
Thistledown had not been given the exposure necessary in order to generate
growth in Thistledown's attendance and handle. We intend to bundle the signal
from Thistledown with the signals from our other racetracks and promote this
bundled signal under our own brand name. We expect that this will enhance the
quality of horse racing offered at Thistledown and result in an increase in
the number of off-track sites Thistledown's racing signal is exported to. We
expect this to result in growth in Thistledown's handle, especially as we
expand our distribution channels.
Thistledown's facilities include a grandstand with a total capacity
of approximately 16,000 patrons, a luxury suite for corporate and group
events, a one-mile oval track, stalls for approximately 1,500 horses and
parking for approximately 6,000 cars. Thistledown also owns the rights to an
additional 57 racing days plus a further 30 winter racing days which it uses
entirely to host simulcasting at other Ohio racetracks in exchange for a
percentage of the handle on these races.
REMINGTON PARK
Remington Park racetrack is situated on approximately 370 acres in
Oklahoma City, Oklahoma. Remington Park offers a total of approximately 122
live racing days during each year. The racing schedule consists of three
meets, a 40-day Quarter Horse meet from mid-April to mid-June and two
separate thoroughbred meets running three to five days per week, from
mid-August to late March. In 1999 Remington Park generated a total handle of
approximately $170 million. Simulcasts from Remington Park are exported to
approximately 35 other racetracks in the United States. As with Thistledown
Racetrack, the simulcast product from Remington Park has not been given the
exposure necessary to generate growth
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in Remington Park's attendance and handle. We expect that by bundling
Remington Park's signal with the signals from our other racetracks, we will
be able to increase the number of off-track sites Remington Park's racing
signal is exported to and Remington Park's handle, especially as we expand
our distribution channels and enhance the quality of horse racing offered at
Remington Park.
Remington Park's facilities include a grandstand with seating for
approximately 20,000 patrons, 21 luxury suites for corporate and group
events, a one-mile dirt track, a seven-eighths mile turf course, stalls for
approximately 1,300 horses and parking facilities sufficient to accommodate
approximately 8,000 cars. The property on which Remington Park is located is
leased from Oklahoma Zoological Trust under a lease which extends through
2013, with options to renew for five 10-year periods.
GREAT LAKES DOWNS
Great Lakes Downs is situated on approximately 85 acres in Muskegon,
Michigan, approximately 35 miles from Grand Rapids. Great Lakes Downs, which
commenced operations in January 1999, offers a total of 134 live racing days
beginning in late April and ending in early November of each year. In 1999,
Great Lakes Downs generated a total handle of approximately $55 million.
Simulcasts from Great Lakes Downs are exported to approximately 45 other
racetracks in the United States. We anticipate that as the simulcast signal
from Great Lakes Downs is combined with the simulcast signals from our other
racetracks, Great Lakes Downs will become a good regional track in terms of
handle.
Great Lakes Downs' facilities include a grandstand with capacity for
approximately 7,500 patrons, a 5/8 mile dirt track, stalls for approximately
920 horses and parking facilities sufficient to accommodate approximately
2,000 cars.
SAN LUIS REY DOWNS
We own San Luis Rey Downs, a horse boarding and training center
located on approximately 200 acres of land near San Diego, California.
MEDIA SPORTS WAGERING
Media sports wagering is wagering on sporting events conducted
through a variety of different media, including telephone account,
interactive television and Internet-based wagering. We are currently
exploring expansion into each of these areas, possibly in conjunction with
business partners and subject to regulatory approvals in order to expand the
market for our simulcast horse racing product. In connection with this
component of our strategy, we recently acquired certain management, marketing
and merchandising rights to an Austrian soccer club. These rights are
expected to assist us in developing media sports operations in Europe. In the
future, we may build on the experience we develop in pari-mutuel wagering by
expanding our operations to include sports wagering on other sports as well.
See "Item 1 -- Business -- Risk Factors -- Gaming Risks -- OUR GAMING
ACTIVITIES ARE DEPENDENT ON GOVERNMENT APPROVALS WHICH IF NOT GRANTED COULD
ADVERSELY AFFECT OUR EXISTING BUSINESS AND OUR GROWTH" for a discussion of
the risks inherent in expansion into media sports wagering.
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TELEPHONE ACCOUNT WAGERING
We are currently considering the establishment of a telephone
account wagering operation, possibly in conjunction with business partners
and subject to regulatory approval. Once established, this type of system
would involve patrons opening an account with us or our strategic partner and
depositing funds into this account through the use of debit or credit cards.
Patrons would then place wagers over the telephone on horse races offered at
our racetracks and on horse races simulcast by other racetracks to our
simulcast wagering facilities. Wagers placed by patrons would not be allowed
to exceed the amounts on deposit in their accounts and winnings would be
credited to patrons' accounts and would be available for future wagers. We
would derive revenues from our share of the wagers placed as well as fees
charged to patrons for the service.
We expect that telephone account wagering will make wagering on
horse racing more convenient for our patrons and expand the market for our
simulcast product by enabling us to fully utilize an important distribution
channel for our horse racing product. A telephone account operator must be
licensed and a telephone account wagering hub or base must be established in
any one of eight states in which telephone account wagering is permitted.
These states are Connecticut, Kentucky, Maryland, Nevada, New York, Ohio,
Oregon and Pennsylvania. Once an operator has obtained the required licenses
and established a hub, the operator may accept wagers from patrons living in
these eight states and in other states.
INTERNET AND INTERACTIVE TELEVISION-BASED WAGERING
We are exploring the potential of Internet and interactive
television-based wagering on horse racing and potentially other sporting
events, possibly in conjunction with business partners and subject to
regulatory approval. Interactive television-based wagering involves the
transmission of horse racing-related television programming through cable or
satellite delivery into the homes of subscribers. These subscribers are able
to use interactive "real-time" television-based technology, generally through
a remote controlled device connected to a television, to wager on the live
horse races being shown in the program. In order to place wagers, patrons
must deposit money with the sponsoring racetrack through the use of debit or
credit cards. We would derive revenue from our patrons' subscriptions and our
share of the wagers placed on the races broadcast.
Interactive television-based wagering would allow us to increase the
market for our simulcast product by utilizing an important distribution
channel for this product. We currently have the non-exclusive right to
broadcast races from Santa Anita Park, Golden Gate Fields, Thistledown,
Remington Park and Great Lakes Downs. Races from Gulfstream Park are subject
to an exclusive contract with TV Games Network until 2003. Commencing in
2003, we will have the exclusive right to broadcast races from Santa Anita
Park, Gulfstream Park and Golden Gate Fields, three of the most sought-after
racing signals in North America. Interactive television-based wagering would
significantly enhance our ability to cross promote our live horse racing and
we expect it would enable us to attract new patrons to horse racing and
cultivate their loyalty. We would aim to show full racing cards and to
develop an appealing, convenient and easy-to-use
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format which would provide a fresh new look for horse racing. Furthermore, we
would aim to broadcast the programming we develop for interactive
television-based wagering through a variety of sources, including satellite
television, cable television and the Internet. As our operations expand, we
would apply the experience we gain in interactive television-based wagering
on horse races in expanding to wagering in other sports.
Due to the growth of the Internet as a medium of both communication
and commerce, we are exploring the possibility of establishing an
Internet-based gaming service, possibly in conjunction with a strategic
partner and subject to regulatory approval. Establishing this type of service
would enable us to increase the market for our simulcast product by
maximizing the opportunities presented by the Internet as a distribution
channel for our live horse racing product. It would also enable us to achieve
economies of scale since the programming we would aim to broadcast on the
Internet would be the same as that produced for our interactive
television-based wagering. As with interactive television-based wagering, we
would expect to develop a competitive position on the strength of our live
horse racing product and we would expect this competitive position to
strengthen by 2003 when we will have the exclusive right to broadcast races
from Santa Anita Park, Gulfstream Park and Golden Gate Fields. As our
operations expand, we would likely be able to apply the experience we gain in
Internet-based wagering on horse races to other sports.
REAL ESTATE PORTFOLIO
We currently own a portfolio of real estate properties in North
America and Europe, including a gated residential community currently under
development, a golf course and related recreational facilities, another golf
course under development and other real estate. We intend gradually to sell
the balance of our real estate portfolio in order to provide capital to be
used in our horse racing and other related businesses; accordingly, we will
take steps including servicing the land and obtaining zoning and other
approvals to enhance the value of the properties and increase the revenues
from resale.
Our real estate portfolio includes land currently being developed in
Austria and undeveloped and partially developed land in both Austria and
Canada. We are currently developing a gated residential community, known as
Fontana, situated amidst the Fontana Sports golf course and related
recreational facilities owned and operated by us. This residential
development consists of approximately 50 acres of land and is located in
Oberwaltersdorf, Austria, approximately 15 miles south of Vienna. Fontana is
being developed in two phases into a luxury residential community consisting
of 250 apartment units and 100 single family homes. We expect to complete the
second and final phase of Fontana by 2006. We also own approximately 1,000
acres of undeveloped land in Ebreichsdorf, Austria located approximately 15
miles south of Vienna, which includes a golf course leased to a third party.
In addition, our real estate portfolio includes approximately 270 acres of
mixed-use land adjacent to the existing headquarters of Magna in Aurora,
Canada, approximately 30 miles north of Toronto. Part of the Aurora property
could be sold to a developer of a gated residential golf course community,
while other parts could be sold to developers of
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retail, office, commercial, light industrial and other developments. We are
currently servicing, improving and seeking zoning and other approvals for
some of these properties in order to enhance their value on resale.
Our real estate portfolio also includes two golf courses, Fontana
Sports which is in operation and located in Oberwaltersdorf, Austria and a
second golf course which is being completed in Aurora, Canada. Fontana Sports
is a semi-private sports facility adjacent to the Fontana residential
community. The Fontana Sports facility includes an 18-hole golf course,
tennis club, fitness facility and a restaurant. When completed, the Aurora
golf course will be an 18-hole golf course. It is adjacent to the lands we
own in Aurora, Canada which are currently under development. Doug Carrick,
one of Canada's leading golf course architects, designed both Fontana Sports
and the Aurora golf course. The Aurora golf course is scheduled to officially
open in May 2001. We expect that amenities will include a clubhouse with a
restaurant, a members' lounge, a spa and a pro shop. Our parent company,
Magna, is currently paying us an annual access fee of $2.7 million pursuant
to an arrangement effective as of March 1, 1999 to access the Fontana Sports
facility for Magna-sponsored corporate and charitable events as well as for
business development purposes. Upon completion of the Aurora golf course,
Magna will pay us an annual access fee to use the Aurora golf course for
Magna-sponsored corporate and charitable events and business development
purposes. These access arrangements are scheduled to expire five years after
their effective dates. We have also granted Magna a right of first refusal to
purchase these golf courses, if we decide to sell them. We are considering a
variety of options with respect to our golf courses, including direct
operation or leasing to third party operators, as well as sale and leaseback
transactions (which would require that Magna not exercise its right of first
refusal) or outright sale. For further information regarding these
arrangements with Magna, see "Item 13 -- Certain Relationships and Related
Transactions".
We also hold some of the land adjacent and in close proximity to
both of the above described golf courses. We expect that the ultimate resale
value of these adjacent and proximate lands will be significantly enhanced
through the presence of these golf courses.
Finally, we own a portfolio of other real estate in Austria, Canada
and the United States. We are currently servicing, improving and seeking
zoning and other approvals for some of these properties in order to enhance
their value on resale. We intend to dispose of these properties gradually as
market conditions permit.
For financial information on our operating segments see Note 11 to
the Consolidated Financial Statements included in "Item 8 - Financial
Statements and Supplementary Data" of this Report.
REORGANIZATION
On November 5, 1999, Magna completed a reorganization of our
corporate structure, under which Magna's North American and European
non-automotive businesses and real estate assets were transferred to us,
including the following:
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1. All the outstanding capital stock of The Santa Anita Companies, Inc.,
which owns all the outstanding capital stock of the Los Angeles Turf
Club, Inc., the operator of Santa Anita Park in California, and
approximately 305 acres of related real estate.
2. All the outstanding capital stock of Fontana Beteiligungs AG (formerly
Magna Vierte Beteiligungs AG), which operates the Fontana Sports golf
course and related recreational facilities and is developing the
adjacent Fontana residential development in Oberwaltersdorf, Austria.
3. All the outstanding capital stock of Magna Projektentwicklungs AG,
which, through a subsidiary, owns the land held for development in
Ebreichsdorf, Austria.
4. Rights to acquire approximately 160 acres of land and improvements in
Aurora, Ontario under a conditional sale agreement with Magna, which is
subject to the successful severance of the affected properties. An
additional 200 acres, which comprise the 18-hole golf course currently
under construction, is also subject to a conditional sale agreement
with a company associated with the members of the family of Frank
Stronach, our Chairman and Chief Executive Officer and the Chairman of
Magna.
5. Various other parcels of land and improvements and other non-automotive
assets located in North America and Europe.
During the course of the reorganization, Magna transferred assets
and settled some intercompany indebtedness which was paid for through the
issuance of approximately $300 million of shares of our common stock. Magna
also subscribed for shares of our stock by way of a cash payment of $250
million. Our Certificate of Incorporation was then amended to add share
provisions for our Class A Subordinate Voting Stock and Class B Stock and our
outstanding common stock was then reclassified and further subdivided into
shares of Class B Stock. On December 30, 1999, 14,823,187 shares of our Class
B Stock held by Magna were repurchased by us for $110,000,000. On this date,
$110,000,000 was invested by Magna in MEC Holdings (Canada) Inc. in return
for 14,823,187 of its Exchangeable Shares, each of which is exchangeable on a
one-for-one basis for shares of our Class A Subordinate Voting Stock.
On December 31, 1999, there were 63,712,141 shares of our Class B
Stock, 1,662,890 shares of our Class A Subordinate Voting Stock and
14,823,187 Exchangeable Shares outstanding.
On March 13, 2000, upon completion of our spin-off from Magna, there
were, 7,176,391 shares of our Class A Subordinate Voting Stock issued and
outstanding. In addition, there were 14,823,187 Exchangeable Shares issued
and outstanding 4,362,328 of which are directly or indirectly owned by Magna.
Magna directly and indirectly owns all 58,466,056 shares of our Class B
Stock. As a result Magna is entitled to exercise approximately 99% of the
total votes attached to all our outstanding stock and Magna is able to elect
all our directors and controls us.
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EMPLOYEES
As of March 22, 2000, we employed approximately 3,000 employees,
approximately 1,700 of whom are represented by a union. Since our inception,
we have not had a work stoppage. We consider our relations with our employees
to be good. We also believe that our future success will depend in part on
our continued ability to attract, integrate, retain and motivate highly
qualified technical and managerial personnel, and upon the continued service
of our senior management.
Our contract with the Service Employees International Union, Local
280, which represents approximately 400 pari-mutuel employees at Santa Anita
Park during our racing season, will expire on July 24, 2000. We expect that
we will be able to negotiate a new union contract with Local 280 through the
collective bargaining process involving all California racetracks.
COMPETITION
We generally do not compete directly with other racetracks for
customers because of geographic separation of facilities and differences in
seasonal timing of meets. In some cases, the differences in seasonal timing
of meets results from the regulatory environment in which racetracks operate.
In California, The California Horse Racing Board has annually licensed us and
Oak Tree Racing Association to conduct racing meets at Santa Anita Park and
it has not licensed other thoroughbred racetracks in Southern California to
conduct racing during these meets. However, night harness racing and night
quarterhorse meets are conducted at other racetracks in Southern California
during portions of these meets. Santa Anita Park and Golden Gate Fields may
face competition if licenses are granted to other racetracks during our
meets. In Florida, tax laws currently discourage the three Miami-area
racetracks from applying for race dates outside of their traditional racing
season. Currently, the race dates for the three Miami-area racetracks do not
overlap. However, commencing July 1, 2001 a new tax structure affecting
Florida racetracks is expected to eliminate this deterrent. As a result,
Gulfstream Park racetrack may face direct competition from other Miami- area
racetracks in the future. We currently compete for customers with off-track
wagering facilities and with operators of other forms of gaming and
entertainment. We attempt to attract customers by providing high quality
racing in appealing facilities, value for money spent and good customer
service.
If we implement our strategy to increase the distribution channels
for our simulcast horse racing product to include telephone account,
interactive television and Internet-based wagering, we will likely face
competition from competitors with significant experience and advanced market
penetration in these distribution channels, including TV Games Network, which
is owned by TV Guide, Inc., and The Racing Network. TV Games Network
currently markets the signals of approximately 45 racetracks, ten of which
are under exclusive contract, including the signal from Churchill Downs'
racetracks and the signals from Gulfstream Park and The Oak Tree Meet. TV
Games Network's exclusive right to market the signals from Gulfstream Park
and The Oak Tree Meet expires in December, 2003. We expect that TV Games
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Network's initial competitive advantage may be off-set by the fact that in
2003 we will have exclusive rights to market the signal for Santa Anita Park,
Gulfstream Park and Golden Gate Fields. In addition, we may be able to
eliminate this competitive disadvantage by pursuing this element of our
strategy in conjunction with an experienced strategic partner.
We currently face competition in Austria from developers of
residential real estate projects, some of which have greater experience, name
recognition and resources than us.
ENVIRONMENTAL MATTERS
We are subject to a wide range of environmental laws and regulations
imposed by governmental authorities relating to wastewater discharge, waste
management and storage of hazardous substances. During calendar 2000 we
intend to adopt a Health, Safety and Environmental Policy pursuant to which
we will commit to:
* conducting our operations in a manner that complies with or
exceeds all legal requirements regarding health, safety and the
environment;
* regularly evaluating and monitoring past and present business
activities affecting health, safety and the environment;
* ensuring that a systematic health, safety and environmental
review program is implemented and monitored at all times for
each of our operations, with a goal of continued improvement in
health, safety and environmental matters; and
* ensuring that adequate reports on health, safety and
environmental matters are presented to our Board of Directors,
at a minimum, on an annual basis.
We are currently subject to Magna's Health, Safety and Environmental
Policy, which is substantially similar to the policy we intend to adopt.
To date, compliance with environmental laws and regulations has not
had a material adverse effect on our financial condition and results of
operations, however, changes in governmental laws and regulations are ongoing
and may make environmental compliance increasingly expensive. We cannot
predict future costs that we may incur to meet environmental obligations.
A subsidiary of Magna has agreed to indemnify us in respect of
environmental remediation costs and expenses relating to existing conditions
in some of our Austrian real estate properties.
RECENT ACQUISITIONS
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A significant proportion of our assets were acquired from our parent
company, Magna and its subsidiaries on a non-arm's length basis pursuant to
the Reorganization. Details of the acquisition of Santa Anita Park by some of
Magna's subsidiaries are provided below. In addition, details of material
acquisitions made by us are also provided below:
Pursuant to an asset purchase agreement dated as of November 13,
1998, with Meditrust Corporation, Meditrust Operating Company, The Santa
Anita Companies, Inc. and Santa Anita Enterprises, Inc. (collectively
referred to as Meditrust), the assets of Santa Anita Park and the stock of
Los Angeles Turf Club, Inc. were acquired by one of Magna's subsidiaries, The
Santa Anita Companies, Inc., as of December 10, 1998 and the transaction
closed on December 11, 1998. The purchase price for the assets acquired was
$118.6 million, all of which was paid in cash. We acquired the shares of The
Santa Anita Companies, Inc. from Magna in the course of the reorganization.
Pursuant to an asset purchase agreement dated as of March 8, 1999,
one of our indirect, wholly-owned subsidiaries, SLRD Thoroughbred Training
Center, Inc., agreed to acquire from San Luis Rey Downs Enterprises LLC the
assets of San Luis Rey Downs for a purchase price of approximately $6.4
million, all of which was paid in cash. This transaction was completed on May
1, 1999.
Pursuant to a stock purchase agreement dated as of June 30, 1999
between us and Gulfstream Holdings, Inc. of Illinois and Gulfstream Park
Racing Association Inc., we agreed to acquire from Gulfstream Holdings Inc.
of Illinois all the issued and outstanding stock of Gulfstream Park Racing
Association Inc. for a purchase price of $89.2 million. Gulfstream Park
Racing Association Inc. owns all the assets of Gulfstream Park racetrack in
Hallandale, Florida. We completed the acquisition on September 1, 1999.
Pursuant to a stock purchase agreement dated as of October 21, 1999,
we agreed to acquire from The Edward J. DeBartolo Corporation and Oklahoma
Racing LLC, all the issued and outstanding stock of Thistledown, Inc. and
Remington Park, Inc. for a total purchase price of $24.5 million.
Thistledown, Inc. owns all the assets of Thistledown racetrack in North
Randall, Ohio. Remington Park, Inc. owns all the assets of Remington Park
racetrack in Oklahoma City, Oklahoma. Of the total purchase price of $24.5
million, the stock of Thistledown cost $14.3 million, $9.8 million of which
was paid in cash and the balance of which was paid through the issuance of
650,695 shares of our Class A Subordinate Voting Stock. The stock of
Remington Park, Inc. cost $10.2 million, all of which was paid in cash. We
completed this acquisition on November 12, 1999.
Pursuant to a stock purchase agreement dated as of November 5, 1999,
we agreed to acquire from Ladbroke Racing Corporation, all the issued and
outstanding stock of Ladbroke Land Holdings Inc. and Pacific Racing
Association. These companies collectively own and operate Golden Gate Fields
racetrack in Albany, California. The purchase price for the stock of these
companies was $84.6 million, of which $60.3 million was paid in cash, $7.0
million was paid through the issuance 1,012,195 shares of our Class A
Subordinate Voting Stock and $20.0 million was paid by way of an
interest-free promissory
15
note (discounted value of $17.3 million), $10.0 million of which matures on
the first anniversary of the date of closing and $5.0 million of which
matures on each of the second and third anniversaries. We completed this
acquisition on December 10, 1999 and subsequently changed the name of
Ladbroke Land Holdings Inc. to MEC Land Holdings (California) Inc.
Pursuant to an amended and restated asset purchase agreement dated
as of January 31, 2000, with Great Lakes Downs, Inc. and Great Lakes Downs
Cafe, Inc. we acquired the assets and assumed approximately $9.3 million of
liabilities of Great Lakes Downs racetrack in Muskegon, Michigan for a
purchase price of $1.7 million, which was paid through the issuance of
267,416 shares of our Class A Subordinate Voting Stock. We completed this
acquisition on February 29, 2000.
RISK FACTORS
The most significant risks and uncertainties we face are described
below, but other risks and uncertainties that are not known to us or that we
currently believe are not material or that are similar to those faced by
other companies in our industry may also have a material adverse effect on
our business, financial condition or results of operations.
If any of the following risks actually occur, our business,
financial condition and results of operations could be materially and
adversely affected. In this case, the trading price of shares of our Class A
Subordinate Voting Stock and the Exchangeable Shares could decline
substantially, and investors may lose all or part of the value of the shares
of our Class A Subordinate Voting Stock or the Exchangeable Shares held by them.
GENERAL RISKS REGARDING OUR BUSINESS
WE HAVE A HISTORY OF LOSSES AND WE ANTICIPATE LOSSES IN THE NEAR
FUTURE ON SOME OF OUR RACETRACKS
We were incorporated approximately one year ago and we have a very
short history of operations and earnings and therefore we have little
historical information on which to base future projections. We have
experienced cumulative consolidated net losses since inception totalling
approximately $17.9 million for periods up to December 31, 1999. Santa Anita
Park, Golden Gate Fields, Remington Park, Thistledown and Great Lakes Downs
racetrack have historically operated at a loss and we anticipate they may do
so in the future.
WE DO NOT PLAN TO PAY DIVIDENDS UNTIL FISCAL YEAR 2004, IF AT ALL
We have not paid any dividends to date, we do not plan to pay any
dividends until our fiscal year commencing January 1, 2004 and we cannot give
any assurance that we will be in a position to pay dividends then, or
thereafter.
16
OUR BUSINESS AND OUR EXPANSION PLANS MAY BE ADVERSELY AFFECTED IF WE
DO NOT RETAIN OUR KEY PERSONNEL
We will be highly dependent on the services of members of our senior
management, most of whom have only recently been hired by us and therefore
have not established a track record of working together successfully. We also
depend on the local management of our racetracks and other operating units.
The loss of the services of any of these individuals may adversely affect our
leadership and direction, which may impede the implementation of our strategy.
OUR STOCK PRICE MAY BE VOLATILE
The price of shares of our Class A Subordinate Voting Stock and the
Exchangeable Shares may continue to be volatile, particularly if some of
Magna's institutional shareholders sell their holdings of our Class A
Subordinate Voting Stock or Exchangeable Shares because they:
* are prohibited from holding stock of a company with a
significantly smaller market capitalization;
* cannot hold stock of a gaming company; or
* do not want to hold our stock for any other reason.
In addition, the following factors may have a significant effect on
the market price of our Class A Subordinate Voting Stock and Exchangeable
Shares: fluctuations in our operating profits; the announcement of new
wagering and gaming opportunities by us or our competitors; the passage of
legislation affecting horse racing or gaming; developments affecting the
horse racing or gaming industries generally; sales of substantial amounts of
our Class A Subordinate Voting Stock or Exchangeable Shares; and sales by
Magna of our Class A Subordinate Voting Stock held by it, as a result of its
stated intention to reduce its majority equity position in us. Moreover,
publicly-held horse racing and gaming companies have experienced price and
trading volume fluctuations that are often unrelated to these companies'
financial condition and results of operations. A shift away from investor
interest in gaming companies in general could have a material adverse effect
on the market price of our Class A Subordinate Voting Stock and the
Exchangeable Shares, regardless of our financial condition and results of
operations.
WE MAY NOT BE ABLE TO OBTAIN FINANCING OR MAY BE ABLE TO OBTAIN IT ONLY
ON UNFAVOURABLE TERMS WHICH MAY AFFECT THE VIABILITY OF OUR EXPANSION
PROJECTS OR MAKE THEM MORE COSTLY
We may require additional financing in order to expand our operations.
It is possible that this financing will not be available or, if available, will
not be available on terms which are favourable to us. In addition, Magna has
made a commitment to its shareholders that it will not, for a period of seven
years ending May 31, 2006, without the prior consent of the holders of a
majority of Magna's Class A
17
Subordinate Voting Shares, make any further debt or equity investment in, or
otherwise provide financial assistance to, us or any of our subsidiaries. See
"Item 13 -- Certain Relationships and Related Transactions -- Relationship
with Magna" for a more detailed description of our relationship with Magna.
IF WE ARE UNABLE TO NEGOTIATE A SATISFACTORY UNION CONTRACT, SOME OF
OUR EMPLOYEES MAY COMMENCE A STRIKE WHICH MAY LEAD TO LOST REVENUES AND
COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS
As of March 22, 2000, we employed approximately 3,000 employees,
approximately 1,700 of whom are represented by a union. Our contract with the
Service Employees International Union, Local 280, which represents
approximately 400 pari-mutuel employees at Santa Anita Park during our racing
season, will expire on July 24, 2000. Although we expect that we will be able
to negotiate a new union contract with Local 280 through the collective
bargaining process, we cannot guarantee that we will be able to negotiate a
satisfactory contract. If we are unable to negotiate a satisfactory union
contract, some of our employees may commence a strike and any strike, if
commenced, may lead to lost revenues and therefore have a material adverse
effect on our financial condition and results of operations.
OUR RELATIONSHIP WITH MAGNA IS NOT AT "ARM'S LENGTH" AND THEREFORE
MAGNA MAY INFLUENCE US TO MAKE DECISIONS THAT ARE NOT IN THE BEST
INTERESTS OF OUR OTHER STOCKHOLDERS
Our relationship with Magna is not at arm's length. Magna owns all
our Class B Stock and some Exchangeable Shares, but none of our Class A
Subordinate Voting Stock which means that Magna is entitled to exercise
approximately 99% of the total votes attached to all our outstanding stock.
Magna is therefore able to elect all our directors and controls us.
Therefore, Magna is able to cause us to effect certain corporate transactions
without shareholder consent, subject to applicable law. In addition, Magna is
able to cause or prevent a change in our control. In some cases, the
interests of Magna may not be the same as those of other stockholders, and
conflicts of interest may arise after the completion of the distribution that
may be resolved in a manner detrimental to us.
For example, Magna has entered into an arrangement with us so as to
ensure their access to the Fontana Sports golf course and related
recreational facilities in return for an agreed upon fee. Magna will enter
into a similar arrangement in relation to the Aurora golf course and related
facilities. These access arrangements expire five years after their effective
dates, but Magna could prematurely terminate them or amend them. The early
termination, amendment or non-renewal of these access arrangements could have
a material adverse effect on our financial condition and results of
operations. We have also granted Magna a right of first refusal to purchase
these golf courses if we decide to sell them. We are currently considering a
variety of options with respect to these golf courses, including direct
operation or leasing to third party operators, as well as sale and leaseback
transactions which would require that Magna not exercise its right of first
refusal or outright sale.
18
GAMING RISKS
OUR GAMING ACTIVITIES ARE DEPENDENT ON GOVERNMENT APPROVALS WHICH, IF
NOT GRANTED, COULD ADVERSELY AFFECT OUR EXISTING BUSINESS AND OUR
GROWTH
Our existing live racing, pari-mutuel wagering and other operations
are contingent upon the continued governmental approval of these operations
as forms of legalized gaming. All our current and proposed operations are
subject to extensive regulations and could be subjected at any time to
additional or more restrictive regulations, or banned entirely.
As of the date of this Report, we have obtained all governmental
licenses, registrations, permits and approvals necessary for the operation of
our gaming facilities. However, we may be unable to maintain or renew our
existing licenses. The loss of our licenses, registrations, permits or
approvals may materially limit the number of races we conduct and could have
a material adverse effect on our business, financial condition and results of
operations. In addition, we currently devote significant financial and
management resources to complying with the various governmental regulations
to which our operations are subject. Any significant increase in governmental
regulation could materially adversely affect our business, financial
condition and results of operations.
Moreover, any future expansion of our gaming operations will likely
require additional licenses, registrations, permits and approvals. The
licensing process can be both lengthy and costly and there is no assurance of
success.
The high degree of regulation in the gaming industry is a
significant obstacle to our growth strategy, especially with respect to
telephone account, interactive television and Internet-based sports betting.
Telephone account and interactive television-based betting from home may
currently be conducted only through hubs or bases located in eight states.
The Los Angeles County District Attorney has recently challenged the ability
of California residents to conduct account wagering through these hubs or
bases. Our expansion opportunities in this area may be limited unless more
states change their laws to permit telephone account and interactive
television-based betting. Wagering over the Internet is also subject to
extensive legal restriction. The United States Congress is currently
considering enacting the Internet Gambling Prohibition Act, also known as the
"Kyl Bill", which would amend the Interstate Wire Act to make it clear that
persons engaged in the United States in the business of betting or wagering
through the Internet as well as casual bettors who knowingly use a
communication facility for betting or gambling over the Internet can be fined
or imprisoned. Internet service providers would be required to block-out
gambling sites and would be subject to state and federal authority. The Kyl
Bill would permit telephone account, interactive television and
Internet-based account wagering on horse racing, but not other sports. A
similar piece of legislation was recently introduced in the House of
Representatives by Rep. Bob Goodlatte (R. Va.). We cannot predict the final
disposition of either piece of legislation.
19
IMPLEMENTATION OF SOME OF THE RECOMMENDATIONS OF THE NATIONAL GAMBLING
IMPACT STUDY COMMISSION COULD ADVERSELY AFFECT OUR GROWTH PROSPECTS
In August 1996, the United States Congress established the National
Gambling Impact Study Commission to conduct a comprehensive study of the
social and economic effects of the gambling industry in the United States.
This commission reviewed existing federal, state and local policy and
practices with respect to the legalization or prohibition of gambling
activities with the aim of formulating and proposing changes in these
policies and practices and recommending legislation and administrative
actions for these proposed changes. On June 18, 1999, the commission issued a
report setting out its findings and conclusions, together with
recommendations for legislation and administrative actions. Some of the
recommendations were:
* prohibiting Internet gambling which is not already authorized
within the United States or among parties in the United States
and any foreign jurisdiction;
* limiting the expansion of gambling into homes through such
mediums as account wagering;
* banning betting on all collegiate and amateur athletic events;
and
* refusing the introduction of casino-style gambling into
pari-mutuel facilities for the primary purpose of saving a
pari-mutuel facility that the market has determined no longer
serves the community or for the purpose of competing with
other forms of gaming.
The recommendations made by the National Gambling Impact Study
Commission could result in the enactment of new laws and/or the adoption of
new regulations which would materially adversely impact the gambling industry
in general and thus would materially adversely affect our growth prospects.
We are unable, at this time, to determine the ultimate disposition of the
commission's recommendations.
WE FACE SIGNIFICANT COMPETITION FROM OPERATORS OF OTHER RACETRACKS AND
OTHER FORMS OF GAMING WHICH COULD DECREASE THE AMOUNT WAGERED AT OUR
FACILITIES AND ADVERSELY AFFECT OUR PROFITABILITY
We face significant competition in each of the jurisdictions in
which we have gaming operations and this competition is expected to intensify
as new gaming operators enter our markets and existing competitors expand
their operations and consolidate management of multiple racetracks. One of
our competitors, Churchill Downs Inc., may have substantially greater name
recognition and financial resources than us. We also compete for customers
with other sports, entertainment and gaming operators, as well as state
governments and native American groups. Competition in the gaming industry is
expected to increase due to limited opportunities for future growth in new
markets. If we lose customers for any reason, including the factors discussed
below, our profitability may be materially adversely affected.
20
In addition, Florida tax laws currently discourage the three
Miami-area racetracks, Gulfstream Park, Hialeah Park and Calder Race Course,
from scheduling concurrent races. We expect that a new tax structure will
eliminate this deterrent in 2001. As a result, while the owners of Hialeah
Park have leased Gulfstream Park racetrack for their 2000 race meet,
Gulfstream Park may face direct competition from other Miami-area racetracks
in the future. This competition could affect the profitability of Gulfstream
Park, which could reduce our overall profitability.
State and provincial lotteries benefit from numerous distribution
channels, including supermarkets and convenience stores, as well as from
frequent and extensive advertising campaigns. We do not have the same access
to the gaming public or the advertising resources available to state and
provincial lotteries.
DECLINING ON-TRACK ATTENDANCE AND INCREASING COMPETITION IN
SIMULCASTING MAY ADVERSELY AFFECT OUR FINANCIAL RESULTS
There has been a general decline in the number of people attending
and wagering at live horse races at North American racetracks due to a number
of factors, including increased competition from other forms of gaming,
unwillingness of customers to travel a significant distance to racetracks and
the increasing availability of off-track wagering. The declining attendance
at live horse racing events has prompted racetracks to increasingly rely on
revenues from simulcasting and off-track wagering. The industry-wide focus on
simulcasting and off-track wagering has increased competition among
racetracks for outlets to simulcast their live races. A decline in consumer
interest in horse racing, a continued decrease in attendance and on-track
wagering as well as increased competition in the simulcast wagering market
could lead to a decrease in the amount wagered at our facilities and may have
a material adverse effect on the overall profitability of our horse racing
operations.
WE CURRENTLY FACE SIGNIFICANT COMPETITION FROM INTERNET AND ON-LINE
WAGERING WHICH MAY REDUCE OUR PROFITABILITY
Although we currently do not operate any Internet or online gaming
services, we currently face competition from operators of those gaming
services. Internet and online gaming services allow their customers to wager
on a wide variety of sporting events from home. Unlike Internet and on-line
gaming operators, our business requires significant and on-going capital
expenditures in order to continue operations and in order to expand. We
currently cannot offer the diverse gaming options offered by Internet and
on-line gaming operators and face significantly greater costs in operating
our business. Our inability to compete successfully with these operators
could limit our market share and growth and may have a material adverse
effect on our profitability.
EXPANSION OF GAMING CONDUCTED BY CALIFORNIA NATIVE AMERICAN TRIBES MAY
LEAD TO INCREASED COMPETITION IN OUR INDUSTRY WHICH MAY NEGATIVELY
IMPACT OUR GROWTH AND PROFITABILITY
21
In November 1998, California voters passed Proposition 5, a ballot
initiative that would have allowed native American tribes to conduct various
gaming activities including pari-mutuel wagering, gambling, some types of
card games, and lotteries. On August 23, 1999, the California Supreme Court
overturned Proposition 5 on the basis that the initiative violated the state
constitution. The California state government recently reached agreements
with California native American tribes to permit a doubling of the number of
gaming machines currently operated by these tribes, as well as the
introduction of slot machines and poker and blackjack tables on California
native reserves. The governor of California, the state legislature and these
native American tribes jointly sponsored a constitutional amendment which
California voters overwhelmingly approved in March 2000. The expansion of
gaming conducted by California native American tribes may lead to increased
competition and may have an adverse effect on the profitability of Santa
Anita Park, Golden Gate Fields and our future growth in California.
IF A U.S. FEDERAL GAMING TAX IS INTRODUCED, OUR FINANCIAL RESULTS MAY
BE ADVERSELY AFFECTED
From time to time, U.S. legislators have proposed the imposition of
a U.S. federal tax on gross gambling revenues. The imposition of this type of
tax could have a material adverse effect on our net income and therefore our
overall financial condition.
OUR PROFITABILITY MAY BE ADVERSELY AFFECTED IF WE ARE UNABLE TO
INTEGRATE RECENT RACETRACK ACQUISITIONS, WHICH COMPRISE ALL OUR
HORSE RACING OPERATIONS, AND TO COMPLETE AND INTEGRATE FUTURE
ACQUISITIONS
Our racetrack operations have been acquired very recently. The
acquisition of Santa Anita Park was completed in December 1998 and the
acquisition of Gulfstream Park was completed in September 1999. The
acquisition of Remington Park and Thistledown Racetrack was completed in
November 1999 and the acquisition of Golden Gate Fields was completed in
December 1999. In addition, we completed the acquisition of Great Lakes Downs
in February 2000. These operations have been operating independently in the
past under different management. Integrating these recently acquired
businesses into our operations will require a significant dedication of
management resources and an expansion of our information systems. This
dedication may distract us from our day-to-day operations which could result
in less efficient and more costly operations as well as a failure of our
management to focus on other important issues.
We also plan to continue pursuing acquisition opportunities and we
may issue our Class A Subordinate Voting Stock as full or partial
consideration in connection with these acquisitions. Our future profitability
will depend to some degree upon the ability of our management to identify,
complete and integrate commercially viable acquisitions. We cannot give any
assurance that we will successfully complete and integrate the new
acquisitions. Furthermore, to the extent that we issue any shares of our
Class A Subordinate Voting Stock in connection with any of these
acquisitions, the percentage of our voting stock that our shareholders own
will decrease.
22
If we do not successfully integrate our new or future acquisitions,
or if this integration consumes a significant amount of our management's
time, then these acquisitions may adversely affect our efficiency and
therefore our profitability.
OUR OPERATING RESULTS MAY BE IMPACTED BY INCLEMENT WEATHER AND MAY
FLUCTUATE SEASONALLY
We experience significant fluctuations in quarterly and annual
operating results due to seasonality. We have a limited number of live racing
days at each of our racetracks and the number of live racing days varies from
year to year. The number of live racing days we have directly affects our
operating results. A significant decrease in the number of live races could
have a material adverse effect on our business, financial condition and
results of operations. Generally our revenues from racetrack operations are
greater in the first and second quarters of the calendar year than in the
third and fourth quarters of the calendar year.
Since horse racing is conducted outdoors, unfavourable weather
conditions, including excessive heat, coolness or rain, may cause races to be
cancelled or may reduce attendance and wagering. Since a substantial portion
of our gaming expenses are fixed, the loss of scheduled racing days or
deterioration of race cards due to unfavourable weather could have a material
adverse effect on the profitability of our horse racing operations.
AN EARTHQUAKE IN CALIFORNIA COULD AFFECT OUR OPERATIONS AT SANTA
ANITA PARK AND GOLDEN GATE FIELDS, WHICH COULD ADVERSELY IMPACT
OUR CASH FLOW FROM THESE RACETRACKS
Two of our primary assets, Santa Anita Park and Golden Gate Fields,
are located in California and are therefore subject to earthquake risks.
Since the structures at our California racetrackS are low-rise buildings, the
risk of earthquake damage is not considered to be high and, as a result, we
do not currently maintain earthquake insurance on these structures. We
currently maintain fire insurance for fire risks, including those resulting
from earthquakes, subject to policy limits and deductibles. There can be no
assurance that earthquakes or the fires often caused by earthquakes will not
seriously damage our California racetracks and related properties or that the
recoverable amount of insurance proceeds will be sufficient to cover
reconstruction costs and other losses suffered fully. If an uninsured or
underinsured loss occurs, we could lose anticipated income and cash flows
from our California racetracks.
REAL ESTATE OWNERSHIP AND DEVELOPMENT RISKS
OWNING AND DEVELOPING REAL ESTATE MAY INVOLVE SIGNIFICANT ONGOING
EXPENDITURES OR LOSSES THAT COULD ADVERSELY AFFECT OUR RESULTS OF
OPERATIONS
All real estate investments are subject to risks including: general
economic conditions, such as the availability and cost of financing; local real
estate conditions, such as an over-supply of residential, office,
23
retail space or warehousing or a reduction in demand for real estate in the
area; governmental regulation, including taxation of property and
environmental legislation; and the attractiveness of properties to potential
purchasers or tenants. Each segment of the real estate industry is capital
intensive and sensitive to interest rates. Further significant expenditures,
including property taxes, mortgage payments, maintenance costs, insurance
costs and related charges, must be made throughout the period of ownership of
real property and during the period of making improvements to the property.
Further, governments can, under eminent domain laws, take real property for
less than an owner might otherwise agree.
If interest rates or other real estate costs escalate, this could
adversely affect our ability to finance our expansion projects and also our
profitability.
WE MAY NOT BE ABLE TO SELL SOME OF OUR REAL ESTATE WHEN WE NEED TO
OR AT THE PRICE WE WANT, WHICH COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION
At times, it may be difficult for us to dispose of some types of
real estate. The costs of holding real estate are high and, during a
recession, we may be faced with ongoing expenditures with little prospect of
earning revenue on our real estate properties. If we have inadequate cash
reserves, we may have to dispose of properties at prices which are
substantially below the price we desire, and in some cases, below the price
we originally paid for the properties.
WE REQUIRE GOVERNMENT APPROVALS FOR SOME OF OUR PROPERTIES WHICH MAY
TAKE A LONG TIME TO OBTAIN OR WHICH MAY NOT BE GRANTED, EITHER OF
WHICH COULD ADVERSELY AFFECT OUR EXISTING BUSINESS OR OUR GROWTH
Some of our properties will require zoning and other approvals from
local government agencies. For example, our applications for re-zoning land
in Aurora, Canada and Ebreichsdorf, Austria are currently being considered.
The process of obtaining these approvals may take many months and there can
be no assurance that we will obtain the necessary approvals for either of
those lands or any other lands. Furthermore, in the case of the land held by
us in Aurora, Canada, the transfer of this land to us is conditional on
obtaining severance and other approvals. We cannot give any assurance that we
will obtain these approvals and we cannot give any assurance that we will
ultimately acquire this land. Holding costs accrue while regulatory approvals
are being sought and delays can render a project economically unfeasible. If
we do not obtain any of these approvals our plans, growth and profitability
could be affected.
WE MAY NOT BE ABLE TO COMPLETE EXPANSION PROJECTS SUCCESSFULLY, WHICH
WOULD MATERIALLY AFFECT OUR GROWTH AND OUR RESULTS OF OPERATIONS
We intend to develop our racetracks further and possibly expand our
gaming activities. Numerous factors, including regulatory and financial
constraints, could cause us to alter, delay or abandon our existing plans. If
we proceed to develop new facilities or enhance our existing facilities, we
face numerous risks that could require substantial changes to our plans,
including time frames or projected budgets. These risks
24
include the inability to secure all required permits and the failure to
resolve potential land use issues, as well as risks typically associated with
any construction project, including possible shortages of materials or
skilled labor, unforseen engineering or environmental problems, delays and
work stoppages, weather interference and unanticipated cost overruns. See
"Item 1. Business -- Horse Racing and Pari-Mutuel Wagering -- Santa Anita
Park" for a description of these upgrades. For example, Santa Anita Park
recently completed upgrades to its facilities and is considering more
upgrades in the future. The disruption caused by these upgrades reduced the
total amount wagered at Santa Anita Park's simulcast wagering facilities and
attendance at The Oak Tree Meet in 1999. Even if completed, our expansion
projects may not be successful, which would affect our growth and could have
an adverse effect on our long term financial projections.
WE FACE STRICT ENVIRONMENTAL REGULATION AND MAY BE SUBJECT TO
LIABILITY FOR ENVIRONMENTAL DAMAGE THAT WE DID NOT CAUSE, WHICH
COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS
Various environmental laws and regulations in the United States,
Canada and Europe impose liability on us as a current or previous owner and
manager of real property, for the cost of maintenance, removal and
remediation of hazardous materials released or deposited on or in properties
now or previously owned or managed by us or disposed of in other locations.
Our ability to sell properties with contamination or hazardous or toxic
substances or borrow using that property as collateral may also be adversely
affected. We cannot give you any assurance that all circumstances giving rise
to exposure under environmental laws are currently known to us. Changes to
environmental laws and regulations, resulting in more stringent terms of
compliance, could expose us to additional liabilities and ongoing expenses.
ITEM 2. PROPERTIES
Information concerning properties required by this item is
incorporated by reference to the information contained in "Item 1. Business"
of this Report.
ITEM 3. LEGAL PROCEEDINGS
One of our Austrian subsidiaries has been named as a defendant in a
class action brought in a United States District Court by Gutwillig et al.
The plaintiffs in this class action claim unspecified compensatory and
punitive damages, for restitution and disgorgement of profits, all in
relation to slave or forced labor performed by the plaintiffs for that
subsidiary and some other Austrian and German corporate defendants at their
facilities in Europe during World War II. As a result of the transactions
described under the heading "Reorganization" above, we acquired the stock of
this subsidiary. Under Austrian law, this subsidiary would be jointly and
severally liable for the damages awarded in respect of this class action
claim. We cannot predict the final outcome of this class action suit, or
establish a reasonable estimate of possible damages or a range of possible
damages that could be awarded to the plaintiffs if their claims are
successful. However, an Austrian subsidiary of Magna has agreed to indemnify
that subsidiary for any damages or expenses associated with this claim.
25
From time to time, various routine claims incidental to our business
are made against us. None of these claims have had, and we believe that none
of the current claims, if successful, will have, a material adverse effect
upon us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of our shareholders during the
fourth quarter of the fiscal year covered by this Report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
TRADING HISTORY
Shares of our Class A Subordinate Voting Stock are listed and quoted
for trading on the Nasdaq National Market ("NASDAQ") under the trading symbol
"MIEC" and are listed and posted for trading on The Toronto Stock Exchange
(the "TSE") under the trading symbol "MIE.A". In addition, Exchangeable
Shares of our subsidiary, MEC Holdings (Canada) Inc., each of which is
exchangeable on a one-for-one basis for shares of our Class A Subordinate
Voting Stock, are listed and posted for trading on the TSE under the trading
symbol "MEH". Prior to February 23, 2000, there was no market for the shares
of our Class A Subordinate Voting Stock or for the Exchangeable Shares.
Shares of our Class A Subordinate Voting Stock commenced trading on a "when
issued" basis on February 23, 2000 on NASDAQ and the TSE and commenced
regular trading on March 13, 2000. The Exchangeable Shares commenced trading
on a "when-issued" basis on the TSE on February 23, 2000 and commenced
regular trading on March 13, 2000.
DIVIDENDS AND DIVIDEND POLICY
Holders of shares of our Class A Subordinate Voting Stock, our Class
B Stock and the Exchangeable Shares are entitled to receive their
proportionate shares of dividends as may be declared by our board of
directors, subject to the prior rights attaching to any other stock ranking
in priority to our Class A Subordinate Voting Stock, our Class B Stock and
the Exchangeable Shares.
Subject to applicable law, we intend to pay dividends starting with
the fiscal year commencing January 1, 2004 in respect of the quarter
commencing on that date and each succeeding quarter on our Class A
Subordinate Voting Stock and our Class B Stock. We will declare future
dividends on our Class A Subordinate Voting Stock and our Class B Stock in
accordance with our restated certificate of incorporation and our Corporate
Constitution.
We were incorporated on March 4, 1999 and have not declared any
dividends to date.
26
ITEM 6. SELECTED FINANCIAL DATA
INCOME STATEMENT DATA (1)
The following table sets forth our selected consolidated financial
data as at and for the periods indicated. The selected consolidated financial
data as at December 31, 1998 and 1999 and for the two years ended July 31,
1998, the five month period ended December 31, 1998 and the year ended
December 31, 1999 have been derived from and should be read in conjunction
with our Audited Consolidated Financial Statements for the two-year period
ended July 31, 1998, the five-month period ended December 31, 1998 and the
year ended December 31, 1999. The selected financial and operating
information should also be read in conjunction with "Item 7. - Management's
Discussion and Analysis of Financial Condition and Operating Results"
included in this Report.
FIVE MONTHS
YEAR ENDED ENDED YEARS ENDED JULY 31,
DECEMBER 31, DECEMBER 31, ----------------------------------------------------
1999 1998 1998 1997 1996 1995
---------------------------------------------------------------------------------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
Revenue
Racetrack $79,426 $3,952 $ -- $ -- $ -- $ --
Real Estate 19,370 6,597 20,486 15,276 2,460 1,166
---------------------------------------------------------------------------------
Total Revenue 98,796 10,549 20,486 15,276 2,460 1,166
Costs and Expenses
Racetrack costs and
expenses 69,289 3,625 -- -- -- --
Real Estate costs and
expenses 19,904 8,462 25,864 13,879 4,613 2,713
Depreciation and
amortization 7,924 1,649 1,852 1,824 330 21
Interest expense
(income), net (920) 1,221 1,380 955 (59) (26)
Other (174) -- -- -- -- --
---------------------------------------------------------------------------------
Income (loss) before
income taxes 2,773 (4,408) (8,610) (1,382) (2,424) (1,542)
=================================================================================
Net loss $ (62) $(4,231) $(8,610) $(1,382) $(2,424) $(1,542)
=================================================================================
Loss per share of
Class A Subordinate
Voting and Class B
Stock and
Exchangeable Shares
Basic and diluted (2) $ 0.00 $ (0.05) $(0.11) $ (0.02) $ (0.03) $ (0.02)
=================================================================================
27
Average number of
shares of Class A
Subordinate Voting
and Class B Stock
and Exchangeable
Shares outstanding
during the period
(in thousands)
Basic and diluted (2) 78,686 78,535 78,535 78,535 78,535 78,535
=================================================================================
(12) We prepare our financial statements in accordance with U.S. generally
accepted accounting principles, or U.S. GAAP, which differ in some
respects from accounting principles generally accepted in Canada, or
Canadian GAAP. For a discussion of the principal differences between
U.S. GAAP and Canadian GAAP, see Note 16, "Canadian Generally Accepted
Accounting Principles", to our Audited Consolidated Financial
Statements.
(13) Assumes the exchange of Exchangeable Shares of MEC Holdings (Canada)
Inc., each of which is exchangeable on a one-for-one basis for shares
of our Class A Subordinate Voting Stock.
28
BALANCE SHEET DATA (1)
JULY 31,
DECEMBER 31, DECEMBER 31, ---------------------------------
1999 1998 1998 1997 1996 1995
------------ ------------ ------- ------- ------ ------
(IN THOUSANDS OF U.S. DOLLARS)
Cash and cash equivalents........ 50,660 12,442 295 220 133 521
Total assets..................... 760,353 364,142 184,802 113,175 76,219 51,636
Total debt(2).................... 45,884 32,335 19,495 18,938 22,614 12
Magna's net investment/
shareholders' equity......... 547,087 302,502 158,275 87,917 49,985 48,166
(1) We prepare our financial statements in accordance with U.S. GAAP which
differ in some respects from Canadian GAAP. For a discussion of the
principal differences between U.S. GAAP and Canadian GAAP, see Note 16,
"Canadian Generally Accepted Accounting Principles" to our Audited
Consolidated Financial Statements.
(2) Total debt includes Bank indebtedness, Long-term debt (including
Long-term debt due within one year) and Note payable to Magna.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The following discussion of our financial condition and operating
results should be read in conjunction with the Audited Consolidated Financial
Statements included in "Item 8 - Financial Statements and Supplementary Data"
in this Report. This discussion contains forward-looking statements that
involve significant risks and uncertainties. Our actual results could differ
materially from those projected in or contemplated by the forward-looking
statements due to a number of factors, including, but not limited to
competition from operators of other racetracks and from other forms of
gaming, including from Internet and on-line wagering, our continued ability
to complete expansion projects designed to generate new revenues and attract
new patrons, our ability to sell some of our real estate when we need to or
at the price we want, the impact of inclement weather and our ability to
integrate recent racetrack acquisitions.
OVERVIEW
We acquire, develop and operate horse racetracks and related
pari-mutuel wagering operations. As a complement to our horse racing
business, we are exploring the development of media sports wagering
operations, including telephone account, interactive television and
Internet-based wagering, as well as leisure and real estate projects on the
land surrounding some of our racetracks, possibly in conjunction with
business partners and subject to regulatory requirements. In addition, we own
a real estate portfolio which includes a gated residential project under
development, a golf course and related recreational facilities, another golf
course under development and other real estate. We are currently considering
a variety of options with respect to the golf courses, including direct
operation or leasing to third party operators, as well as sale and leaseback
transactions (which would require that Magna not exercise its right of first
refusal) or outright sale. We intend gradually to sell the balance of our
real estate portfolio in order to provide capital to be used in our business.
Accordingly, we will take steps including servicing our land and
29
obtaining zoning and other approvals to enhance the value of the properties
and increase the revenues from resale.
RACETRACK OPERATIONS
We acquired Santa Anita Park located in Arcadia, California,
approximately 14 miles northeast of Los Angeles, one of the premier
thoroughbred racetracks in North America, in December 1998. Santa Anita Park
operates through the prime winter racing season, commencing December 26 and
running into late April each year. In addition, we lease Santa Anita Park to
Oak Tree Racing Association which hosts The Oak Tree Meet from the end of
September through early November of each year.
On September 1, 1999, we acquired Gulfstream Park, also one of the
premier thoroughbred racetracks and pari-mutuel wagering facilities in North
America and the host site of the Breeders' Cup held on November 6, 1999.
Gulfstream Park is located in the cities of Hallandale and Aventura, Florida,
between Miami and Fort Lauderdale and operates between early January and
mid-March of each year.
On November 12, 1999, we acquired the Thistledown and Remington Park
racetracks in North Randall, Ohio and Oklahoma City, Oklahoma, respectively.
Thistledown has one of the longest racing seasons of all North American
racetracks, consisting of 187 racing days each year between mid-March and
early December of each year. Remington Park offers both a 40-day Quarter
Horse meet from mid-April to mid-June and an 82-day Thoroughbred Horse meet
from mid-August to early December of each year.
On December 10, 1999, we acquired the Golden Gate Fields racetrack
in Albany and Berkeley, California, approximately 8 miles from downtown
Oakland and approximately 11 miles from San Francisco. Golden Gate Field's
racing season consists of two meets, one of which runs from late March to
mid-June of each year and the other of which runs from mid-November of each
year to mid-January of the following year.
Finally, on February 29, 2000, we acquired the assets and assumed
certain liabilities of Great Lakes Downs racetrack in Muskegon, Michigan.
Great Lakes Downs began operations in January 1999 and offers a total of 134
live racing days beginning in April and ending in early November of each year.
Because of the seasonal nature of our racetrack business, racetrack
revenues and operating results for any interim quarter will not be indicative
of the revenues and operating results for the year. Our live racing schedule
also dictates that we will earn a substantial portion of our net earnings
from racetrack operations in the first quarter of each year, which is when
The Santa Anita Meet and the annual meet at Gulfstream Park occur. Our second
quarter of each year will have the second largest net earnings of each year,
which is when the larger of the two annual meets at Golden Gate Fields occurs.
Our primary sources of racetrack revenues are commissions earned
from pari-mutuel wagering.
30
Pari-mutuel wagering on horse racing is pooled betting in which individuals
bet against each other on the outcome of a horse race. We have no interest in
the order of finish in any given race and therefore have no risk in the
outcome. A percentage of the pooled wagers is retained by us, a portion paid
to the regulatory or taxing authorities and a portion is paid to horsemen in
the form of purses. The balance of the pooled wagers is paid to bettors as
winnings. Our share of pari-mutuel wagering revenues is based on
pre-determined percentages of various categories of the pooled wagers at our
racetracks. The pre-determined percentages are set by state regulators.
Pari-mutuel wagering on horse racing occurs on the live races being conducted
at racetracks as well as on televised racing signals or simulcasts received
or imported by the simulcast wagering facilities located at such racetracks.
Pari-mutuel wagering on horse racing also occurs at wagering establishments
on horse races being conducted at tracks elsewhere. Our racetracks have
simulcast wagering facilities to complement our live horse racing by enabling
our patrons to wager on horse races being held at other racetracks. We also
generate non-wagering revenues consisting primarily of food and beverages,
programs, admissions, parking, and other amounts.
REAL ESTATE OPERATIONS
Our real estate portfolio includes land currently being developed in
Austria and undeveloped and partially developed land in both Austria and
Canada. We are currently developing a gated residential community, known as
Fontana, situated amidst the Fontana Sports golf course and related
recreational facilities owned and operated by us. This residential
development consists of approximately 50 acres and is located in
Oberwaltersdorf, Austria, approximately 15 miles south of Vienna. Fontana is
being developed in two phases into a luxury residential community consisting
of 250 apartment units and 100 single-family homes. We expect to complete the
second and final phase of Fontana by 2006. We also own approximately 1,000
acres of undeveloped land in Ebreichsdorf, Austria, located approximately 15
miles south of Vienna, which includes a golf course leased to a third party.
In addition, our real estate portfolio includes approximately 270 acres of
mixed-use land adjacent to the headquarters of Magna in Aurora, Canada,
approximately 30 miles north of Toronto. Our real estate portfolio also
includes two golf courses, Fontana Sports which is in operation and located
in Oberwaltersdorf, Austria, and a second golf course which is being
completed in Aurora, Canada. We are considering a variety of options with
respect to these golf courses, including direct operation or leasing to third
party operators, as well as sale and leaseback transactions (which would
require that Magna not exercise its right of first refusal) or outright sale.
We intend to gradually sell the balance of our real estate portfolio,
excluding lands adjacent to our racetracks, in order to provide capital to be
used in our business; accordingly we are currently servicing, improving and
seeking zoning and other approvals for some of these properties in order to
enhance their value on resale.
RESULTS OF OPERATIONS
Our parent company Magna changed its fiscal year from July 31 to
December 31 effective December 31, 1998. Throughout this Management's Discussion
and Analysis of Financial Condition and Results of Operations, unless stated
otherwise, operating results are for the year ended December 31, 1998
31
as this period is determinable from consolidated financial statements. Our
comparative consolidated operating results for the years ended December 31,
1999 and 1998 are as follows:
(United States dollars in thousands, except per share figures)
YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
- - ----------------------------------------------------------------------------------------------
REVENUE
Racetrack
Wagering 48,404 2,513
Non-wagering 31,022 1,439
Real estate 19,370 21,239
- - ----------------------------------------------------------------------------------------------
98,795 25,191
- - ----------------------------------------------------------------------------------------------
COSTS AND EXPENSES
Racetrack
Operating costs 63,302 3,461
General and administrative 5,987 164
Real estate
Operating costs 18,071 25,348
General and administrative 1,833 2,004
Depreciation and amortization 7,924 2,762
Interest expense 1,666 2,106
Interest income (2,596) (31)
Other expenses 454 -
Gain on disposal of real estate property (628) -
- - ----------------------------------------------------------------------------------------------
96,023 35,814
- - ----------------------------------------------------------------------------------------------
Income (loss) before income taxes 2,773 (10,623)
Income tax provision (benefit) 2,835 (177)
- - ----------------------------------------------------------------------------------------------
Net loss (62) (10,446)
Other comprehensive income (loss)
Foreign currency translation adjustment (7,493) 2,865
- - ----------------------------------------------------------------------------------------------
Comprehensive loss (7,555) (7,581)
==============================================================================================
Loss per share of Class A Subordinate Voting Stock,
Class B Stock or Exchangeable Share
Basic and diluted $0.00 $ (0.13)
==============================================================================================
Average number of shares of Class A Subordinate
Voting Stock, Class B Stock and Exchangeable Shares
(in thousands)
Basic and diluted 78,686 78,535
==============================================================================================
YEARS ENDED DECEMBER 31, 1999 AND 1998
RACETRACK OPERATIONS
Revenues from our racetrack operations were $79.4 million for the
year ended December 31, 1999. Santa Anita Park contributed revenues of $71.1
million and the remaining racetracks contributed $8.3 million as they were
acquired late in 1999. Santa Anita Park's complete 1999 operations are
reflected in our consolidated results. The other racetracks' operations are
only reflected in our consolidated results
32
from the date of acquisition. We earned no revenues from our racetrack
operations at San Luis Rey Downs, Gulfstream Park, Thistledown and Remington
Park, and Golden Gate Fields in the comparable 1998 period as they were
acquired in May 1999, September 1999, November, 1999 and December, 1999,
respectively. Our total revenues from racetrack operations in the comparable
1998 period of $4.0 million were from Santa Anita Park.
In the year-ended December 31, 1999, our share of total pari-mutuel
wagering revenues for our racetracks was $48.4 million and non-wagering revenues
were $31.0 million.
We derived our pari-mutuel wagering revenues at our racetracks from the
following primary sources:
(a) Live race days
* wagers made by patrons at our racetracks on races held at our
racetracks;
* wagers made by patrons at our racetracks on imported simulcast
signals for races held at other racetracks in-state and
out-of-state;
* wagers made by patrons at Northern California Off-track
Wagering, Inc. ("NCOTWINC") sites and at Southern California
Off-Track Wagering, Inc. ("SCOTWINC") sites on exported
signals from races held at Golden Gate Fields and Santa Anita
Park and on races held at other tracks, when the meets at
Golden Gate Fields and Santa Anita Park are operating; and
* wagers made by patrons at an out-of-state site on exported
simulcast signals for races held at our racetracks.
(b) Non-live race days
* NCOTWINC and SCOTWINC are organizations formed by
representatives of the racing associations, fairs and
satellite wagering facilities of Northern California and
Southern California, respectively, to promote off-track
wagering and to equitably divide expenses associated with
off-track betting. We also receive a percentage of the net
profit of NCOTWINC and SCOTWINC - this helps defray the
costs of off-track wagering, including pari-mutuel
departments, television and satellite costs, and supplies.
The excess NCOTWINC and SCOTWINC funds that are not
distributed are split equally between the track and the
horsemen; and
* wagers placed by patrons at our racetracks and Off-Track
Betting ("OTB") sites on imported simulcast signals from
other racetracks in-state and out-of-state.
33
The distribution of pari-mutuel wagering for the year ended December
31, 1999 is summarized below (in millions except number of live race days):
YEAR ENDED
DECEMBER 31,
1999
------------
Total live race day handle $ 1,244.1
==========
Total number of live race days 149
==========
Our share of live race day handle $ 42.6
Our share of non-live race day handle and other 5.8
----------
Total pari-mutuel wagering revenue 48.4
==========
Our total handle has been positively impacted by the development of
NCOTWINC and SCOTWINC and betting at Golden Gate Fields and Santa Anita Park on
out-of-state races. With the exception of 1997, total wagering has shown an
increase at both tracks since 1994.
Our share of pari-mutuel handle improved in 1999 primarily as a result
of recent changes in the allocation of the handle. On August 11, 1998, the
California Senate passed Bill Number SB27, which gave racetracks in California a
reduction in the state license fees to be paid from the handle and permission to
import up to 20 races per day from out-of-state when running a live meet. The
reduction in the amount of handle allocated to the state resulted in an increase
in allocation to us as well as to purses. The permission to import out-of-state
races is significant, as previously, the only imported races which were wagered
on in California were from outside the U.S., primarily Hong Kong and Australia.
Our non-wagering revenues for the year-ended December 31, 1999 were
$31.0 million. Santa Anita park earned $27.8 million and the other racetracks
earned $3.2 million. The major components of non-wagering revenues were
admission related revenues of $13.7 million (comprising primarily admissions,
parking and program sales) and food and beverage sales of $9.9 million,
collectively representing 76% of total non-wagering revenues.
Racetrack costs and expenses, before depreciation and interest, were
$69.3 million for the year ended December 31, 1999. Santa Anita Park incurred
costs and expenses of $57.9 million with the remaining racetracks
contributing $11.4 million. The major components of our costs and expenses,
before depreciation and interest, were payroll costs ($38.8 million) and
marketing and advertising costs ($6.2 million) representing approximately 65%
of our total costs. The costs and expenses of Gulfstream Park, Thistledown,
Remington Park and Golden Gate Fields were minimal during the year ended
December 31, 1999 since these racetracks' costs are only reflected in our
consolidated results from their respective dates of acquisition, all of which
were in late 1999, and these racetracks had few live race days in 1999
subsequent to their acquisition. With the acquisition of Gulfstream Park,
Thistledown, Remington Park, Golden Gate Fields and Great Lakes Downs, we
intend to continue to implement our strategy which
34
includes the consolidation of our racetrack acquisition with the objective of
maximizing administrative and other cost efficiencies at our racetracks.
REAL ESTATE OPERATIONS
Revenues from our real estate operations were $19.4 million for the
year ended December 31, 1999 compared to $21.2 million for the year ended
December 31, 1998. The decrease is primarily attributable to a reduction in
housing activity at Fontana which is nearing completion of the first phase of a
two phase development plan. Partially offsetting the decrease in revenues was
increased membership and other usage revenue at Fontana Sports, including $2.3
million related to Magna's access fee agreement with Fontana Sports which
commenced March 1, 1999 and will provide $2.7 million annually until March 1,
2004. We also generated increased rental revenues on some properties acquired
during the comparative period. Revenues from our remaining real estate
operations were substantially unchanged.
Real estate costs and expenses, before depreciation and interest, were
$19.9 million for the year ended December 31, 1999 compared to $27.4 million for
the year ended December 31, 1998. The reduction is attributable to the decrease
in housing activity at the Fontana residential development. In addition, we
incurred costs in the year ended December 31, 1998 related to the potential
development of a theme park on approximately 670 acres of our land in
Ebreichsdorf near Vienna, Austria which was acquired by us during the year ended
July 31, 1997. Costs included consultants' fees associated with feasibility
studies, alternative theme park designs, market analysis, presentation
brochures, site models and alternative site investigations. In May 1999, we
announced that we were unable to obtain the various permits and approvals that
would have been required to potentially develop this property as a theme park.
As a result, we are re-assessing the potential uses for the property. Costs
incurred in the year ended December 31, 1999 were substantially reduced.
Costs and expenses of our remaining real estate operations were
substantially unchanged.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased by $5.2 million to $7.9 million
for the year ended December 31, 1999, primarily as a result of depreciation
related to our acquisitions of Santa Anita Park on December 10, 1998, San Luis
Rey Downs on May 1, 1999, Gulfstream Park on September 1, 1999, Thistledown and
Remington Park on November 12, 1999 and Golden Gate Fields on December 10, 1999
and a full year of depreciation on properties acquired in calendar 1998. As of
December 31, 1999, some properties have been classified as available for sale
and depreciation has ceased on these properties.
INTEREST INCOME AND EXPENSE
Our interest income net of interest expense for the year ended December
31, 1999 was $0.9 million compared to interest expense net of interest income of
$2.1 million for the year ended December
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31, 1998, primarily as a result of higher interest income. The increase in
interest income is attributable to cash arising from Magna's equity
investment during the year.
INCOME TAX PROVISION
We recorded an income tax provision of $2.8 million on income before
income taxes of $2.8 million for the year ended December 31, 1999 compared to
an income tax benefit of $0.2 million on a loss before income taxes of $10.6
million for the year ended December 31, 1998. Our income tax provision
relates primarily to the income of our racetrack operations which was
calculated based on a consolidated tax sharing arrangement. The benefit of
our losses from other operations have not been recognized for accounting
purposes.
FIVE MONTH PERIODS ENDED DECEMBER 31, 1998 AND 1997
RACETRACK OPERATIONS
Revenues from our racetrack operations were $4.0 million for the five
month period ended December 31, 1998, all of which related to the operations of
Santa Anita Park. There were only five racing days during the five month period
ended December 31, 1998 as The Santa Anita Meet did not commence until December
26, 1998. We earned no revenues from our racetrack operations in the comparable
1997 period as Santa Anita Park was acquired in December 1998.
Our share of pari-mutuel wagering was $2.5 million and non-wagering
revenues were $1.4 million. The distribution of pari-mutuel wagering for the
last five racing days of 1998 is summarized below (in millions except number of
live race days):
FIVE
RACING
DAYS ENDED
DECEMBER 31,
1998
------------
Total live race day handle $ 61.4
Number of live race days 5
========
Our share of live race day handle $ 2.2
Our share of non-live race day handle and other 0.3
--------
Total pari-mutuel wagering revenue $ 2.5
========
Racetrack costs and expenses, before depreciation and interest, were
$3.6 million, all of which related to our operation of Santa Anita Park. The
major components of the Santa Anita Park's costs and expenses were payroll costs
($1.8 million) and marketing and advertising costs ($0.3 million) representing
approximately 58% of our total costs.
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REAL ESTATE OPERATIONS
Revenues from our real estate operations were $6.6 million for the five
month period ended December 31, 1998 compared to $5.8 million for the five month
period ended December 31, 1997. The increase in revenues is primarily
attributable to rental revenues earned on recently acquired properties. Revenues
from the Fontana residential development, Fontana Sports and other real estate
operations were substantially unchanged between the periods.
Real estate costs and expenses, before depreciation and interest, were
$8.5 million for the five month period ended December 31, 1998 compared to $7.0
million for the five-month period ended December 31, 1997. The increase in costs
and expenses is attributable to increased activity and a change in the mix
between apartment and housing sales at the Fontana residential development. The
costs and expenses of our remaining real estate operations were substantially
unchanged between the periods.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased by $0.9 million to $1.6 million
for the five month period ended December 31, 1998, primarily as a result of
depreciation related to our acquisition of Santa Anita Park on December 10, 1998
and a full five months of depreciation on properties acquired in calendar 1998.
INTEREST INCOME AND EXPENSE
Our interest expense, net of interest income increased by $0.7 million
to $1.2 million for the five month period ended December 31, 1998 compared to
the five month period ended December 31, 1997. The increase in interest expense
is primarily attributable to an increase in interest bearing borrowings from
Magna to finance the acquisition of Santa Anita Park. These borrowings were
converted to equity in 1999.
INCOME TAX BENEFIT
We recorded an income tax benefit of $0.2 million on a loss before
income taxes of $4.4 million for the five month period ended December 31, 1998
compared to nil on a loss before income taxes of $2.4 million for the five month
period ended December 31, 1997. Our income tax benefit relates solely to the
losses of Santa Anita Park from the date of acquisition to December 31, 1998.
The benefit of our losses from other operations have not been recognized for
accounting purposes. The tax benefits of some of these losses have been utilized
by Magna and are not available to us and valuation allowances have been recorded
against the remaining tax loss carryforward benefits.
YEARS ENDED JULY 31, 1998 AND 1997
REAL ESTATE OPERATIONS
37
Revenues from our real estate operations were $20.5 million for the
year ended July 31, 1998 compared to $15.3 million for the year ended July 31,
1997. Substantially all of the increase is attributable to an increase in
housing activity at Fontana and increased membership and usage at Fontana
Sports. Revenues from our remaining real estate operations were substantially
unchanged.
Real estate costs and expenses, before depreciation and interest, were
$25.9 million for the year ended July 31, 1998 compared to $13.9 million for the
year ended July 31, 1997. The increase relates to costs and expenses at the
Fontana res