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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, 2000
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 98-0208374
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(State or Other Jurisdiction (I.R.S. Employer Identification Number)
of Incorporation or Organization)
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337 Magna Drive L4G 7K1
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Aurora, Ontario, Canada (Zip Code)
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(Address of principal executive offices)
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Registrant's telephone number, including area code: (905) 726-2462
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 X No _____
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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. ___________
As of March 26, 2001, the aggregate market value of the Class A Subordinate
Voting Stock held by non-affiliates of the registrant was approximately
$54,036,764 (based on the closing sale price of $4.00 per share of the Class A
Subordinate Voting Stock reported on Nasdaq). As of March 26, 2001, 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
$29,571,940 (based on the closing sale price of $4.00 per share of the Class A
Subordinate Voting Stock reported on Nasdaq).
The number of shares of Class A Subordinate Voting Stock of the registrant
outstanding as of March 26, 2001 was 14,271,491.
The number of shares of Class B Stock of the registrant outstanding as of March
26, 2001 was 58,466,056.
Documents Incorporated by Reference
The registrant's proxy statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A, with respect to the annual meeting of
stockholders scheduled to be held on May 11, 2001, is 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
document incorporated by reference is not deemed to be filed as a part hereof.
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" and in the other documents which we file
with the Securities and Exchange Commission. 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 337 Magna
Drive, Aurora, Ontario, Canada L4G 7K1.
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, 2001.
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Magna Entertainment Corp.
(Delaware)
Horse Racing Operations Real Estate Operations
The Santa Anita Companies, Inc. MEC Holdings (USA) Inc.
(Delaware) (Delaware)
Los Angeles Turf Club, Inc. MEC Holdings (Canada) Inc.
(California) (Ontario)
Gulfstream Park Racing Association, Inc. MI Entertainment Holding GmbH
(Florida) (Austria)
Pacific Racing Association Fontana Beteiligungs AG
(California) (Austria)
Thistledown, Inc. MEC Projektenwicklungs AG
(Ohio) (Austria)
Remington Park, Inc. SDP Landholdings GmbH
(Oklahoma) (Austria)
MI Racing Inc. MEC Land Holdings (California) Inc.
(Delaware) (California)
Bay Meadows Operating Company LLC
(Delaware)
SLRD Thoroughbred Training Center, Inc.
(Delaware)
GPRA Thoroughbred Training Center, Inc.
(Delaware)
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 electronic media wagering operations, including
telephone account, interactive television and Internet-based wagering, possibly
in conjunction with business partners and subject to regulatory requirements. We
are also exploring the development of real estate projects on the land
surrounding some of our racetracks. These real estate projects could be pursued
in conjunction with developers who would be expected to provide the necessary
financing. In addition, we own a real estate portfolio which includes a gated
residential project under development, a golf course and related recreational
facilities in Oberwaltersdorf, Austria, another golf course scheduled to open in
May 2001 in Aurora, Ontario, Canada and other real estate. We intend to continue
to gradually sell the balance of our excess non-racing real estate portfolio,
excluding the land surrounding our racetracks, in order to provide capital to be
used in our business. Accordingly, we are taking steps, including servicing our
land and obtaining zoning and other approvals, to enhance the value of certain
of these properties and increase the revenues which can be generated from their
sale. A brief description of our horse racing business and real estate portfolio
follows.
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Horse Racing and Pari-Mutuel Wagering
We currently operate seven 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; Great Lakes Downs in Muskegon,
Michigan and Bay Meadows Racecourse ("Bay Meadows") near San Francisco,
California. We also own San Luis Rey Downs, a horse boarding and training center
located outside of San Diego, California. We have acquired all these operations
since December 1998.
We own and operate some of the premier horse racing facilities in North
America and, accordingly, we are able to offer a high quality simulcast product.
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,
Golden Gate Fields and Bay Meadows are four of the top racetracks in North
America. With the exception of Bay Meadows and the property on which Remington
Park is located, which are leased from third parties, all of our racetracks are
owned as well as operated by us.
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 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 wagering 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 maximum pre-determined percentages are approved 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.
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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 1986 and 1993. Santa Anita Park is situated on approximately
305 acres of land 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, with the exception of
three years during World War II. The Santa Anita Meet runs through the prime
winter racing season, commencing December 26 and running until mid or 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 or early October 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.
Santa Anita Park had one of the highest total handles of all North American
racetracks in 2000, generating over $1.1 billion in wagers in that year
(excluding The Oak Tree Meet). In addition, Santa Anita Park's simulcast program
generates significant demand from other racetracks and off-track wagering
establishments. 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 customers as well as
standing room for additional customers, a one-mile oval dirt track 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 an upscale restaurant known as
"Frontrunner." 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 customers' entertainment experience.
The improvements to Santa Anita Park include: the construction of the fully
enclosed 750 seat Frontrunner restaurant and bar, that is used for racing and
group functions throughout the year; the installation of a large format LED
screen in the infield track area for racing customers 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 customers with better views of the track; upgrades to
the grandstand to current seismic code requirements;
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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 currently considering a variety of 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 customers from diverse demographic
backgrounds and strengthen the loyalty of existing customers. If any proposal
turns out to be commercially viable after a detailed review, additional time
would be required to obtain the necessary regulatory approvals and negotiate
with potential business partners who would be expected to provide the necessary
financing, as the Company does not intend to devote its capital to non-racing
real estate development. Similar concepts are being explored for available land
at Gulfstream Park and Golden Gate Fields.
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, 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. Until recently, the annual meet at Gulfstream Park
has lasted for approximately 63 days each year and has been held between early
January and mid-March. Beginning in 2002, Gulfstream Park has applied to run its
meet for approximately 85 days between early January and mid-April. The
Breeders' Cup has been held at Gulfstream Park three times--in 1989, 1992 and
1999.
Gulfstream Park ranked as one of the five highest North American racetracks
in average daily off-track handle in 2000, generating an average daily off-track
handle of approximately $8.5 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 2000, generating approximately $715 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.
Gulfstream Park's facilities include a grandstand with permanent seating
for approximately 8,700 customers, a clubhouse with seating for an additional
5,800 customers, 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, casual restaurants, bars and
snack bars. There are also three gourmet dining rooms in the clubhouse.
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Hialeah Park's 2000 race meet was conducted at Gulfstream Park under the
terms of a three-month lease agreement. That arrangement has not been renewed
for 2001.
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, providing a large target market
for live and simulcast horse racing. Golden Gate Fields' racing season comprises
approximately 105 racing days. The racing schedule at Golden Gate Fields
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 highest total handles of all North American racetracks in
2000, generating almost $550 million in wagers during that year. Golden Gate
Fields' simulcast program also generates strong demand from other racetracks and
off-track wagering facilities. Golden Gate Fields exports its simulcast program
to approximately 500 sites in the United States, Canada, Mexico and the
Caribbean.
Golden Gate Fields' facilities include 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 customers, a clubhouse with seating for
approximately 5,250 customers and a turf club with seating for approximately
1,500 customers and parking for over 8,500 cars.
Bay Meadows
Bay Meadows Racecourse is one of the premier horse racing and pari-mutuel
wagering facilities in North America in terms of total handle. Bay Meadows is
situated on approximately 100 acres of land in San Mateo, California, between
San Francisco and San Jose. The racing season at Bay Meadows is divided into a
spring meet, which runs approximately 55 days between early April and mid-June,
and a fall meet, which runs approximately 50 days between late August and early
November. This schedule complements and does not overlap with the racing
schedule of Golden Gate Fields, which is located approximately 31 miles from Bay
Meadows. In addition, we sub-lease Bay Meadows to the San Mateo County
Exposition and Fair Association, which hosts the San Mateo County Fair Meet for
a few weeks during the summer. In 2000, Bay Meadows generated a total handle of
over $525 million (excluding the San Mateo County Fair Meet). Bay Meadows
exports its simulcast program to over 500 outlets in the United States, Canada,
Mexico and the Caribbean.
The facilities at Bay Meadows include a grandstand with a total seating
capacity of approximately 9,500 (including the clubhouse and turf club), a one-
mile oval track with 1-1/4 mile and 6 - furlong chutes, a turf course of
approximately 7 furlongs, and stalls for approximately 900 horses with auxiliary
stabling available at Golden Gate Fields for 900 more horses.
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The Bay Meadows property is leased under a lease that expires on the later
of (i) December 31, 2002, or (ii) the final date of any horse racing meet in
progress on December 31, 2002, but in no event later than March 31, 2003. We
believe it is unlikely that the lease will be renewed and, as a result, we are
exploring various alternatives for the conduct of the Bay Meadows racing days
after the expiry of the lease. Those alternatives include the purchase of land
in the vicinity which we have under option and the transfer of the Bay Meadows
racing days to Golden Gate Fields, subject to regulatory approval.
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 thoroughbred racetracks,
consisting of approximately 185 racing days each year between early April and
late December, encompassing the Summit, Thistledown, Randall and Cranwood meets.
In 2000, Thistledown generated a total handle of approximately $225 million.
Simulcasts from Thistledown are exported to approximately 45 other racetracks in
the United States. 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 have bundled
the signal from Thistledown with the signals from our other racetracks and
promoted this bundled signal under the Magna Entertainment Corp. ("MEC") name.
We expect that this will continue to 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 customers, 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 from other 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 120 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 February or
March. In 2000, Remington Park generated a total handle of over $150 million.
Simulcasts from Remington Park are exported to approximately 35 other racetracks
in the United States. As with Thistledown, the simulcast product from Remington
Park has not been given the exposure necessary to generate growth in Remington
Park's attendance and handle. We expect that, by continuing to bundle Remington
Park's signal with the signals from our other
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racetracks, we will be able to increase the number of off-track sites to which
Remington Park's racing signal is exported.
Remington Park's facilities include a grandstand with seating for
approximately 20,000 customers, 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, recently installed lighting to permit night racing
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 or early May and ending in late October or early
November of each year. In 2000, Great Lakes Downs generated a total handle of
approximately $70 million. Simulcasts from Great Lakes Downs are exported to
approximately 45 other racetracks in the United States. By bundling the
simulcast signal from Great Lakes Downs with the simulcast signals from our
other racetracks, we expect to further increase the number of sites to which
Great Lakes Downs' simulcast program is exported.
Great Lakes Downs' facilities include a grandstand with capacity for
approximately 7,500 customers, 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
San Luis Rey Downs is a horse boarding and training center situated
approximately 45 miles north of downtown San Diego. It is located on
approximately 200 acres of land and includes over 500 horse stalls, a one mile
oval main track, a 3/8 mile training track, an equine exercise pool, and related
facilities and equipment.
Boynton Beach
We recently purchased land in Palm Beach County, Florida, which we are
currently developing into a horse boarding and training center. See "Item 1 -
Business - Recent Acquisitions."
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Home Account Wagering
Home account wagering is wagering on sporting events, such as horse racing,
which is 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. Through the pending acquisition
of Ladbroke Racing Pennsylvania, which we expect to complete in April 2001, we
will acquire the "Call-A-Bet" telephone account wagering operation based in
Pennsylvania. 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 home account wagering.
Telephone Account Wagering
We are currently in the process of acquiring the "Call-A-Bet" telephone
account wagering operation as part of the pending acquisition of Ladbroke Racing
Pennsylvania, Inc. (see "Item 1-Business - Recent Acquisitions"). Call-A-Bet
customers open accounts and deposit funds through the use of credit cards or
wire transfers. They may then place wagers over the telephone on horse races
offered at various racetracks which have entered into agreements with Ladbroke
Racing Pennsylvania, Inc. allowing such wagering. Wagers placed by customers are
not allowed to exceed the amounts on deposit in their accounts. Winnings are
credited to customers' accounts and are available for future wagers or
withdrawal. Call-A-Bet derives revenues primarily from its share of the wagers
placed.
We expect that telephone account wagering through Call-A-Bet will make
wagering on horse racing more convenient for our customers and expand the market
for our simulcast product by enabling us to fully utilize an important
distribution channel for our horse racing product. In the future, we may expand
the operations of Call-A-Bet or use it to develop other telephone account
wagering initiatives, subject to applicable legislation and regulatory approvals
(see "Item 1 - Business - Risk Factors - Gaming Risks").
Internet and Interactive Television-Based Wagering
We are actively exploring the potential of Internet and interactive
television-based wagering on horse racing, possibly in conjunction with business
partners and subject to legislative reform and regulatory approvals (see "Item 1
- - Business - Risk Factors - Gaming Risks"). 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 order to place
wagers, customers must deposit money with the sponsoring racetrack through the
use of debit or credit cards. We would derive revenue from our customers'
subscriptions and our share of the wagers placed on the races broadcast.
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Interactive television-based wagering would allow us to increase the market
for our simulcast product by utilizing an important distribution channel for
this product. At present, we control the rights to broadcast races from our
tracks subject to certain limited exceptions. Interactive television-based
wagering would enhance our ability to cross promote our live horse racing and we
expect it would enable us to attract new customers 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 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, either alone
or in conjunction with others.
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. 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, subject to legislative reform and regulatory
approval.
Real Estate Portfolio
Our real estate portfolio includes undeveloped land, as well as land in
various stages of development and excess land in the United States, Canada and
Austria. We are currently developing a gated residential community, known as
Fontana, situated amidst the Fontana Sports golf course and related recreational
facilities owned by us. This residential development consists of approximately
75 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 116 apartment units and 150 single family
homes. The first phase was substantially completed in prior years and we expect
to complete the second and final phase of Fontana by 2006. We have changed our
marketing concept for our second phase to exclude construction activity and
focus only on the sale of residential lots. We also own approximately 1,050
acres of undeveloped land in Ebreichsdorf, Austria, located approximately 15
miles south of Vienna, which includes a golf course under a long-term lease to a
third party. The balance of the land is largely undeveloped, although we are
currently grading and performing other preliminary work as we seek zoning and
other approvals in order to enhance the value on sale or for other possible
uses, including as part of the Company's racing operations.
In 2000, we acquired approximately 480 acres of land in Palm Beach County,
Florida, which we are currently developing into a horse boarding and training
center (see "Item 1 - Business - Recent Acquisitions").
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Our real estate portfolio also includes two golf courses. Fontana Sports is
a semi-private sports facility which is adjacent to the Fontana residential
community. The Fontana Sports facility includes an 18-hole golf course, tennis
club, fitness facility and restaurant. The Magna Golf Club, which is being
completed in Aurora, Ontario, approximately 30 miles north of Toronto, is
scheduled to open in May 2001. We are currently finalizing our marketing plan
for the sale of memberships in the Magna Golf Club. The clubhouse is under
construction and is expected to be completed in the late summer or early fall of
2001. When completed, the clubhouse will contain a restaurant, a members' lounge
and a pro shop. Doug Carrick, one of Canada's leading golf course architects,
designed both the Fontana golf course and the Magna Golf Club golf course. Our
parent company, Magna International Inc. ("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.
This access arrangement is scheduled to expire five years after its effective
date. Both of our golf courses are subject to rights of first refusal in favor
of Magna. For further information regarding these arrangements with Magna, see
"Item 13 - Certain Relationships and Related Transactions".
Finally, we own a portfolio of other real estate in Austria, Canada and the
United States, including excess land adjacent to three of our premier
racetracks, Santa Anita Park, Gulfstream Park and Golden Gate Fields, totaling
approximately 200 acres, and certain land adjacent to and in close proximity to
our golf courses. We are currently considering a variety of options with respect
to this excess land, including themed entertainment and retail-based
developments. Such projects could be pursued in conjunction with developers who
would be expected to provide the necessary financing. We intend to continue to
gradually sell the balance of our excess non-racing real estate portfolio,
excluding the land adjacent to our racetracks, as market conditions permit, 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 sale.
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 (the "Reorganization"), under which Magna's North American and
European non-automotive businesses and real estate assets were transferred to
us, including the following:
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.
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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 MEC Projektentwicklungs AG (formerly
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 Magna Golf Club, was also subject
to a conditional sale agreement with a company associated with the members
of the family of Frank Stronach, our Chairman and the Chairman of Magna.
The purchase of the Magna Golf Club by the Company was completed in October
2000.
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. On March 26, 2001,
Magna directly and indirectly owned 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, is able to elect all our directors and
controls us.
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Employees
As of December 31, 2000, we employed approximately 3,200 full-time
employees. Due to the seasonal nature of the live horse racing industry, the
number of seasonal and part-time employees of MEC will vary considerably
throughout the year. 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.
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 the
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, Golden Gate Fields and Bay Meadows may face
competition if licenses are granted to other racetracks during our meets. In
Florida, current tax laws discourage the three Miami-area racetracks from
applying for race dates outside of their traditional racing seasons. 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 may face
direct competition from other Miami-area racetracks in the future. Gulfstream
Park has applied to run its 2002 meet for approximately 85 days between early
January and mid-April. Part of this period would overlap with days on which
Hialeah Park traditionally operates its meet. 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.
Several Native American tribes in Florida have recently expressed interest
in opening casinos in southern Florida, which could compete with Gulfstream
Park. Construction for a casino which will be operated by the Seminole Tribe
began in January 2001 and is expected to be completed duing 2002. The opening
and operation of this casino, whose site is approximately 30 miles southwest of
Gulfstream Park, may negatively impact the business of Gulfstream Park.
As we implement our strategy to increase the distribution channels for our
simulcast horse racing product to include telephone account, interactive
television and/or Internet-based wagering, we will likely face competition from
competitors with significant experience and advanced market penetration in these
distribution channels, including Television Games Network ("TVG"), which is
affiliated with Gemstar - TV Guide International, Inc. TVG, which offers live
racing video signals in conjunction with its interactive television wagering
system, currently
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markets the signals of a large number of racetracks, some of which are under
exclusive contract, including the signal from Churchill Downs' racetracks. We
may be able to reduce or eliminate this competitive disadvantage by pursuing
this element of our strategy in conjunction with an experienced strategic
partner, or through The Racing Network (see "Item 1 - Business - Recent
Acquisitions").
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.
There are a large number of established golf courses in the vicinity of the
Magna Golf Club. As a new club, the Magna Golf Club will have to compete for
members with these established courses.
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 2001, we intend to adopt
a formal 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 at 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.
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.
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Recent Acquisitions
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 material acquisitions we have made since January
1, 2000 are provided below:
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 $9.7 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.
Pursuant to a purchase agreement dated as of August 25, 2000, we acquired
all the issued and outstanding limited liability company interests of Bay
Meadows Operating Company LLC and all the issued and outstanding stock of Bay
Meadows Catering Company. Bay Meadows Operating Company LLC operates the Bay
Meadows Racecourse in San Mateo, California. The purchase price for these
interests and stock was $24.1 million, payable in cash. This transaction was
completed on November 17, 2000.
On October 18, 2000, we acquired approximately 480 acres of land in Palm
Beach County, Florida ("Boynton Beach") for a total purchase price of $22.2
million. The property is located approximately 30 miles north of Gulfstream
Park. We are currently developing a horse boarding and training center on this
land to be operated in conjunction with Gulfstream Park.
Pursuant to a stock purchase agreement dated December 21, 2000, we have
agreed to purchase all the issued and outstanding stock of two companies,
Ladbroke Racing Pennsylvania, Inc. and Sports Broadcasting, Inc. Ladbroke Racing
Pennsylvania, Inc. owns the assets of The Meadows, a harness racetrack located
in the Pittsburgh area, four off-track betting facilities located in the
Pittsburgh area and a telephone account wagering system known as "Call-A-Bet."
Sports Broadcasting, Inc. owns an 18.3 percent equity interest in The Racing
Network, which is a television channel devoted to horse race programming which
is available by satellite dish. The aggregate purchase price for this
acquisition is $53.0 million, of which $26.5 million is payable in cash, $13.25
million is payable by the issuance of a promissory note which is due in two
equal instalments on the first and second anniversaries of closing, and the
balance of $13.25 million is payable in shares of our Class A Subordinate Voting
Stock. This transaction is scheduled to close in early April 2001.
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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 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, or any of the risks described in the other
documents we file with the Securities and Exchange Commission, 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 are a relatively new company with a short history of racetrack
operations
We were incorporated approximately two years ago and acquired our first
racetrack in December 1998. Accordingly, we have a relatively short history of
racetrack operations and earnings. Two of our seven racetracks, Remington Park
and Great Lakes Downs, have historically operated at a loss and we anticipate
they may continue to do so for some period of time in the future.
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. 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 trading price of our Class A Subordinate Voting Stock and the
Exchangeable Shares may continue to be volatile. Some of the volatility in the
past has been due to Magna's institutional shareholders selling 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
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. do not want to hold our stock for any other reason.
In addition, the following factors have had and may continue to have a
significant effect on the market price of our Class A Subordinate Voting Stock
and the 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 the 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
unfavorable 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 favorable to us. In addition, Magna has made a
commitment to its shareholders that it will not, during the period ending May
31, 2006, without the prior consent of the holders of a majority of Magna's
Class A 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" for a more
detailed description of our relationship with Magna.
We do not plan to pay dividends until the 2004 fiscal year, 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.
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. Accordingly, 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.
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Therefore, Magna is able to cause us to effect certain corporate transactions
without shareholder consent, subject to applicable law and the fiduciary duties
of our directors and officers. 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 from time to
time that may be resolved in a manner detrimental to us.
For example, Magna has entered into an arrangement with us so as to ensure
its access to the Fontana Sports golf course and related recreational facilities
in return for an agreed upon fee. This access arrangement expires five years
after its effective date, but Magna could prematurely terminate or amend it. The
early termination, amendment or non-renewal of this access arrangement could
have a material adverse effect on our financial condition and results of
operations. Both of our golf courses are subject to rights of first refusal in
favor of Magna.
If we are unable to continue to negotiate satisfactory union contracts,
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 December 31, 2000, we employed approximately 3,200 full-time
employees, approximately 2,000 of whom are represented by a union. A contract
between Gulfstream Park and a local of the International Association of Pari-
Mutuel Employees, which covers approximately 500 employees, will expire on March
31, 2001. Although we expect that we will be able to negotiate a new agreement
through the collective bargaining process, there is no assurance that we will be
able to negotiate a satisfactory contract. Since our inception, we have not had
a work stoppage and we consider our relations with our employees to be good;
however, we realize that a strike or other work stoppage could lead to lost
revenues and have a material adverse effect on our business.
Gaming Risks
Our gaming activities are dependent on governmental 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
19
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 wagering. Telephone account and
interactive television-based wagering from home may currently be conducted only
through hubs or bases located in certain states. Our expansion opportunities in
this area may be limited unless more states change their laws to clearly permit
telephone account and interactive television-based wagering. Wagering over the
Internet is also subject to extensive legal restriction.
In the past, certain state and district attorneys general have expressed
concern over the legality of interstate home account wagering. In December 2000,
legislation was enacted which amends the Interstate Horse Racing Act of 1978. We
believe that this amendment clarifies that simulcasting and home account
wagering, as conducted by the horse racing industry currently, are authorized
under U.S. federal law. It is not entirely clear at this point in time, however,
that the amendment will be interpreted in this manner by all concerned, and
there may be future challenges to this activity by both state and federal law
enforcement authorities.
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
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. 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 wagering 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., has been in operation for a longer period of
time than MEC and may have greater name recognition. 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.
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, effective as of
July 1, 2001, will eliminate this deterrent. As a result, 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 (see "Item 1- Business - Competition").
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
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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 Native American tribes may lead to
increased competition in our industry which may negatively impact our
growth and profitability
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 has reportedly reached agreements
with certain 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,
Bay Meadows and our future growth in California. It may also affect the purses
that those tracks are able to offer and therefore negatively affect our ability
to attract top horses.
In addition, several Native American tribes in Florida have recently
expressed interest in opening casinos in southern Florida, which could compete
with Gulfstream Park (see "Item 1 - Business - Competition").
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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 gaming 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 all been acquired relatively 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 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 and the
acquisition of Bay Meadows in November 2000. These operations have been
operating independently in the past under different management. Integrating
these businesses into our operations will require a significant dedication of
management resources and further 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.
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.
23
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, unfavorable 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 unfavorable 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, Golden Gate Fields and Bay Meadows, which could adversely impact our
cash flow from these racetracks
Three of our prime racetracks, Santa Anita Park, Golden Gate Fields and Bay
Meadows, 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.
The current lease of the Bay Meadows property expires in approximately
two years and is unlikely to be renewed
As described under "Item 1 - Business - Bay Meadows" above, the Bay Meadows
site lease expires on December 31, 2002 (or March 31, 2003, at the latest).
Although we are exploring various alternatives for the conduct of these racing
dates at another site, there is a risk that we will be unable to relocate on
favorable terms, which could have a material adverse effect on our business,
financial condition and results of operations.
The profitability of our racetracks is partially dependent upon the size of
the local horse population in the areas in which our racetracks are located
Horse population is a factor in a racetrack's profitability, because it
generally affects the average number of horses which run in races during a race
meet (i.e. the average "field size"). Larger field sizes generally mean higher
wagering and higher wagering revenues due to a number of factors, including the
availability of exotic bets. Various factors have posed risks to the horse
population in certain areas of the country, including competition from other
racetracks and volatility of economics for owners and breeders. Unless we are
able to address these challenges by offering a competitive environment,
including improved facilities, well-maintained racetracks
24
and better living conditions for backstretch personnel, the profitability of our
racetrack operations may be adversely affected.
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, retail or
warehousing space, 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 governmental 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. The process of obtaining these approvals may take many
months and there can be no assurance that we will obtain the necessary
approvals. Furthermore, in the case of the land held by us in Aurora, Ontario,
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 all of these approvals, our
plans, growth and profitability could be affected.
25
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 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, unforeseen engineering or environmental problems,
delays and work stoppages, weather interference and unanticipated cost overruns.
For example, Santa Anita Park completed certain upgrades to its facilities in
1999. 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 in a timely manner, 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 subsidiaries has been named as a defendant in four class actions
brought in United States District Courts by various plaintiffs. The plaintiffs
in these actions claim unspecified compensatory and punitive damages, for
restitution and disgorgement of profits, all in relation to forced labor
performed by the plaintiffs for such subsidiary and certain other Austrian and
German corporate defendants at their facilities in Europe during World War II.
As a result of the transactions described under "Item 1 - Business -
Reorganization" above, we
26
acquired the stock of such subsidiary. Under Austrian law, such subsidiary would
be jointly and severally liable for the damages awarded in respect of these
class action claims. After consolidation of three of these cases in the United
States District Court for the District of New Jersey together with over 50 other
cases, the presiding judge entered voluntary dismissal orders with prejudice of
these three cases and various other cases as a result of agreements reached with
plaintiffs' attorneys and the Governments of the United States and the Federal
Republic of Germany to dismiss all slave labor cases as a result of the creation
of the German Remembrance Fund. The fourth action was not consolidated and
awaits finalization of similar Austrian funds dealing with slave labor and
property right claims. An Austrian subsidiary of Magna has agreed to indemnify
such subsidiary for any damages or expenses associated with this case.
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. As of March 26, 2001,
there were approximately 430 holders of record of our Class A Subordinate Voting
Stock.
27
The following table sets forth the high and low closing sale prices, as reported
by NASDAQ and the TSE, for our Class A Subordinate Voting Stock during the
periods indicated in 2000:
----------------------------------------------
NASDAQ TSE
----------------------------------------------
2000 High Low High Low
---------------- ---- ---- ----- -----
----------------------------------------------
($US) ($Cdn)
----------------------------------------------
1/st/ Quarter* 6.12 3.00 8.75 3.50
----------------------------------------------
2/nd/ Quarter 7.75 2.81 11.45 4.00
----------------------------------------------
3/rd/ Quarter 7.50 5.75 11.65 8.50
----------------------------------------------
4/th/ Quarter 6.70 4.25 10.00 6.40
----------------------------------------------
(* Trading began on a "when issued" basis on NASDAQ and the TSE on February
23, 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.
28
Item 6. Selected Financial Data
The following table sets forth our selected consolidated financial data as
at the dates and for the periods indicated. The selected consolidated financial
data for the years ended December 31, 2000 and 1999, the five months ended
December 31, 1998 and for the years ended July 31, 1998 and 1997 should be read
in conjunction with our consolidated financial statements. The selected
financial and operating information should also be read in conjunction with
"Item 7. - Management's Discussion and Analysis of Results of Operations and
Financial Position" included in this Report.
Income Statement Data (1)
Five Months
Year Ended Year Ended Ended
December 31, December 31, December 31, Years Ended July 31,
----------------------------------------
2000 1999 1998 (5) 1998 1997 1996
--------------------------------------------------------------------------------------
(In thousands of U.S. Dollars, except per share amounts)
Revenue
Racetrack (2) $355,249 $164,946 $ 8,745 $ - $ - $ -
Real estate 58,314 21,914 6,597 20,486 15,276 2,460
------------------------------------------------------------------------------------
Total revenue 413,563 186,860 15,342 20,486 15,276 2,460
Costs and Expenses
Racetrack costs and
Expenses 336,772 154,809 8,418 - - -
Real estate costs and
Expenses (2) 50,717 21,820 8,462 25,864 13,879 4,613
Depreciation and
Amortization 20,061 7,924 1,649 1,852 1,824 330
Interest expense
(income), net 215 (920) 1,221 1,380 955 (59)
Other 4,245 454 - - - -
------------------------------------------------------------------------------------
Income (loss) before
income taxes 1,553 2,773 (4,408) (8,610) (1,382) (2,424)
====================================================================================
Net income (loss) $ 441 $ (62) $ (4,231) $(8,610) $(1,382) $(2,424)
====================================================================================
Income (loss) per share for
Class A Subordinate
Voting, Class
B Stock or
Exchangeable
Share:
Basic and diluted (3) $ 0.01 $ 0.00 $ (0.05) $ (0.11) $ (0.02) $ (0.03)
====================================================================================
Average number of
Shares of Class A
Subordinate Voting,
Class B Stock and
Exchangeable
Shares outstanding
during the period
(in thousands):
Basic (3) 80,422 78,686 78,535 78,535 78,535 78,535
Diluted 80,424 78,686 78,535 78,535 78,535 78,535
====================================================================================
Balance Sheet Data (1)
December 31, July 31,
2000 1999 1998 1998 1997 1996
--------------------------------------------------------------------
(In thousands of U.S. Dollars)
Cash and cash equivalents $ 31,976 $ 50,660 $ 12,442 $ 295 $ 220 $ 133
Total assets 781,039 760,353 364,142 184,802 113,175 76,219
Total debt (4) 83,706 45,884 32,335 19,495 18,938 22,614
Magna's net investment/shareholders'
Equity 541,788 547,087 302,502 158,275 87,917 49,985
Notes:
(1) We prepare our financial statements in accordance with U.S. generally
accepted accounting principles ("U.S. GAAP"), which differ in some respects
from accounting principles generally accepted in Canada ("Canadian GAAP").
For a discussion of the principal differences between U.S. GAAP and
Canadian GAAP, see Note 16 in the consolidated financial statements.
(2) Effective October 1, 2000, the Company changed its method of accounting for
revenue recognition in accordance with Staff Accounting Bulletin (SAB) No.
101, Revenue Recognition in Financial Statements and guidance provided by
EITF 99-19 Recording Revenue Gross as a Principal versus Net as an Agent.
Previously, the Company recorded its wagering revenue net of "purses,
stakes and awards" and "pari-mutuel wagering taxes". Under the new
accounting method adopted during the fourth quarter of 2000, the Company
now recognizes revenue gross of "purses, stakes and awards" and "pari-
mutuel wagering taxes". The costs relating to these amounts are shown as
"Purses, awards and other" in the Company's consolidated financial
statements. In accordance with SAB 101 guidance, the current year quarterly
unaudited income statements and the prior year income statements have been
retroactively reclassified for all periods presented to comply with the new
accounting method.
(3) 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.
(4) Total debt includes bank indebtedness and long-term debt (including long-
term debt due within one year).
(5) Prior to MEC becoming a separate public company, MEC and its parent
company, Magna, changed their fiscal year ends from July 31 to December 31,
effective December 31, 1998.
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Position
The following discussion of our results of operations and financial position
should be read in conjunction with the consolidated financial statements
included in "Item 8 - Financial Statements and Supplementary Data" in this
Report.
Overview
MEC acquires, develops and operates horse racetracks and related pari-
mutuel wagering operations. As a complement to our horse racing business, we are
exploring the development of electronic media wagering operations, including
telephone account, interactive television and Internet-based wagering, as well
as 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 together with a championship golf course and related
recreational facilities in Europe, another championship golf course scheduled to
open this spring in Aurora, Ontario and other real estate. We intend to continue
to gradually sell the balance of our non-racing excess 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 sale.
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 until mid to 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. Santa Anita Park was the site of the Breeder's Cup in both 1986
and 1993.
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 on three occasions, most recently in November
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. We have applied to extend our racing dates to mid-
April for the 2002 race meet.
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
thoroughbred racetracks, consisting of 187 racing days between April and
December of each year. Remington Park, which operates at a leased facility,
offers two thoroughbred horse meets, the first in January and February and the
second between August and November, and a 40-day Quarter Horse meet from mid-
April to mid-June 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 Fields' 2000 racing
season consisted of two meets, one of which ran from late March to mid-June and
the other of which ran from mid-November to late December 2000. Commencing with
its 2001 racing season, the first meet has changed to run from late December
2000 through to April 1, 2001 and the second meet has changed to run from early
November to mid-December 2001. These changes were made in order to improve our
racing programs and maximize operational synergies between Golden Gate Fields
and our other Northern California racetrack operation, Bay Meadows Racecourse.
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 operates live racing days beginning
in April and ending in early November of each year.
On November 17, 2000 we completed the acquisition of Bay Meadows Operating
Company, LLC. The terms of the transaction allow the Company to conduct racing
at the existing Bay Meadows facility until the later of (i) December 31, 2002
and (ii) the end of any racing meet then in progress but not later then March
31, 2003. Bay Meadows Racecourse is located in the city of San Mateo,
California, approximately 21 miles south of San Francisco and 31 miles from
Golden Gate Fields. The Bay Meadows 2001 racing season will consist of two
meets, the first meet running from early April to mid-June and the second meet
running from late August to early November. We are currently exploring a number
of different sites on which we could operate these race days subsequent to 2002.
As a result of the seasonal nature of our racetrack business, racetrack
revenues and operating results for any 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, and commencing in
fiscal 2001, when the first Golden Gate Fields meet will occur.
Our primary source of racetrack revenues are commissions earned from pari-
mutuel wagering. 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 maximum pre-determined percentages are
approved 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 or off-track betting ("OTB") facilities and through home
account wagering. Our racetracks have simulcast wagering facilities to
complement our live horse racing which enables our patrons to wager on horse
races being held at other racetracks. We also generate non-wagering revenues
consisting primarily of food and beverage sales, program sales, admissions,
parking revenues and income from the rental of facilities to other racing
operators.
Real estate operations
Our real estate portfolio includes undeveloped land, as well as land in
various stages of development and excess land in the United States, Canada and
Austria. 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 75 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 116 apartment units and 150 single-family
homes. The first phase was substantially completed in prior years and we expect
the second and final phase of Fontana to be completed by 2006. We have changed
our marketing concept for our second phase to exclude construction activity and
focus only on the sale of residential lots. We also own approximately 1,050
acres of land in Ebreichsdorf, Austria, located approximately 15 miles south of
Vienna, which includes a golf course under a long term lease to a third party.
The balance of the land is largely undeveloped, although we are currently
grading and performing other preliminary work as we seek zoning and other
approvals in order to enhance the value on sale or for other possible uses,
including as part of MEC's racing operations.
In 2000, we acquired approximately 480 acres of land in Palm Beach County,
Florida, which we are currently developing into a horse boarding and training
center.
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,
approximately 30 miles north of Toronto, and expected to open in May 2001. We
are currently finalizing our marketing plan for the sale of memberships in the
Aurora golf course. The clubhouse is under construction and is expected to be
completed in the late summer or early fall of 2001. Both of our golf courses are
subject to rights of first refusal in favor of Magna. In addition, our real
estate portfolio includes approximately 160 acres of mixed-use land adjacent to
the Aurora golf course.
Included in properties under and held for development is excess land
adjacent to three of our premier racetracks, Santa Anita Park, Gulfstream Park
and Golden Gate Fields, totaling approximately 200 acres. We are currently
considering a variety of options with respect to this excess land including
themed entertainment and retail based developments which could be developed in
conjunction with business partners who would be expected to provide the
necessary financing, as the Company does not intend to devote its capital to
non-racing real estate development.
We intend to continue to gradually sell the balance of our excess non-
racing real estate portfolio, excluding the land 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 sale.
Results of Operations
Year Ended December 31, 2000 Compared to 1999
Racetrack Operations
Effective October 1, 2000, the Company changed its method of accounting for
revenue recognition in accordance with Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements" and guidance provided by EITF 99-
19 "Recording Revenue Gross as a Principal versus Net as an Agent". Previously,
the Company recorded its wagering revenue net of "purses, stakes and awards" and
"pari-mutuel wagering taxes". Under the new accounting method adopted during the
fourth quarter of 2000, the Company now recognizes revenue gross of "purses,
stakes and awards" and "pari-mutuel wagering taxes". The costs relating to these
amounts are shown as "Purses, awards and other" in the Company's consolidated
financial statements. In accordance with SAB 101 guidance, the current year
quarterly unaudited income statements and the prior year income statements have
been retroactively reclassified for all periods presented to comply with the new
accounting method. This change in method of accounting will enable the Company's
financial performance to be compared more readily to other companies in our
industry.
Revenues from our racetrack operations were $355.2 million in 2000
compared to $164.9 million in 1999, an increase of $190.3 million or 115%. The
increase in revenues is primarily the result of the additional racetracks
acquired in 2000 and in late 1999. Revenues for 2000 reflect the full year live
racing and simulcast operations for all of the Company's racetracks except for
Great Lakes Downs and Bay Meadows, which were acquired on February 29, 2000 and
November 17, 2000, respectively. Revenues for 1999 reflect the full year
operations of Santa Anita Park and the operations of Gulfstream Park from
September 1, 1999, the date of acquisition, Thistledown and Remington Park from
November 12, 1999, their date of acquisition, and Golden Gate Fields from
December 10, 1999, the date of acquisition.
Gross wagering revenues for our racetracks increased 125% to $301.2
million in 2000 compared to $133.9 million in 1999. We derive our gross 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; and
. wagers made by patrons at off-track wagering facilities on exported
signals from races held at our racetracks.
(b) Non-live race days
. wagers placed by patrons at our racetracks and OTB sites on imported
simulcast signals from other racetracks in-state and out-of-state.
Non-wagering revenues in 2000 were $54.0 million compared to $31.0
million in 1999 an increase of 74%. Non-wagering revenues primarily comprise
food and beverage sales, program sales, parking revenues, admissions and income
from the rental of facilities to other racing operators. The increase in non-
wagering revenues is lower than the increase in gross wagering revenues because
a portion of the gross wagering revenues is earned from simulcast export
activities which do not provide our racetracks with patrons that would generate
these non-wagering revenues.
Purses, awards and other increased from $85.5 million in 1999 to
$190.0 million in 2000. As a percentage of gross wagering revenue, purses,
awards and other decreased from 63.9% in 1999 to 63.1% in 2000. Operating costs
increased from $63.3 million in 1999 to $128.6 million in 2000. As a percentage
of gross wagering and non-wagering revenues, operating costs decreased from
38.4% in 1999 to 36.2% in 2000. The reduction in operating costs as a percentage
of revenues is primarily the result of cost savings and other synergies realized
on the consolidation of racetrack operations during the year. Racetrack general
and administrative expenses increased to $18.1 million in 2000 compared to $6.0
million in 1999. The
increase is primarily due to the additional racetracks acquired in late 1999 and
2000 and the significant costs incurred to restructure our corporate office and
other one time costs of approximately $7.5 million in 2000.
Real estate operations
Revenues from our real estate operations were $58.3 million in 2000
compared to $21.9 million in 1999. Total real estate revenues less the cost of
real estate sold, operating costs and general and administrative expenses
increased to $7.6 million in 2000 from $0.1 million in 1999. This increase is
primarily attributable to an increase in the number of non-core real estate
properties disposed of in 2000 compared to 1999. The increase in activity is a
reflection of management's previously stated intent to gradually sell the
balance of our excess non-racing real estate portfolio, which is not viewed as
being strategic for the enhancement of our premier racetracks, in order to
provide capital to be used to support our business.
Depreciation and amortization
Depreciation and amortization increased by $12.2 million to $20.1 million
for 2000 compared to $7.9 million in 1999. This increase reflects a full year
depreciation and amortization charge related to Gulfstream Park, Thistledown,
Remington Park and Golden Gate Fields acquired in the second half of 1999 and a
partial year depreciation and amortization charge related to Great Lakes Downs
and Bay Meadows acquired in 2000.
Interest income and expense
Our net interest expense for 2000 was $0.2 million compared to net interest
income of ($0.9) million for 1999. The higher net interest expense is
attributable to the increase in long-term debt in 2000 primarily related to the
financing of the Bay Meadows acquisition and racing related real estate property
additions.
Income tax provision
We recorded an income tax provision of $1.1 million on income before income
taxes of $1.6 million for 2000 compared to an income tax provision of $2.8
million on income before income taxes of $2.8 million for 1999. Our effective
income tax rate in 2000 compared to 1999 decreased primarily as a result of the
lower level of operating losses in 2000 that were not tax benefited.
Year Ended December 31, 1999 Compared to 1998
Prior to MEC becoming a separate public company, MEC and its parent
company, Magna, changed their fiscal year ends from July 31 to December 31,
effective December 31, 1998. As a consequence of the change in year end, the
Company reported a five month period ended December 31, 1998 in the consolidated
financial statements. Throughout this part of Management's Discussion and
Analysis of Results of Operations and Financial Position ("M,D&A") all amounts
for the year ended December 31, 1999 are compared to the unaudited results for
the year ended December 31, 1998. Our comparative consolidated operating
results for the years ended December 31, 1999 and 1998 have been restated to
reflect the change in the method of accounting for revenue recognition discussed
earlier in this M,D&A.
(United States dollars in thousands) Years ended
December 31, December 31,
1999 1998
- --------------------------------------------------------------------------------------------------------------
(Unaudited)
Revenue
Racetrack
Wagering 133,924 7,306
Non-wagering 31,022 1,439
Real estate
Sale of real estate 2,544 -
Rental and other 19,370 21,239
- --------------------------------------------------------------------------------------------------------------
186,860 29,984
- --------------------------------------------------------------------------------------------------------------
Costs and expenses
Racetrack
Purses, awards and other 85,520 4,793
Operating costs 63,302 3,461
General and administrative 5,987 164
Real estate
Real estate sold 1,916 -
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 (2,586) (31)
Other expenses 454 -
- --------------------------------------------------------------------------------------------------------------
184,087 40,607
- --------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 2,773 (10,623)
Income tax provision (benefit) 2,835 (177)
- --------------------------------------------------------------------------------------------------------------
Net loss (62) (10,446)
==============================================================================================================
Racetrack operations
Revenues from our racetrack operations were $164.9 million for 1999. Santa
Anita Park contributed revenues of $147.9 million and the remaining racetracks
that were acquired in late 1999 contributed $17.0 million. Santa Anita Park's
full year 1999 operations are reflected in our consolidated results. The other
racetracks' operations are only reflected in our consolidated results from the
date of acquisition. We earned no revenues from our racetrack operations at
Gulfstream Park, Thistledown and Remington Park, and Golden Gate Fields in the
comparable 1998 period as they were acquired in September 1999, November, 1999
and December 1999, respectively. Our total revenues from racetrack operations in
the comparable 1998 period of $8.7 million were attributable to Santa Anita Park
which was acquired on December 10, 1998 and included only a few race days in
1998.
In 1999, our gross wagering revenues for our racetracks were $133.9 million
and non-wagering revenues were $31.0 million. Santa Anita Park earned $27.8
million and the other racetracks earned $3.2 million of our non-wagering
revenues for 1999. 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 $154.8
million for 1999. Santa Anita Park incurred costs and expenses of $134.5 million
with the remaining racetracks incurring $20.3 million. Santa Anita Park's share
of costs for purses, awards and other was $76.6 million, with the remaining
racetracks incurring $8.9 million. The major components of our operating costs
and general and administrative expenses were payroll costs of $38.8 million and
marketing and advertising costs of $6.2 million. The costs and expenses of
Gulfstream Park, Thistledown, Remington Park and Golden Gate Fields were minimal
during 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. In addition, these racetracks had few live race days in 1999 subsequent to
their acquisition date.
Real estate operations
Revenues from our real estate operations were $21.9 million for 1999
compared to $21.2 million for 1998. Revenues from real estate operations for
1999 were comprised of $2.5 million for the sale of real estate and $19.4
million for rental and other. There were no revenues from the sale of real
estate for 1998. Rental and other revenues decreased $1.9 million for 1999
compared to 1998. The decrease in rental and other revenue is primarily
attributable to a reduction in house building activity at the Fontana
residential development, which was 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
$21.8 million for 1999 compared to $27.4 million for 1998. The reduction is
attributable to the decrease in housing activity at the Fontana residential
development. In addition, we incurred costs in 1998 related to the potential
development of a theme park on approximately 1,050 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.
Costs and expenses of our remaining real estate operations were substantially
unchanged.
Depreciation and amortization
Depreciation and amortization expense increased by $5.1 million to $7.9
million for 1999 compared to $2.8 million in 1998. The increase is substantially
attributable to our acquisition of Santa Anita Park on December 10, 1998, San
Luis Rey Downs, a southern California-based horse boarding and training center,
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
recording a full year of depreciation on properties acquired in calendar 1998.
Interest income and expense
Our net interest income for 1999 was ($0.9) million compared to net
interest expense of $2.1 million for 1998. The higher net interest income was
primarily a result of interest income on higher cash balances in the year. The
increase in cash balances is attributable to Magna's equity investment in the
Company in the third quarter of 1999.
Income tax provision
We recorded an income tax provision of $2.8 million on income before income
taxes of $2.8 million for 1999 compared to an income tax benefit of $0.2 million
on a loss before income taxes of $10.6 million for 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 tax benefit of
our losses from other operations has not been recognized for accounting
purposes.
Financial Position, Liquidity and Capital Resources
Until December 31, 1999, we financed our operations primarily through
contributions by our majority shareholder, Magna. Magna has made a commitment to
its shareholders that, during the period to May 31, 2006, it will not without
the prior consent of the holders of a majority of Magna's Class A Subordinate
Voting Shares:
(i) make additional debt or equity investments in, or otherwise give financial
assistance to, us or any of our subsidiaries; or
(ii) invest in any non-automotive related businesses or assets other than
through its investment in us.
Given the abov