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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, 2001
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)
Delaware 98-0208374
(State or Other Jurisdiction (I.R.S. Employer Identification
of Incorporation or Organization) Number)
337 Magna Drive L4G 7K1
Aurora, Ontario, Canada (Zip Code)
(Address of Principal Executive
Offices)
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
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 15, 2002, the aggregate market value of the Class A Subordinate
Voting Stock held by non-affiliates of the registrant was approximately
$173,702,028 (based on the closing sale price of $9.07 per share of Class A
Subordinate Voting Stock reported on The Nasdaq National Market on March 15,
2002). As of March 15, 2002, 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 $19,194,224 (based on the
closing sale price of $9.07 per share of Class A Subordinate Voting Stock
reported on The Nasdaq National Market on March 15, 2002).
The number of shares of Class A Subordinate Voting Stock of the registrant
outstanding as of March 15, 2002 was 23,513,599.
The number of shares of Class B Stock of the registrant outstanding as of
March 15, 2002 was 58,466,056.
Documents Incorporated by Reference
The registrant's proxy statement filed with the Securities and Exchange
Commission pursuant to Regulation 14A, with respect to the annual meeting of
stockholders scheduled to be held on April 18, 2002, is incorporated by
reference in Part III of this Form 10-K to the extent stated herein. Except
with respect to information specifically incorporated by reference in this
Form 10-K, the document incorporated by reference is not deemed to be filed as
a part hereof.
In this Annual Report, when we use the terms "we", "us", "our" and the
"Company", we are referring to Magna Entertainment Corp. and its subsidiaries,
unless the context otherwise requires. In this Annual Report, unless stated
otherwise, all references to "$" are to U.S. dollars and all references to
"Cdn. $" are to Canadian dollars. All pro forma financial or operating
information in this Annual Report is derived from our unaudited Pro Forma
Consolidated Statements of Operations and Comprehensive Income (Loss) (as filed
with Amendment No. 3 to our Registration Statement on Form S-1, dated March 8,
2002 (File no. 333-70520)), which give effect to acquisitions that we made
after January 1, 2000 as though they were completed on that date.
Part I
Item 1. Business
Special Note Regarding Forward-Looking Information
This Annual Report contains forward-looking statements as defined by the
U.S. Securities Act of 1933 and the U.S. Securities Exchange Act of 1934.
These forward-looking statements may include, among others, statements
regarding: expectations as to operational improvements; expectations as to
cost savings, revenue growth and earnings; the time by which certain
objectives will be achieved; estimates of costs relating to environmental
remediation and restoration; proposed new products and services; expectations
that claims, lawsuits, environmental costs, commitments, contingent
liabilities, labor negotiations or agreements, or other matters will not have
a material adverse effect on our consolidated financial position, operating
results, prospects or liquidity; projections, predictions, expectations,
estimates or forecasts as to our financial and operating results and future
economic performance; and other matters that are not historical facts.
Forward-looking statements should not be read as guarantees of future
performance or results, and will not necessarily be accurate indications of
whether or the times at or by which such future performance or results will be
achieved. Forward-looking statements are based on information available at the
time and/or management's good faith belief with respect to future events, and
are subject to risks and uncertainties that could cause actual performance or
results to differ materially from those expressed in the statements.
Important factors that could cause such differences include, but are not
limited to, the factors discussed below under "Risk Factors".
Forward-looking statements speak only as of the date the statement was
made. We assume no obligation to update forward-looking information to reflect
actual results, changes in assumptions or changes in other factors affecting
forward-looking information. If we update one or more forward-looking
statements, no inference should be drawn that we will make additional updates
with respect thereto or with respect to other forward-looking statements.
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 a
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 subdivide our issued and outstanding Class C Common Stock into
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 by
us, together with the jurisdiction of incorporation of each of the entities
shown thereon as of March 18, 2002.
[MAGNA ENTERTAINMENT CORP. ORGANIZATIONAL CHART]
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OUR BUSINESS
We are the leading owner and operator of thoroughbred racetracks in the
United States, based on revenue, and a leading supplier, via simulcasting, of
live racing content to the growing inter-track, off-track and account wagering
markets. We currently operate eight thoroughbred racetracks, one standardbred
racetrack and one greyhound racetrack, as well as the simulcast wagering
venues at these tracks. In addition, we operate off-track betting ("OTB")
facilities and a national account wagering business known as XpressBetTM,
which permits customers to place wagers by telephone and over the Internet on
horse races at up to 65 racetracks in North America. We also have a one-third
ownership interest in Racetrack Television Network, LLC, a new venture formed
to telecast races from our racetracks and other racetracks, via satellite, to
paying subscribers. For the year ended December 31, 2001, our operations
generated consolidated revenue of approximately $519.1 million, or $548.0
million on a pro forma basis.
Since December 1998, we have acquired four of the most prestigious
racetrack operations in North America: Santa Anita Park near Los Angeles,
Gulfstream Park near Miami, and Golden Gate Fields and Bay Meadows near San
Francisco. We have also acquired the racetrack operations of The Meadows near
Pittsburgh, Thistledown near Cleveland, Remington Park in Oklahoma City and
Great Lakes Downs in Muskegon, Michigan. We own all the land on which the
above-mentioned racetracks are located, with the exception of Bay Meadows and
Remington Park, where we lease the land from third parties. In addition, we
recently began to lease and operate Portland Meadows and we recently acquired
the operations of and leased Multnomah Greyhound Park, both of which are
located in or near Portland, Oregon. These acquisitions have enabled us to
secure the ownership rights to what we believe is some of the highest quality
and most popular live horse racing content in North America, based on standard
industry measures, such as total handle, average daily attendance and average
daily wagering, both on and off-track. We believe that the aggregation of this
high-quality content, coupled with a strong branding strategy and the
introduction of new media distribution technologies, will enhance distribution
of our content and help us develop new sources of revenues. We intend to
continue to acquire strategic racetracks and other related assets on a
selective basis.
We distribute our live racing content to approximately 1,000 off-track and
inter-track venues, including other racetracks, OTB facilities and casinos in
the United States, Canada, Mexico, the Caribbean and Australia. We intend to
expand the distribution of this content in these markets and, to the extent
permitted by various regulatory regimes, in additional markets, particularly
emerging electronic media-based markets, such as wagering via interactive
television and the Internet.
In conjunction with our racetrack operations, we own and operate a horse
boarding and training center located approximately 45 miles north of San Diego
and approximately 90 miles southeast of Santa Anita Park, and we are
developing another such facility in Palm Beach County, Florida approximately
40 miles north of Gulfstream Park. We believe that these facilities will
provide us with a competitive advantage by helping us to attract additional
high-quality horses to our racetracks and to expand our field sizes. We
believe that this will allow us to increase both our number of live races and
the total amount wagered on our races.
In addition to our racetracks, we also have significant real estate
holdings in the United States, Canada and Austria. We characterize our real
estate as follows:
. real estate at our racetracks to be used in our racing operations
("Revenue-Producing Racetrack Real Estate");
. excess real estate at our racetracks that we are considering developing
with strategic partners ("Excess Racetrack Real Estate");
. real estate not at our racetracks that is either under development or
that we are holding for development ("Development Real Estate");
. developed real estate not at our racetracks that is currently generating
revenue for us ("Revenue-Producing Non-Racetrack Real Estate"); and
. non-core real estate that we hold for sale ("Non-Core Real Estate").
As of December 31, 2001, the aggregate net book value of all our real
estate (including fixed assets at racetracks and at Revenue-Producing Non-
Racetrack Real Estate) was $574.7 million. While we are exploring the
development of some of our real estate, we intend to continue to sell our Non-
Core Real Estate in order to generate additional capital to grow and enhance
our racing business. During the past three years, we sold Non-Core Real Estate
with an aggregate
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net book value of $58.8 million for gross proceeds of $99.4 million. As of
December 31, 2001, the aggregate net book value of our remaining Non-Core Real
Estate was approximately $38.5 million.
Please see our financial statements beginning on page 46 for financial
information concerning our business and its segments.
Our Strategy
Since our inception in 1998, we have experienced significant growth in
scale and profitability through a disciplined acquisition program. We intend
to grow and develop our business further by:
Selectively Acquiring Additional Strategic Racetracks and Related Assets
We will selectively pursue the acquisition of strategically important,
geographically diverse racetracks and related operations in order to increase
our ownership of live racing content. We intend to simulcast this content to
other pari-mutuel wagering venues and to increase both the number of days in
the year and hours in the day that we offer wagering on live and simulcast
races.
Continuing to Integrate our Acquisitions by Employing "Best Practice"
Improvements at our Racetracks
Through our acquisitions, we own what we believe are some of the highest-
quality thoroughbred racetracks in North America, as measured in terms of
total handle, average daily attendance and average daily wagering both on and
off-track. We believe that the increased scale and integration of our
racetrack operations will afford us the opportunity to both grow our revenues
and achieve significant operational synergies through the implementation of
best practices, cost reductions realized from economies of scale and increased
efficiencies. We intend to improve the quality of the live racing experience
by upgrading and expanding the infrastructure of our properties in order to
attract the best available horses, trainers and jockeys.
Expanding the Distribution of our Live Racing
We currently distribute our live racing content to inter-track and off-
track venues in the United States, Canada, Mexico, the Caribbean and
Australia. We believe that, subject to applicable regulation, significant
opportunities exist to expand the distribution of our content through the
further development of our simulcasting operations and our XpressBet Internet
and telephone account wagering business, as well as the development of new
forms of account wagering, including interactive television.
Further Developing an Integrated Branding and Marketing Strategy
We intend to combine our racing content, and possibly the racing content
from racetracks not owned by us, and market this content under our brand name.
We believe that aggregating this content would offer pari-mutuel wagering
venues that import our content greater convenience and lower operating costs,
while offering customers at their facilities access to more racing content,
including signals that the venue operators may not have purchased as stand-
alone products. We believe that packaging our product this way will increase
the exposure of our smaller racetracks.
Improving the Quality of the Entertainment Experience at our Racetracks and
OTB Facilities
We believe that the horse racing industry does not currently reach a large
portion of its potential customer base. We are attempting to increase
attendance at our racetracks and broaden the appeal of horse racing by
developing higher-quality racetrack facilities with a wider variety of
amenities. We will seek to enter into joint venture arrangements with
strategic partners to develop leisure and entertainment-based real estate
projects on land surrounding, or adjacent to, certain of our premier
racetracks. Such developments could include retail shopping facilities,
restaurants, hotels and entertainment projects. Subject to regulatory
approval, these developments may also involve the integration of other gaming
operations, such as video lottery terminals or similar gaming devices.
Our History
Our parent company, Magna International Inc. ("Magna International"), is
one of the most diversified automotive parts suppliers in the world. In 1999,
Magna International entered into a series of transactions in order to separate
its non-automotive businesses from its automotive businesses.
4
We were incorporated in Delaware on March 4, 1999. In November 1999, Magna
International completed a reorganization of its corporate structure (the
"Reorganization"), under which Magna International's non-automotive businesses
and certain real estate assets were transferred to us. As part of the
Reorganization, our capital structure was amended to establish two classes of
stock: Class A Subordinate Voting Stock, with one vote per share, and Class B
Stock, generally with 20 votes per share.
In December 1999, Magna International redeemed approximately 14.8 million
shares of our Class B Stock for proceeds of $110.0 million. On that same date,
Magna International invested $110.0 million in our Canadian subsidiary, MEC
Holdings (Canada) Inc. ("Exchangeco"), in return for approximately 14.8
million exchangeable shares of Exchangeco. Each exchangeable share may be
exchanged by the holder for one share of our Class A Subordinate Voting Stock
at any time. The purpose of these shares was to permit certain Canadian
shareholders of Magna International that were subject to limitations on their
holdings of shares of non-Canadian issuers to receive shares of a Canadian
issuer in the special dividend by Magna International described below. Because
the exchangeable shares (together with certain ancillary rights) are
economically equivalent to our Class A Subordinate Voting Stock, those
exchangeable shares that are still outstanding are included for purposes of
calculating our earnings per share and shareholders' equity on a consolidated
basis.
On March 10, 2000, Magna International distributed to holders of its Class
A subordinate voting shares and Class B shares, by way of a special dividend,
approximately 15.7 million shares comprised of our Class A Subordinate Voting
Stock and the exchangeable shares of Exchangeco. As of March 18, 2002, Magna
International owns, directly or indirectly, all our outstanding Class B Stock
and 4,362,328 shares of our outstanding Class A Subordinate Voting Stock. As a
result, Magna International is able to exercise approximately 98% of the total
voting power attached to all our outstanding stock, and therefore is able to
elect all our directors and to control us. Three members of our board of
directors are also members of Magna International's board of directors and we
have the same chairman.
Overview of the Horse Racing Industry
Pari-Mutuel Wagering
Pari-mutuel wagering on horse racing is a form of wagering in which wagers
on horse races are aggregated in a commingled pool of wagers (the "mutuel
pool") and the payoff to winning customers is determined by both the total
dollar amount of wagers in the mutuel pool and the allocation of those dollars
among the various kinds of bets. Unlike casino gaming, the customers bet
against each other, and not against the operator, and therefore the operator
bears no risk of loss with respect to any wagering conducted. The pari-mutuel
operator retains a pre-determined percentage of the total amount wagered (the
"take-out") on each event, regardless of the outcome of the wagering event,
and the remaining balance of the mutuel pool is distributed to the winning
customers. Of the percentage retained by the pari-mutuel operator, a portion
is paid to the horse owners in the form of purses or winnings, which encourage
the horse owners and their trainers to enter their horses in a track's races.
Pari-mutuel wagering on horse racing is the largest form of pari-mutuel
wagering, and it is currently authorized in over 40 states of the United
States, all provinces of Canada and approximately 100 other countries around
the world.
Recent History
The horse racing industry is a highly fragmented industry with relatively
few high-quality racetracks and relatively few operators owning more than two
facilities. Over the past 20 years, live attendance at horse racetracks in the
United States has declined substantially due to a number of factors, including
the growth in off-track wagering; increased competition from other forms of
gaming and leisure entertainment; the attrition of the racing industry's
traditional customer base; the lack of, or deterioration in, the quality of
live racing events at many racetracks; and the inability of racetrack
operators to broaden the appeal of wagering on horse racing. Declines in live
attendance have resulted in an overall decline in the amount of money wagered
on live horse racing, which has exacerbated the problem of producing high-
quality live wagering events and in developing entertaining racetrack
facilities.
In the early 1990s, the introduction of off-track and inter-track wagering
became more prevalent and reversed the decline in the total amount of dollars
wagered on horse racing. The rise of off-track and inter-track wagering has
resulted in a significant increase in total industry revenues, and the
creation of larger pools of wagers on horse races at certain racetracks. This
has more than offset the decline in live on-track wagering due to declining
live attendance. The larger pools of wagers have produced larger purses, which
have resulted in higher-quality racing events and an
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increased interest in horse racing and pari-mutuel wagering. Subsequently, the
financial performance of many of the premier racetracks in the United States
has improved.
The Growth in Off-track and Inter-track Wagering
Pari-mutuel wagering on thoroughbred horse racing in the United States
increased from approximately $9.4 billion in 1990 to approximately $14.6
billion in 2001, according to The Jockey Club. This increase resulted
primarily from the growth of off-track and inter-track wagering, which has
grown by approximately 43.3% from approximately $8.7 billion in 1996 to
approximately $12.4 billion in 2001. Simulcasting live racing events to off-
track and inter-track venues has been facilitated by technological advances
and the introduction of legislative changes.
[BAR CHART - Total U.S. Thoroughbred Pari-Mutuel Wagering Handle]
Source: Equibase Company LLC; The Jockey Club.
[BAR CHART - U.S. Thoroughbred Racing Pari-Mutuel Handle Breakdown]
Source: Equibase Company LLC; The Jockey Club.
Simulcasting is the process of transmitting the audio and video signal of a
live racing performance from one facility to a satellite for retransmission to
other locations or venues where pari-mutuel wagering is permitted.
Simulcasting provides racetracks with the opportunity to increase revenues by
exporting their live racing content to as many wagering locations as possible,
such as other racetracks, OTB facilities and casinos, and by importing racing
content from other racetracks.
Revenues are increased because simulcasting provides racetracks that export
their live content with additional customers in multiple locations who would
not have otherwise been able to place wagers on the live racing event.
Similarly, simulcasting provides operators of pari-mutuel wagering venues who
import content from other racetracks with more product upon which their
customers can place wagers. Providers of live racing content who export their
content to other venues generally charge these venues a percentage of all
monies wagered on their content, while operators of pari-mutuel wagering
venues that import racing content retain a pre-determined percentage of all
amounts wagered at their facility on the imported content. Because the
competition for content time slots is relatively intense, the growth of
simulcasting has been particularly beneficial to the operators of premier
racetracks, which tend to offer higher quality racing, with larger fields and
higher purses. Conversely, operators of smaller or lesser quality racetracks
have historically benefited less from simulcasting, due to a lack of demand
for their content. Part of our strategy involves efforts to broaden the
distribution of, and demand for, the racing content from our smaller tracks.
We expect that off-track and inter-track wagering will experience continued
growth as additional venues able to import simulcast content are established
and new distribution channels for pari-mutuel wagering, such as the telephone,
Internet and interactive television, are further developed.
Because of the high quality of our thoroughbred racing content and
racetrack properties, we believe we are well positioned to participate in the
future growth of off-track, inter-track and account wagering as both a leading
exporter and importer of live racing content.
Our Content
Our racetracks are geographically diversified. Santa Anita Park is near Los
Angeles, Gulfstream Park is near Miami, Golden Gate Fields and Bay Meadows are
near San Francisco, The Meadows is near Pittsburgh, Thistledown is near
Cleveland, Remington Park is in Oklahoma City, Great Lakes Downs is in
Muskegon, Michigan, and Portland Meadows and Multnomah Greyhound Park are in
or near Portland, Oregon.
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2002 Racing Schedule
As illustrated in the chart below, live racing is offered throughout the
year at our racetracks. The racing dates for Santa Anita Park indicated below
include The Oak Tree Meet.
RACETRACK RACING DATES
------------------------ ---------------------------------------
Bay Meadows April 3, 2002--June 16, 2002
and August 30, 2002--November 3, 2002
Golden Gate Fields December 26, 2001--March 31, 2002
and November 6, 2002--December 22, 2002
Great Lakes Downs April 29, 2002--October 29, 2002
Gulfstream Park January 3, 2002--April 24, 2002
The Meadows January 3, 2002--December 29, 2002
Multnomah Greyhound Park May 3, 2002--October 12, 2002
Remington Park April 5, 2002--June 8, 2002
and August 10, 2002--December 21, 2002
Portland Meadows October 27, 2001--February 10, 2002
and October 19, 2002--December 29, 2002
Santa Anita Park December 26, 2001--April 21, 2002
and October 2, 2002--November 3, 2002
Thistledown March 29, 2002--December 23, 2002
Our Properties
Set forth below is a description of certain of our properties.
Santa Anita Park
Santa Anita Park is situated on approximately 305 acres of land in the City
of Arcadia, California, approximately 14 miles northeast of Los Angeles.
Approximately 10.9 million people are located within a 30-mile radius of Santa
Anita Park.
Santa Anita Park opened for thoroughbred horse racing in 1934 and hosts The
Santa Anita Meet. The Santa Anita Meet generally commences on December 26 and
runs until April each year. In addition, we lease Santa Anita Park to The Oak
Tree Racing Association, which is an unaffiliated not-for-profit California
association that holds a license to host The Oak Tree Meet for approximately
six weeks each fall. Pursuant to this lease, we receive rent that consists
primarily of a percentage of the on-track handle wagered on races run at Santa
Anita Park and a percentage of The Oak Tree Racing Association net commissions
from fees earned on racing content, exported from or imported to Santa Anita
Park. Santa Anita Park has one of the longest racing schedules of the top
North American racetracks, totaling approximately 115 racing days each year
(including The Oak Tree Meet). Average daily attendance in 2001 was
approximately 10,500 customers per live racing day, representing one of the
highest average daily attendance figures of all North American racetracks.
Santa Anita Park had one of the highest total handles, or total amounts
wagered, of all North American racetracks in 2001, approximately $1,425.0
million, including wagers made at Santa Anita Park on its races (including The
Oak Tree Meet), wagers made at other wagering venues and through various
account wagering operations on Santa Anita Park's races, and wagers made at
Santa Anita Park on races imported to its inter-track facilities. Wagers on
Santa Anita Park's races (including The Oak Tree Meet and all venues at which
wagers were placed) totaled approximately $984.0 million in 2001. Of this
amount, approximately $798.7 million in wagers were placed at other wagering
venues to which we exported Santa Anita Park's races via simulcast and through
various account wagering operations. Santa Anita Park exports its simulcast
signal to approximately 1,000 off-track and inter-track wagering facilities in
23 countries. Throughout the year, Santa Anita Park operates as an inter-track
wagering facility where customers can wager on races that are imported to
Santa Anita Park from other racetracks.
Santa Anita Park's facilities 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 7/8-
mile turf course, stalls for approximately 2,000 horses and parking facilities
sufficient to accommodate approximately 20,000 cars.
In December 1999, we completed a $45.0 million capital renovation program
at Santa Anita Park, which included the development of a new 750-seat high-end
restaurant, the installation of a 2,120 square foot LED screen in the infield
track area for racing customers and other upgrades to the grandstand, the
track and other areas of the facility.
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We are considering a variety of retail-based development proposals for
approximately 81 acres of Excess Racetrack Real Estate at Santa Anita Park
that are not currently in use. This development would be intended to further
enhance the entertainment experience at Santa Anita Park, broaden the
demographic composition of our customer base and strengthen the loyalty of
existing customers. These proposals are preliminary. If, after a detailed
review, any of these proposals turn out to be commercially viable, 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. We do not intend to devote our capital to the
development of Excess Racetrack Real Estate at Santa Anita Park.
Gulfstream Park
Gulfstream Park is located on approximately 255 acres of land in the cities
of Hallandale and Aventura, between Miami and Ft. Lauderdale in Florida. There
are approximately 4.3 million people living within a 40-mile radius of
Gulfstream Park.
Gulfstream Park opened in 1939 and for the last several years, the annual
meet at Gulfstream Park has lasted for approximately 63 days between January
and March. Beginning in 2002, Gulfstream Park has been granted approval to run
its meet for 90 days between January and April. The Breeders' Cup, one of the
preeminent series of races in the United States, was held at Gulfstream Park
three times--in 1989, 1992 and 1999. Average daily attendance in 2001 was
approximately 10,300 customers per live racing day.
Gulfstream Park had one of the highest total handles of all North American
racetracks in 2001, approximately $704.0 million, including wagers made at
Gulfstream Park on its races, wagers made at other wagering venues and through
various account wagering operations on Gulfstream Park's races, and wagers
made at Gulfstream Park on races imported to its inter-track facilities.
Wagers on Gulfstream Park's races (including all venues at which wagers were
placed) totaled approximately $662.4 million in 2001. Of this amount,
approximately $575.0 million in wagers were placed at other wagering venues to
which we exported Gulfstream Park's races via simulcast and through various
account wagering operations. Gulfstream Park exports its simulcast signal to
approximately 800 off-track and inter-track wagering facilities in the United
States, Canada, the Caribbean 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 7/8-mile turf track, stalls for
approximately 1,390 horses and parking for approximately 14,000 cars.
We are currently considering a major redevelopment of Gulfstream Park.
Should it proceed as currently contemplated, the Gulfstream Park redevelopment
would include a simulcast pavilion, a sports and entertainment arena, and a
new turf club and grandstand. In addition, there would be significant
modifications and enhancements to the racetracks and stable areas. If
completed, the Gulfstream Park redevelopment would require the demolition of a
substantial portion of the current buildings and related structures, which
include the grandstand, turf club and annex. The aggregate carrying value at
December 31, 2001 of the assets that would be demolished if the Gulfstream
Park redevelopment is completed is approximately $23.0 million. If we decide
to proceed with the Gulfstream Park redevelopment and obtain the approval of
our board of directors, a reduction in the expected life of the existing
assets would occur and a write-down would be necessary.
Golden Gate Fields
Golden Gate Fields is located on approximately 181 acres of land in the
cities of Albany and Berkeley, California, approximately eight miles from
Oakland and approximately 11 miles from San Francisco. There are approximately
5.2 million people living within a 40-mile radius of Golden Gate Fields.
Golden Gate Fields' racing season of approximately 103 racing days
complements the Bay Meadows racing schedule, which runs after the close of Bay
Meadows' racing season in the fall through to the end of March, when Bay
Meadows opens again. From the end of December through to the close of the
season, Golden Gate Fields operates simultaneously with Santa Anita Park.
Average daily attendance in 2001 was approximately 2,700 customers per live
racing day.
Golden Gate Fields had one of the highest total handles of all North
American racetracks in 2001, approximately $534.9 million, including wagers
made at Golden Gate Fields on its races, wagers made at other wagering venues
and
8
through various account wagering operations on Golden Gate Fields' races, and
wagers made at Golden Gate Fields on races imported to its inter-track
facilities. Wagers on Golden Gate Fields' races (including all venues at which
wagers were placed) totaled approximately $318.7 million in 2001. Of this
amount, approximately $283.9 million in wagers were placed at other wagering
venues to which we exported Golden Gate Fields' races via simulcast and
through various account wagering operations. Golden Gate Fields exports its
simulcast signal to approximately 500 off-track and inter-track wagering
facilities in the United States, Canada, Mexico and the Caribbean. Throughout
the year, Golden Gate Fields operates as an inter-track wagering facility
where customers can wager on races that are imported to Golden Gate Fields
from other racetracks.
Golden Gate Fields' facilities include a one-mile main track and a 9/10-
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, a turf club with seating for approximately 1,150 customers
and parking for over 8,500 cars.
Bay Meadows
Bay Meadows is situated on approximately 100 acres of land in San Mateo,
California, between San Francisco and San Jose. There are approximately 5.7
million people living within a 40-mile radius of Bay Meadows.
The racing season at Bay Meadows is divided into a spring meet, which runs
approximately 56 days between early April and mid-June, and a fall meet, which
runs approximately 51 days between late August and early November. This
schedule complements the racing schedule of Golden Gate Fields, which is
located approximately 30 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 two weeks during the summer. Average daily
attendance in 2001 was approximately 3,600 customers per live racing day.
Bay Meadows had one of the highest total handles of all North American
racetracks in 2001, approximately $495.3 million, including wagers made at Bay
Meadows on its races, wagers made at other wagering venues and through various
account wagering operations on Bay Meadows' races, and wagers made at Bay
Meadows on races imported to its inter-track facilities. Wagers on Bay
Meadows' races (including all venues at which wagers were placed) totaled
approximately $253.5 million in 2001. Of this amount, approximately $214.3
million in wagers were placed at other wagering venues to which we exported
Bay Meadows' races via simulcast and through various account wagering
operations. Bay Meadows exports its simulcast signal to approximately 500 off-
track and inter-track wagering facilities in the United States, Canada, Mexico
and the Caribbean. Throughout the year, Bay Meadows operates as an inter-track
wagering facility where customers can wager on races that are imported to Bay
Meadows from other racetracks.
The facilities at Bay Meadows include a grandstand with seating for
approximately 8,000 customers (including the clubhouse and turf club), a one-
mile oval track with 1-mile and 3/4-mile chutes, a 7/8-mile turf course and
stalls for approximately 900 horses with auxiliary stabling available at
Golden Gate Fields for 900 more horses.
The Bay Meadows property is operated under a lease that expires on the
later of (1) December 31, 2002, and (2) the final date of any horse racing
meet in progress on December 31, 2002, but in no event later than March 31,
2003. We are exploring various alternatives for the conduct of the Bay Meadows
racing days after the expiration of the lease, which include (1) the renewal
or extension of the lease, (2) the purchase of the Bay Meadows property, (3)
the use of land in the vicinity that we have acquired recently, subject to
regulatory approval, and (4) the transfer of the Bay Meadows racing days to
Golden Gate Fields, subject to regulatory approval.
Thistledown
Thistledown is located on 128 acres in North Randall, Ohio, approximately
10 miles southeast of downtown Cleveland. There are approximately 3.0 million
people living within a 40-mile radius of Thistledown.
Thistledown has one of the longest racing seasons of all North American
thoroughbred racetracks, consisting of approximately 187 racing days between
April and December. Thistledown hosts the Summit, Thistledown, Randall and
Cranwood meets. Annually, Thistledown hosts the Ohio Derby, which is the
premier graded stakes race in Ohio and is one of the top races of three-year
old horses in the United States.
9
Thistledown's handle was approximately $237.4 million in 2001, including
wagers made at Thistledown on its races, wagers made at other wagering venues
and through various account wagering operations on Thistledown's races, and
wagers made at Thistledown on races imported to its inter-track facilities.
Thistledown exports its simulcast signal to as many as 45 off-track and inter-
track wagering facilities in the United States. By packaging the simulcast
signal from Thistledown with the simulcast signals from our other racetracks,
we expect to further increase the number of sites to which Thistledown's
simulcast program is exported. Throughout the year, Thistledown operates as an
inter-track wagering facility where customers can wager on races that are
imported to Thistledown from other racetracks.
Thistledown's facilities include a grandstand with seating for
approximately 8,000 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.
Remington Park
Remington Park racetrack is situated on approximately 370 acres in Oklahoma
City, Oklahoma. There are approximately 1.1 million people living within a 40-
mile radius of Remington Park.
Remington Park offers a total of approximately 118 live racing days during
each year. In 2001, the racing schedule consisted of three meets: a quarter
horse meet from April to June and two separate thoroughbred meets that ran
three to five days per week, from mid-January to late February and mid-August
to late November. In 2002, Remington Park will run two meets: a quarter horse
meet from April to June, and a thoroughbred meet from August to December.
Remington Park's handle was approximately $133.9 million in 2001, including
wagers made at Remington Park on its races, wagers made at other wagering
venues and through various account wagering operations on Remington Park's
races, and wagers made at Remington Park on races imported to its inter-track
and associated OTB facilities. Wagers on Remington Park's races (including all
venues at which wagers were placed) totaled approximately $54.0 million in
2001. Of this amount, approximately $39.3 million in wagers were placed at
other wagering venues to which we exported Remington Park's races via
simulcast and through various account wagering operations. Remington Park
exports its simulcast signal to approximately 35 off-track and inter-track
wagering facilities in the United States. By packaging the simulcast signal
from Remington Park with the simulcast signals from our other racetracks, we
expect to further increase the number of sites to which Remington Park's
simulcast program is exported. Throughout the year, Remington Park operates as
an inter-track wagering facility where customers can wager on races that are
imported to Remington Park from other racetracks.
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 7/8-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 the Oklahoma
Zoological Trust pursuant to a lease which extends through 2013, with options
to renew until 2063 in ten-year increments.
Great Lakes Downs
Great Lakes Downs is situated on approximately 85 acres in Muskegon,
Michigan, approximately 35 miles from Grand Rapids. There are approximately
1.2 million people living within a 50-mile radius of Great Lakes Downs.
Great Lakes Downs, which commenced operations in January 1999, offers
approximately 120 live racing days beginning in April or May and ending in
October or November of each year.
Great Lakes Downs' handle was approximately $59.3 million in 2001,
including wagers made at Great Lakes Downs on its races, wagers made at other
wagering venues and through various account wagering operations on Great Lakes
Downs' races, and wagers made at Great Lakes Downs on races imported to its
inter-track facilities. Wagers on Great Lakes Downs' races (including all
venues at which wagers were placed) totaled approximately $45.7 million in
2001. Great Lakes Downs exports its simulcast signal to approximately 60 off-
track and inter-track wagering facilities in the United States. By packaging
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
10
exported. Throughout the year, Great Lakes Downs operates as an inter-track
wagering facility where customers can wager on races that are imported to
Great Lakes Downs from other racetracks.
Great Lakes Downs' facilities include a grandstand with seating for
approximately 10,000 customers, a 5/8-mile dirt track, stalls for
approximately 800 horses and parking facilities sufficient to accommodate
approximately 3,200 cars.
The Meadows
We acquired The Meadows racetrack, which is our first standardbred (harness
racing) track, through the acquisition of Ladbroke Racing Pennsylvania, Inc.
(renamed MEC Pennsylvania Racing, Inc.) in April 2001. It is located in Meadow
Lands, Pennsylvania, in the greater Pittsburgh area, on approximately 155
acres of land. There are approximately 2.8 million people living within a 50-
mile radius of The Meadows.
The Meadows first opened in 1963 and has a year-round racing schedule
encompassing approximately 222 live racing days. As part of this acquisition,
we also acquired four OTB facilities in the greater Pittsburgh area, located
in New Castle, Harmar Township, Moon Township and West Mifflin.
The Meadows' facilities include a grandstand with seating for approximately
5,000 customers, a 5/8-mile harness track, stalls for approximately 990 horses
and parking facilities to accommodate approximately 3,000 cars. The four OTB
facilities acquired with The Meadows each contain a restaurant and bar and
offer wagering on simulcast races from racetracks across the country.
The Meadows and its associated OTB facilities generated approximately
$248.3 million in handle in 2001, including wagers made at The Meadows on its
races, wagers made at other wagering venues and through various account
wagering operations on The Meadows' races, wagers made at The Meadows on races
imported to its inter-track facilities and wagers made at The Meadows'
associated OTB facilities. Wagers on The Meadows' races (including all venues
at which the wagers were placed) totaled approximately $105.1 million in 2001.
Of this amount, approximately $87.2 million in wagers were placed at other
wagering venues to which we exported The Meadows' races via simulcast and
through various account wagering operations. The Meadows exports its simulcast
signal to approximately 125 off-track and inter-track wagering facilities in
the United States, Canada and the Caribbean. By packaging the simulcast signal
from The Meadows with the simulcast signals from our other racetracks, we
expect to further increase the number of sites to which The Meadows' simulcast
program is exported. Throughout the year, The Meadows operates as an inter-
track wagering facility where customers can wager on races that are imported
to The Meadows from other racetracks.
Portland Meadows
In the second quarter of 2001, we entered into a definitive agreement to
lease and operate, for up to four years, Portland Meadows thoroughbred
racetrack. It is located on approximately 100 acres in the Delta Park area of
Portland, Oregon. There are approximately 2.0 million people living within a
40-mile radius of Portland Meadows.
Portland Meadows first opened in 1946 and generally offers approximately 80
live racing days between October and April.
Portland Meadows' facilities include a grandstand with seating for
approximately 10,000 customers, a one-mile thoroughbred track, stalls for
approximately 850 horses and parking facilities to accommodate approximately
2,500 cars.
Portland Meadows generated approximately $47.0 million in handle in 2001,
including wagers made at Portland Meadows on its races, wagers made at other
wagering venues and through various account wagering operations on Portland
Meadows' races, and wagers on imported races at Portland Meadows and its
associated OTB facilities within the State of Oregon during Portland Meadows'
live meet. Wagers on Portland Meadows' races (including all venues at which
the wagers were placed) totaled approximately $10.0 million in 2001. Of this
amount, approximately $7.4 million in wagers were placed at other wagering
venues to which we exported Portland Meadows' races via simulcast and through
various account wagering operations. By packaging the simulcast signal from
Portland Meadows with the simulcast signals from our other racetracks, we
expect to increase the number of sites to which Portland Meadows'
11
simulcast program is exported. Throughout the year, Portland Meadows operates
as an inter-track wagering facility where customers can wager on races that
are imported to Portland Meadows from other racetracks.
Due to a dispute with the United States Environmental Protection Agency, we
are not currently running live races at Portland Meadows. The dispute with the
EPA concerns the amount of stormwater the facility must capture and send to
the municipal sewers during heavy rain. We anticipate commencing, in the near
future, construction of a stormwater retention system acceptable to the EPA.
We will recommence live racing at Portland Meadows after this construction is
completed. See "Item 1. Business--Our Business--Environmental Matters".
Multnomah Greyhound Park
We acquired the business operations of Multnomah Greyhound Park in October
2001 and entered into a lease for the underlying real estate for a period of
up to five years. The leased real estate consists of approximately 32 acres
and is located in Wood Village, Oregon, which is near Portland. There are
approximately 2.0 million people living within a 40-mile radius of Multnomah
Greyhound Park.
Multnomah Greyhound Park first opened in 1933 and offers approximately 119
live racing days between May and mid-October.
Multnomah Greyhound Park's facilities include a grandstand with seating for
approximately 6,000 customers, a 1/4-mile greyhound track and parking facilities
to accommodate approximately 1,200 cars.
Multnomah Greyhound Park generated approximately $47.1 million in handle in
2001, including wagers made at Multnomah Greyhound Park on its races, wagers
made at other wagering venues and through various account wagering operations
on Multnomah Greyhound Park's races, and wagers made on imported races at
Multnomah Greyhound Park and its associated OTB facilities within the State of
Oregon during Multnomah Greyhound Park's live meet. Wagers on Multnomah
Greyhound Park's races (including all venues at which the wagers were placed)
totaled approximately $17.4 million in 2001. Of this amount, approximately
$8.7 million in wagers were placed at other wagering venues to which we
exported Multnomah Greyhound Park's races via simulcast and through various
account wagering operations. Throughout the year, Multnomah Greyhound Park
operates as an inter-track wagering facility where customers can wager on
races that are imported to Multnomah Greyhound Park from other racetracks.
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 dirt main track, a 3/8-mile dirt training track, an equine exercise pool,
and related facilities and equipment. Due to its proximity to Santa Anita
Park, San Luis Rey Downs supplements Santa Anita Park's stabling facilities,
which we believe enables us to continue to attract some of the top horses in
North America.
Palm Meadows
On October 18, 2000, we acquired 481 acres of land in Palm Beach County,
Florida for a total purchase price of $22.9 million. The property is located
approximately 40 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. We believe that this facility will help us to continue
to attract high-quality horses to Gulfstream Park and to expand our field
sizes.
Account Wagering Operations
Account wagering involves the placing of wagers on live horse racing events
through various forms of electronic media, which could include telephone, the
Internet and interactive television. Currently, fourteen states expressly
permit the licensing of an operator to conduct telephone account wagering:
California, Connecticut, Kentucky, Louisiana, Maryland, Massachusetts, Nevada,
New Hampshire, New Jersey, New York, North Dakota, Ohio, Oregon and
Pennsylvania. Currently, the states that expressly permit telephone account
wagering also permit Internet account wagering and interactive television-
based wagering.
12
Telephone Account Wagering and Internet Account Wagering
Operators of telephone account wagering may establish a hub in one of the
states where telephone account wagering is permitted, establish accounts into
which customers deposit funds through debit or credit cards or by check to
fund their wagering, and receive wagering instructions from these customers.
Wagers placed by customers are not allowed to exceed the amounts on deposit in
their accounts. States permitting telephone account wagering allow telephone
account wagering facilities to accept wagering instructions from customers
residing in those states as well as in states where the placing of such
wagering instructions by telephone is not expressly prohibited. According to
the National Gambling Impact Study Commission's June 1999 report, the amount
wagered through telephone account wagering systems in the United States in
1998 was approximately $550.0 million.
In 2001, we acquired the Call-A-Bet (renamed XpressBetTM) telephone account
wagering operation as part of our acquisition of Ladbroke Racing Pennsylvania,
Inc. Customers of XpressBetTM may give wagering instructions on horse races
offered at our racetracks and at various racetracks that have entered into
agreements with us.
Since 1997, XpressBetTM has been party to a Telecommunications Facilitation
System Agreement with YouBet.com, Inc. ("YouBet") whereby YouBet operates an
interactive system over the Internet from its website that facilitates the
transmission of wagering information from customers to XpressBetTM's
Pennsylvania hub account wagering operation. Customers of YouBet's interactive
system are customers of XpressBetTM, but net revenue is shared equally by
XpressBetTM and YouBet. In 2001, total handle for amounts wagered through
XpressBetTM's Pennsylvania hub was approximately $132.8 million, of which
approximately $72.1 million came through the YouBet interactive system and
approximately $60.7 million came from telephone wagering instructions received
by XpressBetTM's Pennsylvania hub. Until August 2001, YouBet offered only the
XpressBetTM system, but now also offers its own interactive wagering system at
its website.
We expect that telephone account wagering through XpressBetTM 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.
On January 18, 2002, we introduced a new online wagering platform,
www.xpressbet.com. Due to the growth of the Internet and its increased
recognition as a medium of both communication and commerce facilitation, we
are exploring further opportunities to enhance our Internet-based account
wagering services. We believe that this would enable us to increase the market
for our simulcast product by maximizing the opportunities offered by the
Internet as a distribution channel for our live horse racing content.
On January 25, 2002, we announced that our wholly-owned subsidiary that
operates XpressBetTM's California wagering hub had been granted a license to
conduct account wagering in the State of California by the California Horse
Racing Board. In the future, we will seek to expand the operations of
XpressBetTM through a focused marketing effort.
Interactive Television-based Wagering
Interactive television-based wagering involves the transmission of horse
racing-related television content through cable or satellite delivery into the
homes of subscribers. Subscribers would then be able to use interactive,
"real-time" technology, generally through a remote-controlled device connected
to a television, to wager on televised broadcasts of live horse races. In
order to place wagers, customers must deposit money with the relevant wagering
operators through the use of debit or credit cards. The horse racetrack
exporting its live signal would be entitled to a simulcast fee based on in-
home wagers placed on its races.
Interactive television-based wagering would allow us to increase the market
for our simulcast product by using an important distribution channel for this
product. We currently control the rights to broadcast races from our tracks.
Interactive television-based wagering would enhance our ability to promote our
live horse racing, and we expect that it would enable us to attract new
customers to horse racing. We are currently exploring the potential of
interactive television-based wagering on horse racing, possibly in conjunction
with business partners.
Television Distribution
We have commenced the first step in our television distribution plans
through our participation in the Racing Television Network, LLC ("RTN"). RTN
is jointly owned by Roberts Communications Network, Inc., Greenwood
13
Racing, Inc. and us. It is a direct-to-home satellite service that offers
eight channels dedicated to horse racing on a monthly subscription basis.
The RTN service is being managed independently by Roberts Communications
Network, Inc. on behalf of RTN and we are primarily a content provider to the
service. We believe that offering core and loyal wagering customers and
owners, trainers and breeders this dedicated racing on television is
important.
We also believe that broad television distribution will help increase
future interest in the sport and attract additional wagering customers. In the
effort to broaden the audience, reach and appeal of horse racing and wagering
across North America, we are pursuing carriage agreements with multiple system
digital cable operators (MSO's) and direct broadcast satellite operators
(DBS), for our horse racing TV network concept outlined below.
Our horse racing TV network will broadcast continuous live horse racing on
two channels and will display odds, results and other related wagering
information on a third channel. One of our live horse racing channels will
showcase our premier live horse racing year-round. Our horse racing TV network
will be produced by Santa Anita's award-winning television department and the
network is scheduled to launch in June 2002.
Once our horse racing TV network is operating, the carriage agreements that
we are seeking for at least one of the live horse racing channels would
package the channel with other digital sports programming sold to DBS and MSO
subscribers.
Competition
We face numerous sources of competition. We compete with other racetracks
for customers both with respect to attendance at our racetracks and in the
simulcast markets. We also compete with other racetracks for horses, jockeys
and backstretch personnel. One of our competitors, Churchill Downs Inc., has
been in operation for a much longer period of time than we have and may have
greater name recognition. We expect this competition from other racetracks to
intensify as new gaming operators enter our markets and existing competitors
expand their operations and consolidate management of multiple racetracks.
We also compete for customers with other sports, entertainment and gaming
operators, including casinos and government-sponsored lotteries. We also
compete with Internet and other account wagering gaming services that allow
their customers to wager on a wide variety of sporting events and Las Vegas-
style casino games from home, many of which are currently operating from off-
shore locations in violation of U.S. law by accepting wagers from U.S.
residents.
As we develop our account wagering operations, including telephone,
Internet and interactive television wagering, we expect our competition with
other account wagering operators to increase substantially. In addition, our
ability to conduct account wagering on racetracks that we do not own is
dependent on our ability to enter into agreements with those racetracks
whereby we obtain account wagering rights. Certain racetracks, including those
currently owned by Churchill Downs Inc. and those currently operated by the
New York Racing Association, have entered into contracts with other account
wagering operators, granting such operators exclusive rights to accept account
wagering on their races. We may not be able to obtain access to racing content
from racetracks not owned by us for our account wagering operations as a
result of these exclusive arrangements or otherwise on terms that are
acceptable to us.
Government Regulation
Horse racing is a highly regulated industry. Individual states control the
operations of racetracks located within their state with the intent of, among
other things, protecting the public from unfair and illegal gambling
practices, generating tax revenue, licensing racetracks and operators and
preventing organized crime from involvement in the industry. Although the
specific form may vary, states that regulate horse racing generally do so
through a horse racing commission or other state gambling regulatory
authority. Regulatory authorities perform background checks on all racetrack
owners prior to granting them the necessary operating licenses. Horse owners,
trainers, jockeys, drivers, stewards, judges and backstretch personnel are
also subject to licensing by state authorities. State regulation of horse
races extends to virtually every aspect of racing and usually extends to
details such as the presence and placement of specific race officials,
including timers, placing judges, starters and patrol judges.
14
In addition to state regulation of horse racing, the United States
government regulates horse racing through the Interstate Horseracing Act of
1978 and the Interstate Wire Act of 1961. As a result of these two statutes,
racetracks can commingle wagers from differing racetracks and wagering
facilities and broadcast horse racing events to other licensed establishments.
Currently, fourteen states expressly permit the licensing of an operator to
conduct telephone account wagering: California, Connecticut, Kentucky,
Louisiana, Maryland, Massachusetts, Nevada, New Hampshire, New Jersey, New
York, North Dakota, Ohio, Oregon and Pennsylvania.
We currently satisfy the applicable licensing requirements of the racing
and gambling regulatory authorities in each state where we maintain racetracks
and/or carry on business, including the California Horse Racing Board, the
Florida Department of Business and Professional Regulation Division of Pari-
Mutuel Wagering, the Oklahoma Horse Racing Commission, the Ohio State Racing
Commission, the Office of the Racing Commissioner of the Michigan Department
of Agriculture, the Pennsylvania Harness Racing Commission, the Nevada Gaming
Commission, the New Jersey Casino Control Commission and the Oregon Racing
Commission. As part of this regulation, licenses to conduct live horse racing
and to participate in simulcast wagering must be obtained annually, and there
is no assurance that these licenses will be granted.
In California, the California Horse Racing Board is responsible for
regulating the form of wagering, the length and conduct of meets and the
distribution of the pari-mutuel wagers within the limits set by the California
legislature. The California Horse Racing Board has annually licensed one of
our subsidiaries, Los Angeles Turf Club, Inc., and The Oak Tree Racing
Association to conduct racing meets at Santa Anita Park. At present, the
California Horse Racing Board has not licensed other thoroughbred racetracks
in Southern California to conduct racing during these meets. However, night
quarter horse meets are conducted at other racetracks in Southern California
during portions of these meets. The California Horse Racing Board also
annually licenses the operations of Golden Gate Fields and Bay Meadows.
Furthermore, pursuant to legislation effective January 1, 2002, the California
Horse Racing Board granted us, on January 24, 2002, a license to conduct
account wagering in California that runs until December 31, 2003. Currently,
there are two other licensees in California that are licensed to conduct
account wagering in that state. Our financial condition and operating results
could be materially adversely affected by legislative changes or action by the
California Horse Racing Board that would increase the number of competitive
racing days, reduce the number of racing days available to us and The Oak Tree
Racing Association, authorize other forms of wagering, grant additional
licenses authorizing competitors to conduct account wagering, or remove or
limit our authority to conduct account wagering in California.
In Florida, the Division of Pari-Mutuel Wagering considers applications for
annual licenses for thoroughbred, standardbred and quarter horse races. Tax
laws in Florida have historically discouraged the three Miami-area racetracks,
Gulfstream Park, Hialeah Park and Calder Race Course, from applying for race
days outside of their traditional racing season, so the race days for these
Miami-area racetracks did not overlap. Effective July 1, 2001, a new tax
structure has eliminated this deterrent. As a result, Gulfstream Park applied
for and received an additional 27 race days for 2002. This increase in race
days may cause an overlap in racing seasons which could result in Gulfstream
Park facing direct competition from other Miami-area racetracks in 2002.
In Ohio, the Ohio State Racing Commission approves annual licenses for
thoroughbred, standardbred and quarter horse races. The Ohio State Racing
Commission has not licensed any other operators of thoroughbred racetracks in
the Cleveland area to conduct racing during Thistledown's meets. However, the
Ohio State Racing Commission has licensed an operator of a night harness
racing track in the Cleveland area.
In Oklahoma, the Oklahoma Horse Racing Commission approves annual licenses
for thoroughbred, standardbred and quarter horse races.
In Michigan, the Office of the Racing Commissioner approves annual licenses
for thoroughbred, standardbred and quarter horse races. There are currently no
other thoroughbred racetracks in Michigan other than Great Lakes Downs.
However, the Office of the Racing Commissioner has licensed standardbred
racetracks in Michigan.
In Pennsylvania, the Pennsylvania Harness Racing Commission approves annual
licenses for standardbred racetracks. Neither the Pennsylvania Harness Racing
Commission nor the Pennsylvania Horse Commission (which approves annual
licenses for thoroughbred racetracks) has licensed any other operators of
horse racetracks in the Pittsburgh area. However, the Pennsylvania Horse
Commission has recently received an application for a thoroughbred
15
racing license for an operation to be located near Erie, Pennsylvania, which
is approximately 100 miles from The Meadows.
In Oregon, the Oregon Racing Commission approves annual licenses for horse
and greyhound racetracks. The Oregon Racing Commission has not licensed any
other operators of horse or greyhound racetracks in the Portland area.
Our Real Estate Portfolio
As of December 31, 2001, the aggregate net book values of our real estate
and certain fixed assets were as follows:
(in millions)
-------------
Revenue-Producing Racetrack Real Estate........................... $320.4(1)
Excess Racetrack Real Estate...................................... 80.8
Development Real Estate........................................... 78.3
Revenue-Producing Non-Racetrack Real Estate....................... 56.7(1)
Non-Core Real Estate.............................................. 38.5
------
Total............................................................. $574.7
======
- -------
(1) Includes fixed assets.
Approximately 39.5% of our earnings before interest, taxes, depreciation
and amortization for the year ended December 31, 2001 resulted from gains from
sales of our Non-Core Real Estate. We expect these gains to be reduced to zero
over the next two years as the balance of our Non-Core Real Estate is sold. We
intend to continue to sell the balance of our Non-Core Real Estate in order to
provide capital to grow and enhance our racing business; accordingly, we are
currently servicing, improving and seeking zoning and other approvals for some
of this real estate in order to enhance its value on sale. See "Item 1.
Business--Risk Factors--Risks Regarding Our Company--Our recent operating
income includes substantial gains from the sale of non-core real estate, which
sales will soon decrease and may cause our future operating income and cash
flow to decrease."
Included in our Excess Racetrack Real Estate is land adjacent to three of
our largest racetracks, Santa Anita Park, Gulfstream Park and Golden Gate
Fields, totaling approximately 150 acres. We are considering a variety of
options with respect to this excess land, including entertainment and retail-
based developments that could be undertaken in conjunction with business
partners who would be expected to provide the necessary financing, as we do
not intend to devote our capital to the development of our Excess Racetrack
Real Estate.
Our Development Real Estate is largely undeveloped, and includes: 481 acres
in Palm Beach County, Florida that are being used to develop a horse training
and boarding facility; approximately 1,050 acres of land in Ebreichsdorf,
Austria, located approximately 15 miles south of Vienna, on which we have
commenced development of a horse racetrack; approximately 110 acres of
undeveloped land in Oberwaltersdorf, Austria, also located approximately 15
miles south of Vienna; approximately 800 acres of undeveloped land in upstate
New York; and approximately 225 acres of land in northern California between
San Francisco and Sacramento.
Our Revenue-Producing Non-Racetrack Real Estate consists of two golf
courses that we operate, Fontana Sports and Magna Golf Club. Fontana Sports,
which opened in 1997, is a semi-private sports facility located in
Oberwaltersdorf, Austria that includes an 18-hole golf course, a clubhouse
which contains a restaurant, a pro shop, a tennis club and a fitness facility.
The Magna Golf Club, which is in Aurora, Ontario, adjacent to our and Magna
International's headquarters approximately 30 miles north of Toronto, opened
in May 2001. We are currently marketing and accepting memberships in the Magna
Golf Club. The clubhouse is expected to be completed in the spring of 2002.
When completed, the clubhouse will contain a restaurant, a members' lounge and
a pro shop.
Pursuant to an access arrangement effective as of March 1, 1999, Magna
International is paying us an annual fee of 2.5 million Euros to access the
Fontana Sports golf course and related recreational facilities for Magna
International-sponsored corporate and charitable events, as well as for
business development purposes. The access fee relating to Fontana Sports is
payable until March 1, 2004. Pursuant to an access agreement effective as of
January 1, 2001, Magna International is paying us an annual fee of Cdn. $5.0
million to access the Magna Golf Club. The access fee relating to the Magna
Golf Club is payable until December 31, 2003. The Fontana Sports and Magna
Golf Club properties are both subject to rights of first refusal in favor of
Magna International if we decide to sell either of them.
16
Environmental Matters
We are subject to a wide range of requirements under environmental laws and
regulations relating to wastewater discharge, waste management and storage of
hazardous substances. Those requirements include United States Environmental
Protection Agency and state regulations that address the impacts of manure and
wastewater generated by concentrated animal feeding operations ("CAFOs") on
water quality, including, but not limited to, stormwater discharges. CAFO
regulations include permit requirements and water quality discharge standards.
Enforcement of CAFO regulations has been receiving increased governmental
attention. Compliance with these and other environmental laws and regulations
can, in some circumstances, require significant capital expenditures.
Moreover, violations can result in significant penalties and, in some cases,
interruption or cessation of operations. Historically, environmental laws and
regulations have not had a material adverse effect on our financial condition
and operating results.
A dispute with the EPA involving the Portland Meadows racetrack caused us
to postpone the planned September 1, 2001 opening of that facility. The
dispute with the EPA concerns the amount of stormwater the facility must
capture and send to the municipal sewers during heavy rain. The Portland
Meadows facility ultimately opened on October 27, 2001 for an abbreviated race
meet which concluded on February 10, 2002. We anticipate commencing, in the
near future, construction of a stormwater retention system acceptable to the
EPA. We will recommence live racing at Portland Meadows after this
construction is completed.
While we have environmental permits for many of our racetracks and are
taking steps to comply with them and other applicable environmental legal
requirements, we may not have all required environmental permits or otherwise
be in compliance with all applicable environmental requirements. Where we do
not have an environmental permit, but one may be required, we will determine
whether a permit is in fact required and, if so, will seek to obtain one and
address any related compliance issues, which may require us to make
significant capital expenditures. Also, changes in governmental laws and
regulations are ongoing, as evidenced by proposed changes to the CAFO
regulations that would significantly increase the burden of CAFO regulations
and may make environmental compliance increasingly expensive. In addition to
environmental requirements that regulate our operations, 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 managed by us or disposed
of in other locations. We believe that environmental legal requirements will
not have a material adverse impact on our business, although it is possible
that they will.
A subsidiary of Magna International has agreed to indemnify us in respect
of environmental remediation costs and expenses relating to existing
conditions at some of our Austrian real estate properties.
Employees
As of December 31, 2001, we employed approximately 4,300 full-time
employees, approximately 2,500 of whom were represented by unions. Due to the
seasonal nature of the live horse racing industry, the number of our seasonal
and part-time employees 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.
Legal Proceedings
From time to time, various routine claims incidental to our business are
made against us. None of these claims has had, and we believe that none of the
current claims, if successful, will have, a material adverse effect upon our
business.
Business Developments
Set forth below is a summary of material business developments that have
occurred since January 1, 2001.
17
On April 5, 2001, we completed the acquisition of Ladbroke Racing
Pennsylvania, Inc. and Sport Broadcasting, Inc. (collectively the "Ladbroke
Companies") for a total purchase price, including transaction costs, of $46.6
million, net of cash acquired of $7.0 million. The total purchase price was
satisfied by cash payments of $20.1 million, the issuance of two promissory
notes totaling $13.25 million which bear interest at 6% with the first note in
the amount of $6,625,000 maturing on the first anniversary of the closing date
and the second note in the amount of $6,625,000 maturing on the second
anniversary of the closing date and by the issuance of 3,178,297 shares of
Class A Subordinate Voting Stock. The Ladbroke Companies include account
wagering operations, The Meadows harness racetrack and four OTB facilities
located around the Pittsburgh, Pennsylvania area.
On July 5, 2001, we announced that we had entered into definitive
agreements to lease and operate, for up to four years, Portland Meadows
thoroughbred racetrack and to acquire the operations and lease of Multnomah
Greyhound Park, both of which are located in Portland, Oregon. A dispute with
the United States Environmental Protection Agency concerning our backside
stormwater retention plan for Portland Meadows caused us to postpone the
planned September 1, 2001 opening of that facility. The Portland Meadows
facility ultimately opened on October 27, 2001 for an abbreviated race meet
which concluded on February 10, 2002. We anticipate commencing, in the near
future, construction of a stormwater retention system acceptable to the EPA.
We will recommence live racing at Portland Meadows after this construction is
completed. See "Item 1. Business--Our Business--Environmental Matters". In
addition, on October 26, 2001, we completed the acquisition of Multnomah
Greyhound Park for a total purchase price, including transaction costs, of
approximately $5.9 million, net of cash acquired of $0.3 million.
Approximately one-third of the purchase price was satisfied by the issuance of
330,962 shares of our Class A Subordinate Voting Stock and the balance was
paid in cash.
On August 2, 2001, we were notified that a joint venture in which we have a
one-third ownership interest, GMR-NY LLC, was selected by the City of New York
as the successful bidder in an auction to acquire the operations of New York
City Off-Track Betting Corporation, or NYCOTB, from the City. The acquisition
was subject to substantial conditions, including the passage, by December 31,
2001, of enabling legislation by both the New York State Assembly and Senate.
As a result of the events of September 11, 2001 and other factors, the
enabling legislation was not passed by this deadline and the prospective
transaction was not completed.
In January 2002, we entered into a joint venture with Roberts
Communications Network, Inc. and Greenwood Racing, Inc. to establish an
equally-owned company that will telecast horse races from racetracks owned by
us, Greenwood Racing and others. These telecasts will be carried on the
Racetrack Television Network, a private direct-to-home satellite horse racing
service. The network will provide up to eight channels of horse racing that
can be accessed by paying subscribers through digital set-top boxes in
conjunction with small dish satellite receiver technology.
On January 18, 2002, we announced the rebranding of our national account
wagering service as XpressBetTM and the introduction of a new online wagering
platform, www.xpressbet.com. On January 25, 2002, we announced that our
wholly-owned subsidiary that operates XpressBetTM had been granted a license,
valid until December 31, 2003, to conduct account wagering in the State of
California by the California Horse Racing Board.
On February 8, 2002, we signed a commitment letter with the Canadian
chartered bank affiliate of BMO Nesbitt Burns Inc. and BMO Nesbitt Burns
Corp., with respect to a proposed $75.0 million senior unsecured revolving
credit facility. If completed, this proposed credit facility will have a term
of approximately one year that may be extended with the consent of both
parties.
On March 6, 2002, we entered into a definitive agreement to acquire
substantially all the operations and related assets of Lone Star Park at Grand
Prairie, a thoroughbred and American quarter horse racetrack located near
Dallas, Texas. The acquired assets include the rights under a long-term lease
of the Lone Star Park facility and a related purchase option exercisable at
the termination of the lease in 2027. The purchase price of the acquisition
will be satisfied by the payment of $80.0 million in cash and the assumption
of certain liabilities, which includes the Lone Star Park facility capital
lease obligation of approximately $19.0 million, subject to usual adjustments
at closing. The transaction is expected to close in the second quarter of
2002, subject to certain conditions, including the receipt of regulatory
approvals. Lone Star Park's racing season complements our current racing
season by adding live racing dates at a premier racetrack in the last three
quarters of our fiscal year.
For the year ended December 31, 2001, Lone Star Park had revenues of
approximately $66.0 million and earnings before interest, taxes, depreciation
and amortization, adjusted for estimated non-recurring costs, of approximately
$7.0
18
million. Lone Star Park's total handle was approximately $398 million in 2001.
In 2001, wagers on Lone Star Park's races placed at Lone Star Park totaled
approximately $52 million; wagers placed at other wagering venues to which
Lone Star Park's races are exported via simulcast totaled approximately $168
million; and wagers placed at Lone Star Park on races imported to its inter-
track facilities totaled approximately $178 million.
On March 8, 2002, we announced that we intended to proceed with the
offering which was first announced on October 26, 2001, but was deferred in
view of market conditions. An amendment to our registration statement on Form
S-1 was filed with the Securities and Exchange Commission, and a preliminary
short form prospectus was filed with the securities commissions of each
province of Canada, on March 8, 2002, for a public offering of 20 million
shares of our Class A Subordinate Voting Stock in the United States and
Canada. The offering also contemplates an over-allotment option allowing the
underwriters to purchase up to an additional 3 million shares of our Class A
Subordinate Voting Stock. The issue is being underwritten by a syndicate for
which the representatives are Bear, Stearns & Co. Inc., BMO Nesbitt Burns Inc.
and CIBC World Markets Corp.
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, operating results or prospects.
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, operating results and prospects could be
materially adversely affected. In that case, the trading price of shares of
our Class A Subordinate Voting Stock and the exchangeable shares of our
Canadian subsidiary, MEC Holdings (Canada) Inc., 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.
Risks Regarding Our Company
We are a relatively new company with a short history of racetrack
operations. We must successfully integrate recent racetrack acquisitions or
our operating results may be adversely affected.
We were incorporated approximately three years ago and acquired our first
racetrack in December 1998. Accordingly, although all our racetracks have been
in operation for some time, we have a relatively short history of owning and
operating racetracks. The acquisition of Santa Anita Park was completed in
December 1998, the acquisition of Gulfstream Park was completed in September
1999, the acquisition of Remington Park and Thistledown was completed in
November 1999, the acquisition of Golden Gate Fields was completed in December
1999, the acquisition of Great Lakes Downs was completed in February 2000, the
acquisition of Bay Meadows was completed in November 2000, the acquisition of
The Meadows was completed in April 2001 and the acquisition of Multnomah
Greyhound Park was completed in October 2001. The Portland Meadows facility
commenced operations under our management in July 2001. Prior to their
respective acquisitions, most of these racetracks had been operated separately
under different ownership. Completing the integration of these businesses into
our operations will require a significant dedication of management resources
and further expansion of our information and other operating systems.
If we do not successfully integrate our recent acquisitions and any future
acquisitions, or if this integration consumes a significant amount of our
management's time, then these acquisitions may materially adversely affect our
efficiency and, therefore, significantly harm our business.
If we do not identify, negotiate and complete a sufficient number of
strategic acquisitions, we may not achieve our business plan and our growth
prospects may suffer.
Our current business plan calls for us to continue to actively pursue
strategic acquisitions. Our future profitability will depend to some degree
upon the ability of our management to identify, complete and successfully
integrate commercially viable acquisitions. If we do not do so for any reason,
we may not be able to implement our business plan successfully, or grow as
quickly as we anticipate, and this could have a material adverse effect on our
future profitability.
19
We have recruited most of our senior executive officers from outside the
racetrack industry.
Although our management personnel at our racetracks generally have extensive
experience in the racetrack industry, we have recruited most of our senior
executive officers from outside the industry. Our chief executive officer,
chief operating officer and chief financial officer each joined us during the
last two years. This lack of racetrack industry experience may impede the
implementation of our strategy and slow our growth.
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 expansion 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 that are favorable to us. Our controlling
stockholder, Magna International, has made a commitment to its shareholders
that it will not, before June 1, 2006, make any further debt or equity
investments in, or otherwise provide financial assistance to, us or any of our
subsidiaries without the prior consent of the holders of a majority of Magna
International's subordinate voting shares. If we are unable to obtain
financing on favorable terms, or at all, we may not be able to expand our
operations, which could have a material adverse effect on our future
profitability.
Our recent operating income includes substantial gains from the sale of
non-core real estate, which sales will soon decrease and may cause our future
operating income and cash flow to decrease.
Approximately 37% of our pro forma earnings before interest, taxes,
depreciation and amortization for the year ended December 31, 2001 resulted
from gains from real estate sales. These gains will likely be reduced to zero
over the next two years as the balance of our non-core real estate portfolio
is sold. Additionally, our short-term and annual operating income and cash
flow may decline from the prior year due to decreases in non-core real estate
sales. If we do not replace these gains or offset these decreases with
additional operating income and cash flow from our racetrack operations, our
future operating income and cash flow will decline.
Our business is heavily concentrated at certain of our racetracks.
Four of our racetracks, Santa Anita, Gulfstream, Golden Gate Fields and Bay
Meadows, accounted for approximately 61% of our pro forma revenue and 83% of
our pro forma earnings before interest, taxes, depreciation and amortization
for the year ended December 31, 2001. If a business interruption were to occur
and continue for a significant length of time at any of these racetracks, it
could harm our operating results. Additionally, certain of our other racetrack
properties have experienced negative earnings before interest, income taxes,
depreciation and amortization over the past two years. These racetrack
properties may not improve their operating performance in the future.
We are controlled by Magna International and therefore Magna International
is able to prevent any takeover of us by a third party.
Magna International owns all our Class B Stock, which is generally entitled
to 20 votes per share, and therefore is able to exercise approximately 98% of
the total voting power of our outstanding stock. It is therefore able to elect
all our directors and to control us. As a result, Magna International is able
to cause or prevent a change in our control.
Our relationship with Magna International is not at "arm's length", and
therefore Magna International may influence us to make decisions that are not
in the best interests of our other stockholders.
Our relationship with Magna International is not at "arm's length". In
addition to the ownership of our stock as described in the preceding risk
factor, three members of our board of directors are also members of Magna
International's board of directors and we have the same chairman. In some
cases, the interests of Magna International may not be the same as those of
our other stockholders, and conflicts of interest may arise from time to time
that may be resolved in a manner detrimental to us or our minority
stockholders. Magna International is able to cause us to effect certain
corporate transactions without the consent of the holders of our Class A
Subordinate Voting Stock, subject to applicable law and the fiduciary duties
of our directors and officers. Consequently, transactions effected between us
and Magna International may not be on the same terms as could be obtained from
independent parties, resulting in the possibility of our minority
stockholders' interests being compromised.
20
A decline in general economic conditions could adversely affect our
business.
Our operations are affected by general economic conditions, and therefore
our future success is unpredictable. The demand for entertainment and leisure
activities tends to be highly sensitive to consumers' disposable incomes, and
thus a decline in general economic conditions may lead to our customers having
less discretionary income to wager on horse racing. This would cause a
reduction in our revenues and could therefore have a material adverse effect
on our operating results.
We are exposed to currency exchange rate fluctuations.
Our business outside the United States is generally transacted in
currencies other than U.S. dollars. Fluctuations in currencies relative to the
U.S. dollar may make it more difficult to perform period-to-period comparisons
of our operating results. Moreover, fluctuations in the U.S. dollar relative
to currencies in which earnings are generated outside the United States could
result in a reduction in our profitability.
Risks Relating to Our Gaming Operations
A decline in the popularity of horse racing could adversely impact our
business.
The continued popularity of horse racing is important to our growth plans
and our operating results. Our business plan anticipates our attracting new
customers to our racetracks, off-track betting facilities and account wagering
operations. Even if we are successful in making acquisitions and expanding and
improving our current operations, we may not be able to attract a sufficient
number of new customers to achieve our business plan. Public tastes are
unpredictable and subject to change. Any decline in interest in horse racing
or any change in public tastes may adversely affect our revenues and,
therefore, our operating results.
Declining on-track attendance and increasing competition in simulcasting
may materially adversely affect our operating results.
There has been a general decline in the number of people attending and
wagering at live horse races at North American racetracks due to a number of
factors, including increased competition from other forms of gaming,
unwillingness of customers to travel a significant distance to racetracks and
the increasing availability of off-track wagering. The declining attendance at
live horse racing events has prompted racetracks to rely increasingly on
revenues from inter-track, off-track and account wagering markets. The
industry-wide focus on inter-track, off-track and account wagering markets has
increased competition among racetracks for outlets to simulcast their live
races. A continued decrease in attendance at live events and in on-track
wagering, as well as increased competition in the inter-track, off-track and
account wagering markets, could lead to a decrease in the amount wagered at
our facilities and on races conducted at our racetracks and may materially
adversely affect our business, financial condition, operating results and
prospects.
Our gaming activities are dependent on governmental regulation and
approvals. Amendments to such regulation or the failure to obtain such
approvals could adversely affect our business.
All our pari-mutuel wagering operations are contingent upon the continued
governmental approval of these operations as forms of legalized gaming. All
our current gaming operations are subject to extensive governmental regulation
and could be subjected at any time to additional or more restrictive
regulation, or banned entirely. See "Item 1. Business--Our Business--
Government Regulation" and "--Environmental Matters".
We may be unable to obtain, maintain or renew all governmental licenses,
registrations, permits and approvals necessary for the operation of our pari-
mutuel wagering facilities. Licenses to conduct live horse racing and
simulcast wagering must be obtained annually from each state's regulatory
authority. The loss or non-renewal of any of our licenses, registrations,
permits or approvals may materially limit the number of races we conduct or
the form or types of pari-mutuel wagering we offer, and could have a material
adverse effect on our business. In addition, we currently devote significant
financial and management resources to complying with the various governmental
regulations to which our operations are subject. Any significant increase in
governmental regulation would increase the amount of our resources devoted to
governmental compliance, could substantially restrict our business, and could
materially adversely affect our operating results.
21
Any future expansion of our gaming operations will likely require us to
obtain additional governmental approvals or, in some cases, amendments to
current laws governing such activities.
The high degree of regulation in the gaming industry is a significant
obstacle to our growth strategy, especially with respect to account wagering,
including telephone, interactive television and Internet-based wagering.
Account wagering may currently be conducted only through hubs or bases located
in certain states. Our expansion opportunities in this area will be limited
unless more states amend their laws to permit account wagering. The necessary
amendments to those laws may not be enacted. In addition, the licensing and
legislative amendment processes can be both lengthy and costly, and we may not
be successful in obtaining required licenses, registrations, permits and
approvals.
In the past, certain state attorneys general, district attorneys and other
law enforcement officials have expressed concern over the legality of
interstate account wagering. In December 2000, legislation was enacted in the
United States that amends the Interstate Horseracing Act of 1978. We believe
that this amendment clarifies that inter-track simulcasting, off-track betting
and account wagering, as currently conducted by the U.S. horse racing
industry, are authorized under U.S. federal law. The amendment may not be
interpreted in this manner by all concerned, however, and there may be
challenges to these activities by both state and federal law enforcement
authorities, which could have a material adverse impact on our business,
financial condition, operating results and prospects.
From time to time, the United States Congress has considered legislation
that would inhibit or restrict the use of certain financial instruments,
including credit cards, to provide funds for account wagering. For example, in
May 2001, the United States Senate Commerce Committee proposed legislation, in
the form of the Unlawful Internet Gambling Funding Bill, that would prohibit
financial institutions from enforcing credit card debts if they knew the debts
were being incurred in order to gamble illegally through the Internet.
Further, in July 2001, a bill was reintroduced into the United States House of
Representatives that would prohibit any person in a gambling business from
knowingly accepting, in connection with the participation of another person in
Internet gambling, credit, an electronic funds transfer, a check, a draft or
the proceeds of credit or an electronic funds transfer. Legislation of this
nature, if enacted, could inhibit account wagering by restricting the use of
credit cards and other commonly used financial instruments to fund wagering
accounts. This, or any other legislation restricting account wagering, could
cause our business and its growth to suffer.
Implementation of some of the recommendations of the National Gambling
Impact Study Commission may harm 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 April 28, 1999, the Commission voted to recommend
that there be a pause in the expansion of gaming. 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 that was 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; and
. banning 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 in the United States, which would materially adversely impact the
gambling industry in the United States in general or our segment in particular
and consequently may threaten our growth prospects.
We face significant competition from other racetrack operators which could
hurt our operating results.
22
We face significant competition in each of the jurisdictions in which we
operate racetracks and we expect this competition to intensify as new
racetrack operators enter our markets and existing competitors expand their
operations and consolidate management of multiple racetracks. In addition, the
introduction of legislation enabling slot machines or video lottery terminals
to be installed at racetracks in certain states allows those racetracks to
increase their purses and compete more effectively with us for horse owners
and trainers. One of our competitors, Churchill Downs Inc., has been in
operation for a much longer period of time than we have and may have greater
name recognition. Competition from existing racetrack operators, as well as
the addition of new competitors, may hurt our future performance and operating
results.
In addition, Florida tax laws have historically discouraged the three
Miami-area horse racetracks, Gulfstream Park, Hialeah Park and Calder Race
Course, from scheduling concurrent races. A recent tax structure, effective as
of July 1, 2001, has eliminated this deterrent. As a result, our Gulfstream
Park racetrack may face direct competition from the other Miami-area horse
racetracks in the future. This competition could significantly affect the
operating results of Gulfstream Park which could reduce our overall
profitability.
Competition from non-racetrack gaming operators may reduce the amount
wagered at our facilities and materially adversely affect our operating
results.
We compete for customers with casinos, sports wagering services and other
non-racetrack gaming operators, including government-sponsored lotteries,
which benefit from numerous distribution channels, including supermarkets and
convenience stores, as well as from frequent and extensive advertising
campaigns. We do not enjoy the same access to the gaming public or possess the
advertising resources that are available to government-sponsored lotteries as
well as some of our other non-racetrack competitors, which may adversely
affect our ability to effectively compete with them.
We depend on agreements with our horsemen's industry associations to
operate our business.
The U.S. Interstate Horseracing Act of 1978, as well as various state
racing laws, require that, in order to simulcast races, we have written
agreements with the horsemen at our racetracks, who are represented by
industry associations. In some states, if we fail to maintain operative
agreements with the industry associations, we may not be permitted to conduct
live racing or simulcasting at tracks within those states. In addition, our
simulcasting agreements are generally subject to the approval of the industry
associations. Should we fail to renew existing agreements with the industry
associations on satisfactory terms or fail to obtain approval for new
simulcast agreements, we would lose revenues and our operating results would
suffer.
If we are unable to continue to negotiate satisfactory union contracts,
some of our employees may commence a strike. A strike by our employees or a
work stoppage by backstretch personnel, who are employed by horse owners and
trainers, may lead to lost revenues and could have a material adverse effect
on our business.
As of December 31, 2001, we employed approximately 4,300 full-time
employees, approximately 2,500 of whom were represented by unions. A strike or
other work stoppage by our employees could lead to lost revenues and have a
material adverse effect on our business, financial condition, operating
results and prospects.
Recently enacted legislation in California will facilitate the organization
of backstretch personnel in that state. A strike by backstretch personnel
could, even though they are not our employees, lead to lost revenues and
therefore hurt our operating results.
We currently face significant competition from Internet and other forms of
account wagering, which may reduce our profitability.
Internet and other account wagering gaming services allow their customers
to wager on a wide variety of sporting events and casino games from home. The
National Gambling Impact Study Commission's June 1999 report estimates that
there are over 250 on-line casinos, 64 lotteries, 20 bingo games and 139
sports wagering services offering gambling over the Internet. Amounts wagered
in the Internet gaming market are estimated to have doubled from approximately
$445 million in 1997 to over $900 million in 1998, according to Interactive
Gaming News, an Internet gaming publication. Although many on-line wagering
services are operating from offshore locations in violation of U.S. law by
accepting wagers from U.S. residents, they may divert wagering dollars from
legitimate wagering venues
23
such as our racetracks and account wagering operations. Moreover, our
racetrack operations may require greater ongoing capital expenditures in order
to expand our business than the capital expenditures required by Internet and
other account wagering gaming operators. Currently, we cannot offer the
diverse gaming options offered by many Internet and other account wagering
gaming operators and may face significantly greater costs in operating our
business. Our inability to compete successfully with these operators could
hurt our business.
In addition, the market for account wagering is affected by changing
technology. Our ability to anticipate such changes and to develop and
introduce new and enhanced services on a timely basis will be a significant
factor in our ability to expand, remain competitive and attract new customers.
Expansion of gaming conducted by Native American groups may lead to
increased competition in our industry, which may negatively impact our growth
and profitability.
In March 2000, the California state constitution was amended, resulting in
the expansion of gaming activities permitted to be conducted by Native
American groups in California. This 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 adversely affect
our ability to attract top horses.
Several Native American groups in Florida have recently expressed interest
in opening or expanding existing casinos in southern Florida, which could
compete with Gulfstream Park and reduce its profitability.
Moreover, other Native American groups may open or expand casinos in other
regions of the country where we currently operate, or plan to operate,
racetracks or other gaming operations. Any such competition from Native
American groups could adversely affect our growth and profitability.
Some jurisdictions view our operations primarily as a means of raising
taxes, and therefore we are particularly vulnerable to additional or increased
taxes and fees.
We believe that the prospect of raising significant additional revenue
through taxes and fees is one of the primary reasons that certain
jurisdictions permit legalized gaming. As a result, gaming companies are
typically subject to significant taxes and fees in addition to the normal
federal, state, provincial and local income taxes, and such taxes and fees may
be increased at any time. From time to time, legislators and officials have
proposed changes in tax laws, or in the administration of such laws, affecting
the gaming industry. For instance, U.S. legislators have proposed the
imposition of a U.S. federal tax on gross gaming revenues. It is not possible
to determine with certainty the likelihood of any such changes in tax laws or
their administration; however, if enacted, such changes could have a material
adverse effect on our business.
Our operating results fluctuate seasonally and may be impacted by a
reduction in live racing dates due to regulatory factors.
We experience significant fluctuations in quarterly operating results due
to the seasonality associated with the racing schedules at our racetracks.
Generally, our revenues from racetrack operations are greater in the first
quarter of the calendar year than in any other quarter. We have a limited
number of live racing dates at each of our racetracks and the number of live
racing dates varies somewhat from year to year. The allocation of live racing
dates in most of the states in which we operate is subject to regulatory
approval from year to year and, in any given year, we may not receive the same
or more racing dates than we have had in prior years. Recently, the regulatory
agencies in California have announced their intention to reduce live racing
dates. We are also faced with the prospect that competing racetracks may seek
to have some of our historical dates allocated to them. A significant decrease
in the number of our live racing dates would reduce our revenues and cause our
business to suffer.
Unfavorable weather conditions may result in a reduction in the number of
races we hold.
Since horse racing is conducted outdoors, unfavorable weather conditions,
including extremely high or low temperatures, excessive precipitation, storms
or hurricanes, may cause races to be cancelled or may reduce attendance and
wagering. Since a substantial portion of our operating expenses is fixed, a
reduction in the number of races held or the number of horses racing due to
unfavorable weather would reduce our revenues and cause our business to
suffer.
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The current lease of the Bay Meadows property expires in less than one year
and may not be renewed.
The Bay Meadows site lease expires on December 31, 2002 (subject to
extension through March 31, 2003 if we are holding a race meet). Although we
are exploring various alternative venues for the conduct of the racing dates
currently held at Bay Meadows, there is a risk that we will be unable to
obtain the necessary regulatory approvals to transfer these racing dates to
another racetrack operated by us in northern California, which could cause a
reduction in our revenues and, therefore, materially adversely affect our
operating results.
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 (i.e., the average "field
size") that run in races. Larger field sizes generally mean increased wagering
and higher wagering revenues due to a number of factors, including the
availability of exotic bets (such as "exacta" and "trifecta" wagers). Various
factors have led to declines in the horse population in certain areas of the
country, including competition from racetracks in other areas, increased costs
and changing economic returns for owners and breeders, and Mare Reproductive
Loss Syndrome, which last year caused a large number of mares in Kentucky to
sustain late term abortions or early embryonic loss. If we are unable to
attract horse owners to stable and race their horses at our tracks by offering
a competitive environment, including improved facilities, well-maintained
racetracks, better living conditions for backstretch personnel involved in the
care and training of horses stabled at our tracks, and a competitive purse
structure, our profitability could decrease.
An earthquake in California could interrupt our operations at Santa Anita
Park, Golden Gate Fields and Bay Meadows, which would adversely impact our
cash flow from these racetracks.
Three of our largest racetracks, Santa Anita Park, Golden Gate Fields and
Bay Meadows, are located in California and are therefore subject to earthquake
risks. We do not maintain significant earthquake insurance on the structures
at our California racetracks. We 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 fully cover reconstruction costs and other losses. If an
uninsured or underinsured loss occurs, we could lose anticipated revenue and
cash flow from our California racetracks.
Our business depends on providers of totalisator services.
In purchasing and selling our pari-mutuel wagering products, our customers
depend on information provided by two of the three main totalisator companies
operating in North America. These totalisator companies provide the computer
systems that accumulate wagers, record sales, calculate payoffs and display
wagering data. The loss of any of the totalisator companies as a provider of
these critical services would decrease competition in the market for those
services and could result in an increase in the cost to obtain them.
Additionally, the failure of the totalisator companies to keep their
technology current could limit our ability to serve customers effectively or
develop new forms of wagering. Because of the highly specialized nature of
these services, replicating these totalisator services would be expensive.
Real Estate Ownership and Development Risks
Our ownership and development of real estate is subject to risks and may
involve significant ongoing expenditures or losses that could adversely affect
our operating results.
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 oversupply 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. The real estate industry is also 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, which
expenditures may negatively impact our operating results.
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We may not be able to sell some of our non-core real estate when we need to
or at the price we want, which may materially adversely affect our financial
condition.
At times, it may be difficult for us to dispose of some of our non-core
real estate. The costs of holding real estate may be high and, during a
recession, we may be faced with ongoing expenditures with little prospect of
earning revenue on our non-core real estate properties. If we have inadequate
cash reserves, we may have to dispose of properties at prices that are
substantially below the prices we desire, and in some cases, below the prices
we originally paid for the properties, which may materially adversely affect
our financial condition and our growth plans.
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
materially 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 we might not obtain the necessary approvals. Furthermore, in the
case of certain land to be held by us in Aurora, Ontario, the transfer of this
land to us from Magna International is conditional on our obtaining permission
to sever the land from adjoining properties and other approvals. If we do not
obtain these approvals, we may not ultimately acquire this land. Holding
costs, while regulatory approvals are being sought, and delays may render a
project economically unfeasible. If we do not obtain all of our necessary
approvals, our plans, growth and profitability could be materially adversely
affected.
We may not be able to complete expansion projects successfully and on time,
which would materially adversely affect our growth and our operating results.
We intend to further develop our racetracks and 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. These risks include
the inability to secure all required permits and the failure to resolve
potential land use issu