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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of the
Securities Exchange Act of 1934
----------------
MI ENTERTAINMENT CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 98-0208374
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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285 West Huntington Drive, Arcadia, California 90017
(Address of principal executive offices)
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Registrant's telephone number, including area code (626) 574-7223
Securities to be registered pursuant to Section 12(b) of the Exchange Act:
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<CAPTION>
Title of each class Name of each exchange on which
to be so registered each class is to be registered
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None
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Securities to be registered pursuant to Section 12(g) of the Exchange Act:
Class A Subordinate Voting Stock, par value $.01 per share
(Title of class)
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I. CROSS REFERENCE SHEET BETWEEN INFORMATION STATEMENT AND ITEMS OF FORM 10
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<CAPTION>
Form 10 Location in Information
Item No. Item Caption Statement
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1. Business..................................... "Summary", "Risk
Factors", "Business of
the Company", "Corporate
Strategy", "Industry
Overview", "Management's
Discussion and Analysis
of Financial Condition
and Operating Results"
and "Financial
Statements"
2. Financial Information........................ "Summary", "Selected
Financial and Operating
Information",
"Management's Discussion
and Analysis of
Financial Condition and
Operating Results",
"Quantitative and
Qualitative Disclosures
about Market Risk",
"Consolidated
Capitalization" and
"Financial Statements"
3. Properties................................... "Business of the
Company" and "Recent
Acquisitions"
4. Security Ownership of Certain "Security Ownership of
Beneficial Owners and Management............. Certain Beneficial
Owners and Management"
5. Directors and Executive Officers............. "Directors and Executive
Officers"
6. Executive Compensation....................... "Directors and Executive
Officers"
7. Certain Relationships and Related "Certain Relationships
Transactions................................. and Related
Transactions"
8. Legal Proceedings............................ "Legal Proceedings"
9. Market Price of and Dividends on the "Trading History and
Registrant's Common Equity and Dividend Record and
Related Stockholder Matters.................. Policy" and "Description
of Securities"
10. Recent Sales of Unregistered Securities...... "Recent Sales of
Unregistered Securities"
11. Description of Registrant's Securities "Description of
to be Registered............................. Securities"
12. Indemnification of Directors and Officers.... "Indemnification of
Directors and Officers"
13. Financial Statements and Supplementary Data.. "Financial Statements"
14. Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure......................... Not applicable
15. Financial Statements and Exhibits............ "Financial Statements"
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II. INDEX OF EXHIBITS
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Exhibit No. Description
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<C> <S>
2.1 Share Purchase Agreement dated October 29, 1999 between MI Venture
Inc.
(now MI Entertainment Corp.) and 1305272 Ontario Inc.*
Share Purchase Agreement dated October 29, 1999 between MI Venture
Inc.
(now MI Entertainment Corp.) and Magna International Inc.*
Share Purchase Agreement dated October 29, 1999 between MI Venture
Inc.
(now MI Entertainment Corp.) and 1346457 Ontario Inc.*
3.1 Articles of Incorporation of MI Entertainment Corp., including
amendments thereto
3.2 By-Laws of MI Entertainment Corp.
4.1 Form of Stock Certificate for Class A Subordinate Voting Stock*
10.1 Asset Purchase Agreement dated as of November 13, 1998 between MI
Developments (America) Inc., Meditrust Corporation, Meditrust
Operating Company, The Santa Anita Companies, Inc. and Santa Anita
Enterprises, Inc. together with assignment of interest from MI
Developments (America) Inc. to The Santa Anita Companies, Inc.*
Stock Purchase Agreement dated as of June 30, 1999 between MI
Venture Inc. (now MI Entertainment Corp.) and Gulfstream Holdings
Inc. of Illinois and Gulfstream Park Racing Association Inc.*
Stock Purchase Agreement dated as of October 21, 1999 between MI
Venture Inc. (now MI Entertainment Corp.), The Edward J. DeBartolo
Corporation and Oaklahoma Racing LLC*
Stock Purchase Agreement dated as of November 5, 1999 between MI
Venture Inc. (now MI Entertainment Corp.) and Ladbroke Racing
Corporation, Ladbroke Land Holdings Inc. and Pacific Racing
Association Inc.*
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedules
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*To be filed by amendment
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PRELIMINARY INFORMATION STATEMENT DATED NOVEMBER 8, 1999
MI ENTERTAINMENT CORP.
Class A Subordinate Voting Stock
----------------
This Information Statement relates to the distribution of approximately 20%
of our current equity in the form of shares of our Class A Subordinate Voting
Stock. On or about . , our parent company, Magna International Inc., will
distribute to holders of its Class A Subordinate Voting Shares and Class B
Shares of record on . , by way of special dividend, approximately 15.7 million
shares of our Class A Subordinate Voting Stock. As a result of the special
dividend, Magna shareholders will receive one fifth of one share of our Class A
Subordinate Voting Stock for every one Class A Subordinate Voting Share or
Class B Share of Magna that they hold on the record date. Magna will
concurrently distribute to those holders its regular quarterly cash dividend of
$ . per share. In this Information Statement, we refer to the special dividend
and concurrent regular quarterly cash dividend as the distribution. If you are
a holder of record of Magna Class A Subordinate Voting Shares or Magna Class B
Shares on the record date, you will receive shares of our Class A Subordinate
Voting Stock automatically on the distribution date. You do not need to take
any further action. If you are the beneficial owner of Magna Class A
Subordinate Voting Shares or Class B Shares, you will automatically become the
beneficial owner of our Class A Subordinate Voting Stock received by the record
holder of your Magna Class A Subordinate Voting Shares or Class B Shares on the
distribution date, unless you have specifically agreed otherwise with the
record holder.
Our capital stock consists of two classes--Class A Subordinate Voting Stock
and Class B Stock. Holders of our Class A Subordinate Voting Stock are entitled
to one vote per share, holders of our Class B Stock are entitled to 20 votes
per share and all holders vote together as a single class, except where
separate class votes are required by law or by our Certificate of
Incorporation. Upon completion of the distribution, Magna will own all our
Class B Stock (and none of our Class A Subordinate Voting Stock), which means
that Magna will be entitled to exercise approximately 99% of the total votes
attached to all our outstanding stock. Magna will therefore continue to be able
to elect all our directors and continue to control us.
We intend to apply to The Nasdaq Stock Market, Inc. to approve our Class A
Subordinate Voting Stock for quotation and trading on the Nasdaq National
Market under the symbol " . ". We also intend to apply for approval to list our
Class A Subordinate Voting Stock on The Toronto Stock Exchange under the symbol
" . ". Magna has advised us that it will not complete the distribution until we
receive these approvals.
IN REVIEWING THIS INFORMATION STATEMENT, YOU SHOULD CAREFULLY CONSIDER THE
MATTERS AFFECTING OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND THE
VALUE OF SHARES OF OUR CLASS A SUBORDINATE VOTING STOCK THAT THIS INFORMATION
STATEMENT DESCRIBES IN DETAIL UNDER THE HEADING "RISK FACTORS" BEGINNING ON
PAGE 15.
STOCKHOLDER APPROVAL IS NOT REQUIRED FOR THE DISTRIBUTION OR ANY OF THE
OTHER TRANSACTIONS THAT THIS INFORMATION STATEMENT DESCRIBES. WE ARE NOT ASKING
YOU FOR A PROXY AND WE REQUEST THAT YOU NOT SEND ONE TO US.
This Information Statement is not an offer to sell or solicitation of an
offer to buy any securities. The Securities and Exchange Commission and state
securities regulators have not approved or disapproved these securities or
determined if this Information Statement is truthful or complete. Any
representation to the contrary is a criminal offense.
The date of this Information Statement is . . We first mailed this
Information Statement to shareholders of Magna on . . Information contained
herein is subject to completion or amendment.
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TABLE OF CONTENTS
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Heading Page No.
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Special Note Regarding Forward-Looking Information................... 2
Questions and Answers About the Distribution......................... 3
Summary.............................................................. 7
Risk Factors......................................................... 15
The Special Dividend................................................. 22
Business of the Company.............................................. 24
Corporate Strategy................................................... 31
Industry Overview.................................................... 33
Selected Financial and Operating Information......................... 37
Management's Discussion and Analysis of Financial Condition and
Operating Results................................................... 39
Quantitative and Qualitative Disclosures About Market Risk........... 48
Consolidated Capitalization.......................................... 49
Reorganization....................................................... 50
Recent Acquisitions.................................................. 53
Certain Income Tax Considerations.................................... 54
Directors and Executive Officers..................................... 57
Security Ownership of Certain Beneficial Owners and Management....... 60
Certain Relationships and Related Transactions....................... 60
Legal Proceedings.................................................... 62
Trading History and Dividend Record and Policy....................... 62
Recent Sales of Unregistered Securities.............................. 62
Description of Securities............................................ 63
Indemnification of Directors and Officers............................ 65
Auditors, Transfer Agent and Registrar............................... 65
Promoter............................................................. 65
Financial Statements................................................. F-1
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SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements included herein constitute "forward-looking statements"
within the meaning of the United States Private Securities Litigation Reform
Act of 1995. These forward-looking statements are based on certain assumptions
and analyses made by us in light of our experience and our perception of
historical trends, current conditions and expected future developments as well
as other factors we believe are appropriate in the circumstances. However,
whether actual results and developments will conform with our expectations and
predictions is subject to a number of risks and uncertainties, including but
not limited to those described below under "Risk Factors". Consequently, all
the forward-looking statements made in this Information Statement are fully
qualified by this special note, and there can be no assurance that the actual
results or developments anticipated by us will be realized, or even if
realized, that they will have the expected consequences to, or effects on, us.
See "Risk Factors" below.
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QUESTIONS AND ANSWERS ABOUT THE DISTRIBUTION
Q: WHAT IS THE PURPOSE OF THE DISTRIBUTION?
A: Magna International Inc. is separating its non-automotive businesses from
its automotive businesses in a series of transactions. Magna has completed a
reorganization in which it transferred its North American and European non-
automotive assets to us in exchange for our Class B Stock. Prior to the
distribution, Magna will convert approximately 15.7 million shares of our
Class B Stock, representing approximately 20% of our total issued and
outstanding Class B Stock, into an equivalent number of shares of our
Class A Subordinate Voting Stock. On or about . , Magna will distribute to
holders of its Class A Subordinate Voting Shares and Class B Shares of
record on . , by way of special dividend, approximately 15.7 million shares
of our Class A Subordinate Voting Stock. Magna will concurrently distribute
to those holders its regular quarterly cash dividend of $ . per share of
Magna. Magna will not continue to hold any of our Class A Subordinate Voting
Stock.
Upon completion of these transactions, you will own stock in two separately
traded public companies, Magna International Inc. (NYSE: MGA; TSE: MG.A,
MG.B; ME: MG.A) and MI Entertainment Corp. (NASDAQ: . ; TSE: . ).
Q: WHAT WILL I RECEIVE WHEN THE SPECIAL DIVIDEND IS DISTRIBUTED?
A: You will receive one fifth of one share of our Class A Subordinate Voting
Stock for every one of Magna's Class A Subordinate Voting Shares and Magna's
Class B Shares that you own of record on . . The distribution will not
change the number of Class A Subordinate Voting Shares or Class B Shares of
Magna that you own.
Q: WHAT WILL YOUR BUSINESS BE AFTER THE DISTRIBUTION?
A: We will continue to acquire, develop and operate horse racetracks and
related pari-mutuel wagering operations. As a complement to our horse racing
business, we will explore the development of media sports wagering
operations, including telephone account, interactive television and
Internet-based wagering, as well as certain leisure and retail-based real
estate projects on the excess land around certain of our racetracks,
possibly in conjunction with business partners and subject to regulatory
requirements. In addition, we will continue to own a real estate portfolio
which includes a "gated" residential community currently under development,
one operational golf course and related recreational facilities, a golf
course under development and other real estate. We are currently considering
a variety of options with respect to our golf courses, including direct
operation or leasing to third party operators, as well as sale and leaseback
transactions or outright sales. We intend gradually to sell the balance of
our real estate portfolio in order to provide capital to be used in our
business; accordingly, we will take steps such as servicing such land and
obtaining zoning approval to enhance the value of such properties and
increase the revenues from resale.
Q: WHAT WILL MAGNA'S BUSINESS BE AFTER THE DISTRIBUTION?
A: Magna will continue to be the largest Canadian, and one of the largest
global, independent suppliers of technologically advanced automotive
components, systems and complete modules. Magna will continue to design,
engineer and manufacture a complete range of these vehicle systems and
engineer and assemble low volume niche vehicles primarily for North American
and European original equipment manufacturers.
Q: WHY IS MAGNA DISTRIBUTING SHARES OF YOUR CLASS A SUBORDINATE VOTING STOCK?
A: Magna's board of directors and management has determined that, because our
business is not one of Magna's core businesses, we and Magna will be better
able to develop and grow our respective businesses after we become a
separate public company.
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Q: WHAT WILL BE THE IMPACT OF THE DISTRIBUTION ON MAGNA'S SHARE PRICE?
A: The prices of Magna Class A Subordinate Voting Shares and Magna Class B
Shares may decline upon completion of the distribution to the extent that
the value of our shares that Magna is distributing to its shareholders has
not already been factored into the prices of Magna's shares. However, since
the separation will permit Magna to focus on its core automotive business,
Magna has advised us that its management expects prices of Magna's shares to
improve gradually over a period of time.
Q: WHAT DO I HAVE TO DO TO PARTICIPATE IN THE DISTRIBUTION?
A: Nothing. No proxy or vote is required to participate in the distribution.
You do not need to, and should not, mail in any certificates representing
Magna Class A Subordinate Voting Shares or Magna Class B Shares in order to
receive our Class A Subordinate Voting Stock in the distribution.
Q: HOW WILL MAGNA DISTRIBUTE YOUR CLASS A SUBORDINATE VOTING STOCK TO ME?
A: If you are a registered holder of Magna Class A Subordinate Voting Shares or
Magna Class B Shares as of the close of business on the record date for the
distribution, Magna's distribution agent will automatically credit the
number of shares of our Class A Subordinate Voting Stock to a book-entry
account established to hold such stock for you. This credit will occur on
the distribution date. After the distribution, the distribution agent will
mail you a statement of your ownership of our Class A Subordinate Voting
Stock. Following the distribution, you may retain your shares of our Class A
Subordinate Voting Stock in your book-entry account, sell them or transfer
them to a brokerage or other account.
You will not receive any new stock certificates in the distribution. However,
if you are a registered holder, you may request a physical stock certificate
after you receive the statement of ownership of our stock from the
distribution agent. The statement of ownership will contain instructions on
how to do this.
Q: WHAT IF I HOLD MY MAGNA SHARES THROUGH MY STOCKBROKER, A BANK OR OTHER
NOMINEE?
A: If you hold your Magna Class A Subordinate Voting Shares or Magna Class B
Shares through a stockbroker, bank or other nominee, you are probably not a
registered shareholder of record and the manner in which you receive our
Class A Subordinate Voting Stock depends on your arrangements with the
stockbroker, bank or other nominee that holds your Magna Class A Subordinate
Voting Shares or Magna Class B Shares for you. We expect that stockbrokers
and banks generally will credit their customers' accounts with our stock on
or after the distribution date, but you will have to confirm that with your
stockbroker, bank or other nominee.
After the distribution, you may instruct your stockbroker, bank or other
nominee, subject to any arrangement you may have with that person, to
transfer your Class A Subordinate Voting Stock into your own name to be held
in book-entry form.
Q: WHAT ABOUT FRACTIONAL SHARES?
A: If you are a registered holder of Magna Class A Subordinate Voting Shares or
Magna Class B Shares, the distribution agent will automatically credit the
number of whole shares of our Class A Subordinate Voting Stock to which you
are entitled to a book-entry account established to hold such stock for you.
All fractional shares to which you and other Magna shareholders are entitled
will be aggregated and sold by the distribution agent on your behalf. You
will receive your pro rata share of the net proceeds from the sale of any
fractional shares together with your statement of ownership. If you own
fewer than five Magna Class A Subordinate Voting Shares or Magna Class B
Shares, you will receive cash instead of your fractional share of our Class
A Subordinate Voting Stock as described below. No interest will be paid on
any cash distributed in lieu of fractional shares.
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Q: ON WHICH STOCK EXCHANGE WILL SHARES OF YOUR CLASS A SUBORDINATE VOTING STOCK
TRADE?
A: We intend to apply to The Nasdaq Stock Market, Inc. to approve our Class A
Subordinate Voting Stock for quotation and listing on the Nasdaq National
Market ("NASDAQ") under the trading symbol " . ". In addition, we intend to
apply for approval to list our Class A Subordinate Voting Stock on The
Toronto Stock Exchange (the "TSE") under the trading symbol " . ". Magna has
advised us that it will not complete the distribution until we receive these
approvals.
Q: WHEN WILL I BE ABLE TO BUY AND SELL YOUR CLASS A SUBORDINATE VOTING STOCK?
A: Regular trading of our Class A Subordinate Voting Stock is expected to begin
on NASDAQ and the TSE on the distribution date. Prior to that, our Class A
Subordinate Voting Stock is expected to trade on NASDAQ and the TSE on an
if, as and when issued basis, commencing . .
Q: HOW WILL I BE ABLE TO BUY AND SELL MAGNA CLASS A SUBORDINATE VOTING SHARES
BEFORE THE DISTRIBUTION DATE?
A: Magna has advised us that its Class A Subordinate Voting Shares will
continue to trade on The New York Stock Exchange (the "NYSE"), the TSE and
the Montreal Exchange ("ME") on a regular basis through the distribution
date and that its Class B Shares will continue to trade on the TSE through
the distribution date. Any Magna Class A Subordinate Voting Share or Magna
Class B Share sold on a regular basis beginning on the date that is .
trading days before the record date and ending on the distribution date
(i.e., between . and . ) will be accompanied by an attached "due bill"
representing your shares of our Class A Subordinate Voting Stock to be
distributed in the distribution.
Additionally, Magna has advised us that it expects that "ex-distribution"
trading for Magna Class A Subordinate Voting Shares and Magna Class B Shares
will develop before the distribution date. "Ex-distribution" trading means
that you may trade your Magna Class A Subordinate Voting Shares and Magna
Class B Shares before the completion of the distribution, but on a basis
that reflects the value at which the market expects the Magna Class A
Subordinate Voting Shares to trade after the distribution.
If "ex-distribution" trading develops in Magna Class A Subordinate Voting
Shares, you may buy and sell those shares before the distribution date on
the NYSE under the symbol " . " and on the TSE under the symbol " . ". If
"ex-distribution" trading develops in Magna Class B Shares, you may buy and
sell those shares before the distribution date on the TSE under the symbol
" . ". None of these trades, however, will settle until after the
distribution. If the distribution does not occur, all "ex-distribution"
trading will be null and void.
Q: WILL MY DIVIDENDS CHANGE?
A: Before the distribution, Magna was paying a quarterly dividend of $0.25 per
Magna Class A Subordinate Voting Share and Magna Class B Share, which is
equivalent to an annual rate of $1.00 per Magna Class A Subordinate Voting
Share and Magna Class B Share. The board of directors of Magna will be
responsible for determining Magna's dividend rate and policy after the
distribution, subject to the terms of Magna's Corporate Constitution.
We do not anticipate paying any dividends until our fiscal year commencing
January 1, 2004. Our Corporate Constitution, which is set forth in our
Certificate of Incorporation, provides that holders of our Class A
Subordinate Voting Stock and Class B Stock will be entitled to receive
dividends at least equal to 10% of our after-tax profits for our fiscal
years commencing January 1, 2004 and 2005. In respect of each fiscal year
thereafter, holders of our Class A Subordinate Voting Stock and Class B
Stock will be entitled to receive dividends at least equal to the greater of
(i) 10% of our after-tax profits, and (ii) 20% of the
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average of our after-tax profits for such fiscal year and the two
immediately preceding fiscal years. Our board of directors will be
responsible for determining our dividend rate and policy after the
distribution, subject to the terms of our Corporate Constitution.
Q: WILL I BE TAXED AS A RESULT OF THE DISTRIBUTION?
A: Yes. The distribution of shares of our Class A Subordinate Voting Stock will
be treated as a dividend for purposes of Canadian and United States federal
income taxation. The distribution paid to non-residents of Canada will be
subject to Canadian withholding tax on its fair market value at the time the
distribution is paid. If you are a United States resident shareholder of
Magna, the rate of Canadian withholding tax should generally be 15%, which,
subject to certain limitations, may be claimed as a credit or deduction on
your United States income tax return. This withholding tax will be satisfied
by Magna withholding the required amount from the concurrent cash dividend.
Q: WHAT WILL THE RELATIONSHIP BETWEEN YOU AND MAGNA BE AFTER THE DISTRIBUTION?
A: Upon completion of the distribution, Magna will own all our Class B Stock
(and none of our Class A Subordinate Voting Stock), which means that Magna
will be entitled to exercise approximately 99% of the total votes attached
to all our outstanding stock. Magna will therefore continue to be able to
elect all our directors and continue to control us. Magna has informed us
that it intends to convert some shares of our Class B Stock to shares of our
Class A Subordinate Voting Stock and dispose of such shares of our Class A
Subordinate Voting Stock when market conditions for doing so are favorable,
with the ultimate intention of retaining only a minority equity position.
This may occur through a combination of: (i) secondary sales by Magna of
such stock held by it; and/or (ii) the dilution of its interest through the
issuance of Class A Subordinate Voting Stock by us in connection with
capital market transactions, acquisitions and/or other investments by
business partners in us.
Magna has made a commitment to its shareholders that for a period of seven
years ending May 31, 2006, it will not without the prior consent of the
holders of a majority of Magna's Class A Subordinate Voting Shares: (i) make
any further debt or equity investment in us or any of our subsidiaries; or
(ii) invest in any non-automotive-related businesses or assets other than
through its investment in us.
Magna is currently paying us an access fee to access our Fontana Sports golf
course and related recreational facilities for Magna-sponsored corporate and
charitable events and business development purposes. Upon completion of our
Aurora Downs golf course, Magna will pay us an annual access fee for similar
purposes. We have also granted Magna a right of first refusal to purchase
these two golf courses if we decide to sell them.
Q: WHOM SHOULD I CONTACT FOR FURTHER INFORMATION ON THE DISTRIBUTION?
A: If you have questions about the distribution or if you would like additional
copies of this Information Statement or any other document to which this
Information Statement refers, you should contact the Secretary of Magna at
337 Magna Drive, Aurora, Ontario, Canada L4G 7K1, telephone: (905) 726-2462.
This Information Statement is also available through the Internet on the
Electronic Data Gathering, Analysis and Retrieval (EDGAR) system, which can
be accessed at www.sec.gov/edgarhp.htm.
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SUMMARY
The following information is a summary only and is qualified in its entirety
by reference to, and must be read in conjunction with, the detailed information
and financial statements appearing elsewhere in this Information Statement. In
this Information Statement, all references to "dollars", "$" or "U.S.$" are to
United States dollars and references to "Cdn.$" or "Canadian dollars" are to
Canadian dollars.
MI Entertainment Corp.
We acquire, develop and operate horse racetracks and related pari-mutuel
wagering operations. As a complement to our horse racing business, we are
exploring the development of media sports wagering operations, including
telephone account, interactive television and Internet-based wagering, as well
as certain leisure and retail-based real estate projects on the excess land
around certain of our racetracks, possibly in conjunction with business
partners and subject to regulatory requirements. In addition, we own a real
estate portfolio which includes a "gated" residential community currently under
development, one operational golf course and related recreational facilities, a
golf course under development and other real estate. We are currently
considering a variety of options with respect to our golf courses, including
direct operation or leasing to third party operators, as well as sale and
leaseback transactions or outright sales. We intend gradually to sell the
balance of our real estate portfolio in order to provide capital to be used in
our business; accordingly, we will take steps such as servicing such land and
obtaining zoning approval to enhance the value of such properties and increase
the revenues from resale.
Pari-mutuel wagering on horse racing is pooled betting in which individuals
bet against each other as to what the outcome of a horse race will be. The
applicable racetrack operator has no interest in the order of finish in any
given race and therefore has no risk in the outcome. A percentage of the pooled
wagers is retained by the operator of the wagering facility, a portion is paid
to the applicable regulatory or taxing authorities and a portion is paid to the
racetrack's horsemen in the form of "purses" which encourage owners and
trainers to enter their horses in that track's live races. The balance of the
pooled wagers is paid to bettors as winnings. Pari-mutuel wagering on horse
racing occurs at horse racetracks on the races being conducted at such tracks
as well as at such racetracks on televised racing signals ("simulcasts")
received or "imported" by the simulcast wagering facilities located at such
tracks (collectively, "on-track wagering"). Pari-mutuel wagering on horse
racing also occurs at wagering establishments on horse races being conducted at
tracks elsewhere ("off-track wagering"). Horse racetracks generally have
simulcast wagering facilities to complement their live horse racing by enabling
their patrons to wager on horse races being held at other racetracks when there
is no live racing occurring at their tracks.
We operate two horse racetracks and have entered into definitive agreements
to acquire a further three racetracks. Each of these racetracks includes a
facility that accepts wagers on races conducted at other racetracks, the live
television broadcasts (or "simulcasts") of which are shown at our facilities.
We also broadcast, or "export", simulcasts of our races to a number of
locations across the United States, Canada, Mexico, the Caribbean region and
Australia. Our horse racing and related wagering operations include Santa Anita
Park near Los Angeles, California and Gulfstream Park near Miami, Florida. We
also own San Luis Rey Downs, a horse training track located outside of San
Diego, California. We have acquired all these racetracks since December 1998.
In addition, we have agreed to acquire the stock of the companies that own
Thistledown Racetrack near Cleveland, Ohio and Remington Park in Oklahoma City,
Oklahoma and we expect to complete these acquisitions in November 1999. We have
also entered into a definitive agreement to buy all the stock of the companies
which own and operate Golden Gate Fields racetrack near San Francisco,
California, subject to obtaining the necessary regulatory and other approvals.
We expect to complete this acquisition in December 1999.
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We own and operate some of the premier horse racing facilities in North
America and one of the horse racing industry's best simulcast products. For
example, Santa Anita Park has hosted the Breeder's Cup Championship twice since
the inception of the Breeder's Cup in 1984 and Gulfstream Park has hosted it
three times, the most recent being on November 6, 1999. Furthermore, by many
standard industry measures such as total "handle" (or total amount wagered),
average daily attendance, average daily handle, average daily on-track handle
and average daily off-track handle, we believe that Santa Anita Park and
Gulfstream Park are two of the top ten racetracks in North America. If the
acquisition of Golden Gate Fields is completed, we believe that we will own and
operate three of the top ten racetracks in North America in terms of total
handle. See "Business of the Company".
Corporate Strategy
There are four related components of our corporate strategy: (1) continuing
our consolidation of racetracks and enhancing the facilities at some of these
racetracks; (2) "bundling", or combining, our simulcast horse racing products
and marketing the signal under our own brand name; (3) leveraging our
competitive position in the horse racing industry and, ultimately, our brand
name, in expanding our distribution channels and range of sports wagering
products; and (4) developing total entertainment destinations centered on some
of our racetracks.
1. Continuing our consolidation and enhancement of racetracks--Through our
acquisitions of Santa Anita Park and Gulfstream Park and the acquisitions of
Thistledown Racetrack, Remington Park, and Golden Gate Fields currently in
progress, we have become one of the leading consolidators of premier horse
racetracks in North America. Being an industry consolidator means that we
have acquired multiple racetracks with the objective of maximizing
administrative and cost efficiencies at those tracks. We expect to acquire
other high-quality, geographically diverse racetracks which would increase
the number of racing days we offer, distribute the races we offer over more
days in each year, expand our simulcasting content and enhance the value of
our simulcast product. In addition we have made certain enhancements to the
facilities at some of our racetracks and are also examining further upgrades
at some of our racetracks which are intended to increase live attendance,
strengthen our ability to consistently attract some of the top horses,
trainers and jockeys in North America, increase the market for our simulcast
product, improve racing conditions and help to generate additional revenues.
2. Bundling our simulcast horse racing products and marketing the signal under
our own brand name--As a result of our racetrack consolidation strategy, we
believe that we offer one of horse racing's leading simulcast products and
we expect our position to strengthen further through future acquisitions.
Our annual racing schedule currently consists of 126 race days broadcast
from two of the top ten U.S. racetracks, in terms of total "handle" or total
amount wagered. The acquisitions of Thistledown Racetrack, Remington Park
and Golden Gate Fields will increase the number of race days broadcast
during our annual racing schedule and will provide us with another leading
racetrack in North America in terms of total handle. Over the next few
years, we intend to "bundle", or combine, the signals from our racetracks,
and possibly also signals from racetracks not owned by us, and market this
bundled simulcast product through a single signal marketed under our own
brand name.
3. Leveraging our competitive position in the horse racing industry and our
brand name in expanding our distribution channels and range of sports
wagering products--We intend to leverage our competitive position in the
horse racing industry and build on the brand name recognition we expect to
develop, in order to expand the distribution channels for our simulcast
product and, ultimately, expand the range of sports wagering products we
offer, possibly in conjunction with business partners and subject to
regulatory requirements. As part of our strategy, we intend to increase the
market for our existing simulcast product by establishing telephone account,
interactive television and Internet-based wagering
8
<PAGE>
operations as distribution channels for our simulcast product. We also
intend to explore the expansion of our sports wagering products to sports
other than horse racing, both in North America and in Europe, subject to
regulatory requirements.
4. Developing total entertainment destinations centered on some of our
racetracks--We are considering developing leisure and retail-based real
estate development projects on the excess land around some of our
racetracks, possibly in conjunction with business partners. Such
developments could include multiplex theaters, retail shopping, restaurants,
hotels and entertainment themed developments and may involve the integration
of other gaming options.
See "Corporate Strategy" below for a more detailed discussion of our
corporate strategy. There are a number of risks inherent in our corporate
strategy, which will take at least several years to implement fully. See "Risk
Factors" for a discussion of these and other risks.
The Distribution
The following is a brief description of the principal terms of the
distribution.
Distributing Company.... Magna will make the distribution. The Class A
Subordinate Voting Shares of Magna trade on the NYSE
under the symbol "MGA" and on the TSE and the ME
under the symbol "MG.A". The Class B Shares of Magna
trade on the TSE under the symbol "MG.B".
Reasons for the Special
Dividend................ The board of directors and management of our parent
company, Magna, have determined that it is in the
best interests of its shareholders to separate our
non-automotive assets and operations from Magna's
automotive assets and operations by distributing
approximately 20% of our current equity in the form
of shares of our Class A Subordinate Voting Stock to
Magna's shareholders by way of a special dividend.
Magna has advised us that, in reaching its decision,
its board of directors and management considered a
number of factors, including that:
. the separation will permit Magna to focus on its
core automotive business;
. the separation will permit investors to choose
whether to invest in the automotive industry by
retaining or purchasing Magna shares, invest in
the sports gaming industry by retaining or
purchasing our stock, or both;
. establishing our business as a separately traded
public company will enable us to respond better to
the opportunities and challenges of the sports
gaming industry;
. in light of Magna's commitment to its shareholders
not to make any further debt or equity investment
in us or any of our subsidiaries for a period of
seven years ending May 31, 2006, establishing our
business as a separately traded public company
will facilitate our future access to capital and
will allow us to acquire further racetracks
through the issuance of our publicly-traded stock;
and
9
<PAGE>
. as a public company, we will be better able to
develop profit-based compensation programs for our
management and employees.
Securities and Cash to
be Distributed.......... On or about . , Magna will distribute to holders of
its Class A Subordinate Voting Shares and Class B
Shares of record on . , approximately 15.7 million
shares of our Class A Subordinate Voting Stock,
representing approximately 20% of our current equity.
Magna will concurrently distribute to those holders
its regular quarterly cash dividend of $ . per Magna
share.
Distribution Ratio...... You will receive one fifth of one share of our Class
A Subordinate Voting Stock for each Magna Class A
Subordinate Voting Share or Magna Class B Share that
you own of record as of the close of business on the
record date.
Record Date............. . (5:00 p.m., New York time).
Distribution Date....... . (4:59 p.m., New York time). On the distribution
date, Magna's distribution agent will credit the
whole shares of our Class A Subordinate Voting Stock
that you receive in the distribution to your new
book-entry account or to your stockbroker, bank or
other nominee if you are not a registered holder of
record, but are a beneficial owner, of Magna Class A
Subordinate Voting Shares or Magna Class B Shares on
the record date.
Distribution Agent...... Before the distribution, Magna will appoint Montreal
Trust Company of Canada as its distribution agent for
the distribution.
Trading Market and
Symbol.................. There has been no market for our Class A Subordinate
Voting Stock. We intend to apply to NASDAQ to approve
our Class A Subordinate Voting Stock for quotation
and trading under the symbol " . ". We also intend to
apply for approval to list our Class A Subordinate
Voting Stock on the TSE under the symbol " . ". Magna
has advised us that it will not complete the
distribution until we receive these approvals.
Certain Income Tax
Considerations.......... The special dividend of shares of our Class A
Subordinate Voting Stock will be treated as a
dividend for Canadian and United States federal
income tax purposes. A non-resident of Canada who
receives the special dividend and the concurrent cash
dividend will be subject to Canadian withholding tax
at a rate of 25% on the fair market value of the
special dividend and 25% of the cash dividend at the
time the dividend is paid, subject to reduction by an
applicable tax treaty, which, in the case of the
Canada-United States Income Tax Convention, generally
results in a reduction to 15%, which amount, subject
to certain limitations, may be claimed as a credit or
deduction on your United States federal income tax
return. Such withholding tax liability will be
satisfied by Magna withholding the appropriate amount
from the concurrent Magna quarterly cash dividend
otherwise payable.
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<PAGE>
Fractional Share
Treatment............... If you are a registered holder of Magna Class A
Subordinate Voting Shares or Magna Class B Shares,
you may request a physical stock certificate for all
whole shares of our Class A Subordinate Voting Stock
that you receive in the distribution after you
receive your statement of stock ownership from the
distribution agent. If you own a number of Magna
Class A Subordinate Voting Shares or Magna Class B
Shares not evenly divisible by five, you will receive
cash instead of your fractional share of our Class A
Subordinate Voting Stock in addition to any whole
shares of Class A Subordinate Voting Stock you may be
entitled to receive.
The distribution agent will aggregate the fractional
shares to be cashed out into whole shares and sell
them in the open market at then prevailing prices on
behalf of registered holders. In lieu of a fractional
share, such holders will receive a cash payment in
the amount of their pro rata share of the total
proceeds of those sales, less any brokerage
commissions. The distribution agent will pay the net
proceeds from sales of fractional shares based upon
the average selling price per share of our Class A
Subordinate Voting Stock of all those sales, less any
brokerage commissions. None of Magna, the
distribution agent or us will guarantee any minimum
sale price for those fractional shares of our Class A
Subordinate Voting Stock, and no interest will be
paid on the proceeds of those shares.
Risk Factors............ You should carefully consider the matters discussed
under the heading "Risk Factors" beginning on page 15
of this Information Statement.
Relationship with Magna
After the
Distribution............ Upon completion of the distribution, Magna will own
all our Class B Stock (and none of our Class A
Subordinate Voting Stock), which means that Magna
will be entitled to exercise approximately 99% of the
total votes attached to all our outstanding stock.
Magna will therefore continue to be able to elect all
our directors and continue to control us. Magna has
informed us that it intends to convert some shares of
our Class B Stock to shares of our Class A
Subordinate Voting Stock and dispose of such shares
of our Class A Subordinate Voting Stock when market
conditions for doing so are favorable, with the
ultimate intention of retaining only a minority
equity position. This may occur through a combination
of: (i) secondary sales by Magna of such stock held
by it; and/or (ii) the dilution of its interest
through the issuance of Class A Subordinate Voting
Stock by us in connection with capital market
transactions, acquisitions and/or other investments
by business partners in us.
Magna has made a commitment to its shareholders that
for a period of seven years ending May 31, 2006, it
will not without the prior consent of the holders of
a majority of Magna's Class A Subordinate Voting
Shares: (i) make any further debt or equity
investment in us or any of our subsidiaries; or (ii)
invest in any non-automotive-related businesses or
assets other than through its investment in us.
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<PAGE>
Magna is currently paying us an access fee to access
our Fontana Sports golf course and related
recreational facilities for Magna-sponsored corporate
and charitable events and business development
purposes. Upon completion of our Aurora Downs golf
course, Magna will pay us an annual access fee for
similar purposes. We have also granted Magna a right
of first refusal to purchase these two golf courses
if we decide to sell them.
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<PAGE>
Selected Financial and Operating Information
The following table sets forth certain of our consolidated and pro forma
consolidated financial data as at and for the periods indicated. The selected
consolidated financial data as at and for the eight months ended August 31,
1999 have been derived from our Unaudited Consolidated Financial Statements as
at and for the eight months ended August 31, 1999, which, in the opinion of
management, include all adjustments (consisting of normal recurring accruals)
necessary to present fairly the information set forth therein. Results for the
eight months ended August 31, 1999 are not necessarily indicative of the
results that may be expected for the full year. The selected consolidated
financial data as at and for the three years ended July 31, 1998 and the
five month period ended December 31, 1998 have been derived from and should be
read in conjunction with our Audited Consolidated Financial Statements for the
three-year period ended July 31, 1998 and the five-month period ended December
31, 1998. The pro forma selected consolidated financial data for the year ended
December 31, 1998 and eight months ended August 31, 1999 have been derived from
and should be read in conjunction with our Pro Forma Consolidated Financial
Statements as at and for the eight months ended August 31, 1999 and the year
ended December 31, 1998. The selected financial and operating information
should also be read in conjunction with the section entitled "Management's
Discussion and Analysis of Financial Condition and Operating Results" included
in this Information Statement.
Income Statement Data(1)
<TABLE>
<CAPTION>
Pro Forma
Eight Months Pro Forma Eight Months Five Months
Ended Year Ended Ended Ended Years Ended July 31,
August 31, December 31, August 31, December 31, ----------------------------------
1999 1998 1999 1998 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------- ------- ------- -------
(in thousands of U.S. dollars, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue
Racetrack.............. $122,600 $149,585 $57,557 $ 3,952 $ -- $ -- $ -- $ --
Real estate............ 10,974 21,239 10,974 6,597 20,486 15,276 2,460 1,166
-------- -------- ------- ------- ------- ------- ------- -------
Total revenue.......... 133,574 170,824 68,531 10,549 20,486 15,276 2,460 1,166
Costs and Expenses
Racetrack operating
costs................. 90,508 126,278 42,245 3,625 -- -- -- --
Real estate operating
costs................. 10,605 27,355 10,605 8,462 25,864 13,879 4,613 2,713
Depreciation and
amortization........... 12,061 19,288 4,041 1,649 1,852 1,824 330 21
Interest expense
(income), net.......... 377 1,615 522 1,221 1,380 955 (59) (26)
-------- -------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... 20,023 (3,712) 11,118 (4,408) (8,610) (1,382) (2,424) (1,542)
======== ======== ======= ======= ======= ======= ======= =======
Net income (loss)....... $ 11,304 $ (5,996) $ 5,776 $(4,231) $(8,610) $(1,382) $(2,424) $(1,542)
======== ======== ======= ======= ======= ======= ======= =======
Earnings (loss) per
share of Class A
Subordinate Voting and
Class B Stock
Basic and diluted(2)... $ 0.14 $ (0.07) $ 0.07 $ (0.05) $ (0.11) $ (0.02) $ (0.03) $ (0.02)
======== ======== ======= ======= ======= ======= ======= =======
Average number of shares
Class A Subordinate
Voting and Class B
Stock outstanding
during the period
(in thousands):
Basic and diluted(2)... 80,198 80,198 78,535 78,535 78,535 78,535 78,535 78,535
======== ======== ======= ======= ======= ======= ======= =======
</TABLE>
- --------
(1) We prepare our financial statements in accordance with U.S. generally
accepted accounting principles ("U.S. GAAP") which differ in certain
respects from accounting principles generally accepted in Canada ("Canadian
GAAP"). For a discussion of the principal
13
<PAGE>
differences between U.S. GAAP and Canadian GAAP, see Note 14, "Canadian
Generally Accepted Accounting Principles", to our Audited Consolidated
Financial Statements.
(2) On November 5, 1999, Magna completed the reorganization described in this
Information Statement. As part of the reorganization, our capital structure
was established creating Class A Subordinate Voting Stock with one vote per
share and Class B Stock with 20 votes per share. As of November 5, 1999,
78,535,328 shares of our Class B Stock and none of our Class A Subordinate
Voting Stock were issued and outstanding. Our historical basic and diluted
earnings (loss) per share has been calculated assuming that 78,535,328
shares of our Class B Stock and none of our Class A Subordinate Voting
Stock were issued and outstanding at the beginning of the periods
presented. Our pro forma basic and diluted earnings (loss) per share has
been calculated assuming that 78,535,328 shares of our Class B Stock and
1,662,890 shares of our Class A Subordinate Voting Stock (to be issued in
connection with the acquisitions of the Thistledown and Golden Gate Fields
racetracks) were issued and outstanding at the beginning of the periods
presented.
Balance Sheet Data(1)
<TABLE>
<CAPTION>
Pro Forma
August July 31,
31, August 31, December 31, ---------------------------------
1999 1999 1998 1998 1997 1996 1995
--------- ---------- ------------ -------- -------- ------- -------
(in thousands of U.S. dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............. $ 79,388 $ 15,629 $ 17,503 $ 295 $ 220 $ 133 $ 521
Total assets............. 739,145 377,390 364,142 184,802 113,175 76,219 51,636
Total debt(2)............ 46,840 57,942 32,335 19,495 18,938 22,614 12
Magna's net
investment/shareholder's
equity.................. 554,623 296,941 302,502 158,275 87,917 49,985 48,166
</TABLE>
- --------
(1) We prepare our financial statements in accordance with U.S. generally
accepted accounting principles ("U.S. GAAP") which differ in certain
respects from accounting principles generally accepted in Canada ("Canadian
GAAP"). For a discussion of the principal differences between U.S. GAAP and
Canadian GAAP, see Note 14, "Canadian Generally Accepted Accounting
Principles", to our Audited Consolidated Financial Statements.
(2) Total debt includes Bank indebtedness, Long-term debt (including Long-term
debt due within one year) and Note payable to Magna.
The matters discussed under the heading "Reorganization" below may
materially affect the comparability of some of the foregoing selected financial
data. Accordingly, please refer to such section for details of the terms of the
Reorganization.
14
<PAGE>
RISK FACTORS
In reviewing this Information Statement, you should carefully consider the
following factors. The most significant risks and uncertainties we face are
described below, but other risks and uncertainties that are not known to us or
that we currently believe are not material or that are similar to those faced
by other companies in our industry may also have a material adverse effect on
our financial condition or results of operations. In addition, our actual
results could differ materially from those anticipated in forward-looking
statements contained in this Information Statement as a result of various
risks, including those discussed below and elsewhere in this Information
Statement. Please refer to "Special Note Regarding Forward-Looking Information"
on page 2 of this Information Statement.
If any of the following risks actually occur, our business, financial
condition and results of operations could be materially and adversely affected.
In this case, the trading price of shares of our Class A Subordinate Voting
Stock could decline substantially, and you may lose all or part of the value of
the shares of our Class A Subordinate Voting Stock being distributed to you.
General risks regarding our business
We have a history of losses and we anticipate losses in the near future on
certain of the racetracks we are in the process of acquiring
We have experienced cumulative consolidated net losses since inception
totaling approximately $12.2 million for periods up to August 31, 1999. Certain
of the racetracks we are in the process of acquiring have historically operated
at a loss and may do so in the future.
We have not been in existence for long and do not plan to pay dividends
until fiscal year 2004, if at all
We have only recently been incorporated and we have a very short history of
operations and earnings. See "Selected Financial and Operating Information" and
our Pro Forma Consolidated Financial Statements and Consolidated Financial
Statements, together with the notes thereto, appearing elsewhere in this
Information Statement. We have not paid any dividends to date, we do not plan
to pay any dividends until our fiscal year commencing January 1, 2004 and we
cannot give any assurance that we will be in a position to pay dividends then,
or thereafter. See "Description of Securities--Corporate Constitution".
We depend on our new members of senior management and other key personnel
We will be highly dependent on the services of members of our senior
management, most of whom have only recently been hired by us or are currently
being recruited by us and therefore have not established a track record of
working together successfully. We also depend on the local management of our
racetracks and other operating units. The loss of the services of any of these
individuals could have a material adverse effect on our business, financial
condition and results of operations.
Our stock price may be volatile
Shares of our Class A Subordinate Voting Stock have not previously traded.
The price of shares of our Class A Subordinate Voting Stock may be volatile in
the future, particularly shortly after the distribution, when some of Magna's
institutional shareholders sell their holdings of our stock because they:
. may not wish to or are unable to continue holding our stock, as it will
constitute "foreign property" under the Income Tax Act (Canada);
. are prohibited from investing in a company with a significantly smaller
market capitalization;
. cannot hold stock of a gaming company; or
. do not want to hold our stock for any other reason.
15
<PAGE>
Furthermore, sales of fractional shares in the market by the distribution
agent may lead to additional price volatility. In addition, fluctuations in our
operating profits, the announcement of new wagering and gaming opportunities by
us or our competitors, the passage of legislation affecting horse racing or
gaming, developments affecting the horse racing or gaming industries generally
and sales of substantial amounts of our Class A Subordinate Voting Stock,
possibly including sales by Magna as a result of its stated intention to reduce
its majority equity position in us, may have a significant effect on the market
price of our Class A Subordinate Voting Stock. Moreover, publicly-held horse
racing and gaming companies have experienced price and trading volume
fluctuations that are often unrelated to such companies' financial condition
and results of operations. A shift away from investor interest in gaming
companies in general could have a material adverse effect on the market price
of our common stock, regardless of our financial condition and results of
operations.
We may not be able to obtain financing or may only be able to obtain it on
unfavorable terms
We may require additional financing in order to expand our operations. It is
possible that such financing will not be available or, if available, will not
be available on terms which are favorable to us. In addition, Magna has made a
commitment to its shareholders that it will not, for a period of seven years
ending May 31, 2006, without the prior consent of the holders of a majority of
Magna's Class A Subordinate Voting Shares, make any further debt or equity
investment in us or any of our subsidiaries. See "Certain Relationships and
Related Transactions--Relationship with Magna".
Our relationship with Magna is not at "arm's length"
Our relationship with Magna is not at arm's length. Upon completion of the
distribution, Magna will own all our Class B Stock (and none of our Class A
Subordinate Voting Stock), which means that Magna will be entitled to exercise
approximately 99% of the total votes attached to all our outstanding stock.
Magna will therefore continue to be able to elect all our directors and will
continue to control us. Therefore, Magna will continue to be able to cause us
to effect certain corporate transactions without your consent, subject to
applicable law. In addition, Magna will continue to be able to cause or prevent
a change in our control. In some cases, the interests of Magna may not be the
same as those of other stockholders, and conflicts of interest may arise after
the completion of the distribution that may be resolved in a manner detrimental
to us.
For example, Magna has entered into arrangements with us so as to ensure
their access to our Fontana Sports and Aurora Downs golf courses and related
recreational facilities in return for an agreed upon fee. These access
arrangements are scheduled to expire five years after their effective dates.
These arrangements may not be renewed by Magna after their expiration or could
be amended or terminated prematurely by Magna. The early termination, amendment
or non-renewal of these access arrangements could have a material adverse
effect on our financial condition and results of operations. We have also
granted Magna a right of first refusal to purchase these golf courses if we
decide to sell them. We are currently considering a variety of options with
respect to our golf courses, including direct operation or leasing to third
party operators, as well as sale and leaseback transactions (which would
require that Magna not exercise its right of first refusal) or outright sale.
Gaming Risks
Our gaming activities are extensively regulated and this could adversely
affect our growth prospects
Our existing live racing, pari-mutuel wagering and other operations are
contingent upon the continued governmental approval of such operations as forms
of legalized gaming. All our current and proposed operations are subject to
extensive regulations which are described in more detail under "Industry
Overview--Key Characteristics of the Industry--Government Regulation", and
could be subjected at any time to additional or more restrictive regulations,
or banned entirely.
As of the date of this Information Statement, we have obtained all
governmental licenses, registrations, permits and approvals necessary for the
operation of our gaming facilities. However, we may be unable to maintain our
existing licenses. The loss of our licenses, registrations, permits or
approvals may materially limit
16
<PAGE>
the number of races we conduct and could have a material adverse effect on our
financial condition and results of operations. In addition, we currently devote
significant financial and management resources to complying with the various
governmental regulations to which our operations are subject. Any significant
increase in governmental regulation could materially adversely affect our
financial condition and results of operations.
Moreover, any future expansion of our gaming operations will likely require
additional licenses, registrations, permits and approvals. The licensing
process can be both lengthy and costly and there is no assurance of success.
For example, we recently entered into an agreement to acquire the racetrack
operations of Golden Gate Fields. This acquisition is subject to a number of
regulatory proceedings, including anti-trust review by the U.S. Federal Trade
Commission and Department of Justice, permission from The California Horse
Racing Board to operate more than one California racetrack, and licensing
approvals from The California Horse Racing Board and the Nevada Gaming
Commission. Although we anticipate obtaining all required regulatory approvals
in December 1999, we cannot assure you that all such regulatory approvals will
be obtained and therefore that this acquisition will be successfully completed.
The high degree of regulation in the gaming industry is a significant
obstacle to our growth strategy, especially with respect to telephone account,
interactive television and Internet-based sports betting. Telephone account and
interactive television-based betting from home may currently be conducted only
through "hubs" located in eight states (although the Los Angeles County
District Attorney has recently challenged the ability of California residents
to conduct account wagering through such hubs). Our expansion opportunities in
this area may be limited unless more states change their laws to permit
telephone account and interactive television-based betting. Wagering over the
Internet is also subject to extensive legal restriction. The United States
Congress is currently considering enacting the Internet Gambling Prohibition
Act, also known as the "Kyl Bill", which would amend the Interstate Wire Act to
make it clear that persons engaged in the United States in the business of
betting or wagering through the Internet as well as casual bettors who
knowingly use a communication facility for betting or gambling over the
Internet can be fined or imprisoned. Internet service providers would be
required to block-out gambling sites and would be subject to state and federal
authority. The Kyl Bill would permit telephone account, interactive television
and Internet-based account wagering on horse racing, but not other sports. A
similar piece of legislation was recently introduced in the House of
Representatives by Rep. Bob Goodlatte (R. Va.). We cannot predict the final
disposition of either such piece of legislation.
Implementation of some of the recommendations of the National Gambling
Impact Study Commission could adversely affect our growth prospects and the
gambling industry in general
In August 1996, the United States Congress established the National Gambling
Impact Study Commission (the "NGISC") to conduct a comprehensive study of the
social and economic effects of the gambling industry in the United States, to
review existing federal, state and local policy and practices with respect to
the legalization or prohibition of gambling activities, to formulate and
propose changes in such policies and practices and to recommend legislation and
administrative actions for such changes. The NGISC issued its report containing
its findings and conclusions, together with recommendations for legislation and
administrative actions, on June 18, 1999. Some of the recommendations issued by
the NGISC include:
. prohibiting Internet gambling which is not already authorized within the
United States or among parties in the United States and any foreign
jurisdiction;
. limiting the expansion of gambling through such mediums as account
wagering into homes;
. banning betting on collegiate and amateur athletic events where
currently legal; and
. refusing the introduction of casino-style gambling into pari-mutuel
facilities for the primary purpose of saving a pari-mutuel facility that
the market has determined no longer serves the community or for the
purpose of competing with other forms of gaming.
17
<PAGE>
The recommendations made by the NGISC could result in the enactment of new
laws and/or the adoption of new regulations which would materially adversely
impact the gambling industry in general and thus would materially adversely
affect our growth prospects. We are unable at this time to determine the
ultimate disposition of the NGISC's recommendations.
We face significant competition from operators of other racetracks and
other forms of gaming
We face significant competition in each of the jurisdictions in which we
have gaming operations and this competition is expected to intensify as new
gaming operators enter our markets and existing competitors expand their
operations and consolidate management of multiple racetracks. Several of our
competitors, including Churchill Downs Inc., have substantially greater name
recognition, management and financial resources. We also compete for customers
with other sports, entertainment and gaming operators, including such larger
competitors as MGM Grand Inc., which operates numerous casinos, as well as
state governments and native American groups. Competition in the gaming
industry is expected to increase due to limited opportunities for future growth
in new markets. If we lose customers for any reason, including the factors
discussed below, our financial condition or results of operations may be
materially adversely affected.
In addition, Florida tax laws currently discourage the three Miami-area
racetracks from scheduling concurrent races. We expect that a new tax structure
will eliminate this deterrent in 2001. As a result, Gulfstream Park racetrack
may face direct competition from other Miami-area racetracks in the future.
Such competition could have a material adverse effect on our financial
condition and results of operations.
State and provincial lotteries benefit from numerous distribution channels,
including supermarkets and convenience stores, as well as from frequent and
extensive advertising campaigns. We do not have the same access to the gaming
public or the advertising resources available to state and provincial
lotteries.
Declining on-track attendance and increasing competition in simulcasting
may adversely affect our financial results
There has been a general decline in the number of people attending and
wagering at live horse races at North American racetracks due to a number of
factors, including increased competition from other forms of gaming,
unwillingness of customers to travel a significant distance to racetracks, the
increasing availability of off-track wagering and other factors. The declining
attendance at live horse racing events has prompted racetracks to increasingly
rely on revenues from simulcasting and off-track wagering. The industry-wide
focus on simulcasting and off-track wagering has increased competition among
racetracks for outlets to simulcast their live races. A decline in consumer
interest in horse racing, a continued decrease in attendance and on-track
wagering or increased competition in the simulcast wagering market could have a
material adverse effect on our financial condition and results of operations.
We currently face significant competition from Internet and on-line
wagering
Although we currently do not operate any Internet or online gaming services,
we currently face significant competition from operators of those gaming
services. Internet and online gaming services allow their customers to wager on
a wide variety of sporting events from home. Unlike Internet and on-line gaming
operators, our business requires significant and on-going capital expenditures
in order to continue operations and in order to expand. We currently cannot
offer the diverse gaming options offered by Internet and on-line gaming
operators and face significantly greater costs in operating our business. Our
inability to compete successfully with these operators could materially
adversely affect our financial condition and results of operations.
Expansion of gaming conducted by California native American tribes may have
a material adverse effect on us
In November 1998, California voters passed Proposition 5, a ballot
initiative that would have allowed native American tribes to conduct various
gaming activities including pari-mutuel wagering, gambling, banked
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card games, and lotteries. On August 23, 1999, the California Supreme Court
overturned Proposition 5 on the basis that the initiative violated the state
constitution. The California state government recently reached agreements with
California native American tribes to permit a doubling of the number of gaming
machines currently operated by such tribes, as well as the introduction of slot
machines and poker and blackjack tables on California native reserves. The
governor of California, the state legislature and these native American tribes
will jointly sponsor a constitutional amendment which California voters will
vote on in March 2000. The expansion of gaming conducted by California native
American tribes may have a material adverse effect on our financial condition
and results of operations.
If a U.S. federal gaming tax is introduced, our financial results may be
adversely affected
From time to time, U.S. legislators have proposed the imposition of a U.S.
federal tax on gross gambling revenues. The imposition of any such tax could
have a material adverse effect on our financial condition and results of
operations.
Our profitability may be adversely affected if we are unable to integrate
recent racetrack acquisitions, which comprise all our horse racing
operations, and to complete and integrate future acquisitions
Our racetrack operations have been acquired very recently. The acquisition
of Santa Anita Park was completed in December 1998 and the acquisition of
Gulfstream Park was completed on September 1, 1999. We expect to complete the
acquisition of Remington Park and Thistledown Racetrack in November 1999. In
addition, we expect to complete the acquisition of Golden Gate Fields in
December 1999. These operations have been operating independently in the past
under different management. Integrating these recently acquired businesses into
our operations will require a significant dedication of management resources
and an expansion of our information systems. This dedication may distract us
from our day-to-day operations which could result in less efficient and more
costly operations as well as a failure of our management to focus on other
important issues.
We also plan to continue pursuing acquisition opportunities and we may issue
our Class A Subordinate Voting Stock as full or partial consideration in
connection with such acquisitions. Our future profitability will depend to some
degree upon the ability of our management to identify, complete and integrate
commercially viable acquisitions. We cannot give any assurance to you that we
will successfully complete and integrate any such acquisitions. Furthermore, to
the extent that we issue any shares of our Class A Subordinate Voting Stock in
connection with any such acquisitions, the percentage of our voting stock that
you own will decrease.
Some of our employees are unionized and one of the collective agreements
governing some of our employees is subject to renewal in 2000
As of September 30, 1999, we employed approximately 870 employees,
approximately 420 of whom are represented by a union. Our contract with the
Service Employees International Union, Local 280, which represents
approximately 400 pari-mutuel employees at Santa Anita Park during our racing
season, will expire on July 24, 2000 and union executives have notified
management that union demands will be significant due to changes in working
conditions resulting from full card simulcasting and the increased usage of
self-service terminals for placing wagers which has reduced staffing and union
dues. Although we expect that we will be able to negotiate a new union contract
with Local 280 through the collective bargaining process, we cannot guarantee
that we will be able to negotiate a satisfactory contract. If we are unable to
negotiate a satisfactory union contract, some of our employees may commence a
strike and any such strike, if commenced, may have a material adverse effect on
our financial condition and results of operations.
Our operating results may be impacted by inclement weather and may
fluctuate seasonally
We experience significant fluctuations in quarterly and annual operating
results due to seasonality and other factors. We have a limited number of live
racing days at our racetracks and the number of live racing days varies from
year to year. The number of live racing days we have directly affects our
operating results. A significant decrease in the number of live races could
have a material adverse effect on our financial condition
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and results of operations. Our live racing schedule also dictates that we will
earn a substantial portion of our net earnings in the first quarter of each
year which is when The Santa Anita Meet and the annual meet at Gulfstream Park
will occur as well as the fourth quarter of each year, which is when the Oak
Tree Meet and one of the two annual meets at Golden Gate Fields will occur.
Since horse racing is conducted outdoors, unfavorable weather conditions,
including excessive heat, coolness or rain, may cause races to be canceled or
may reduce attendance. Since a substantial portion of our gaming expenses are
fixed, the loss of scheduled racing days could have a material adverse effect
on our financial condition or results of operations.
Our primary horse racetrack assets are concentrated in California and are
subject to earthquake risks
After we acquire Golden Gate Fields, two of our primary assets, Santa Anita
Park and Golden Gate Fields, will be located in California and are therefore
subject to earthquake risks. Since the structures at our California racetracks
are low-rise buildings, the risk of earthquake damage is not considered to be
high and, as a result, we do not maintain earthquake insurance on such
structures. We currently maintain fire insurance for fire risks, including
those resulting from earthquakes, subject to certain policy limits and
deductibles. There can be no assurance that earthquakes or the fires often
caused by earthquakes will not seriously damage our California racetracks and
related properties or that the recoverable amount of insurance proceeds will be
sufficient to cover reconstruction costs and other losses suffered fully. If an
uninsured or underinsured loss occurs, we could lose anticipated income and
cash flows from our California racetracks.
Real Estate Ownership and Development Risks
Owning and developing real estate subjects us to a variety of risks
inherent in the industry
All real estate investments are subject to risks such as general economic
conditions (including the availability and cost of financing), local real
estate conditions (such as an over-supply of residential, office, retail space
or warehousing or a reduction in demand for real estate in the area),
governmental regulation (such as taxation of property and environmental
legislation) and the attractiveness of properties to potential purchasers or
tenants. Each segment of the real estate industry is capital intensive and
therefore sensitive to interest rates. Further significant expenditures,
including property taxes, mortgage payments, maintenance costs, insurance costs
and related charges, must be made throughout the period of ownership of real
property and during the period of making improvements to the property. Further,
governments can, under eminent domain laws, take real property. Such taking may
be for less compensation than the owner of the property believes it is worth.
We may not be able to sell some of our real estate when we need to or at
the price we want
At times, it may be difficult for us to dispose of certain types of real
estate. The costs of holding real estate are high and, during a recession, we
may be faced with ongoing expenditures with little prospect of earning revenue
on our real estate properties. If we have inadequate cash reserves, we may have
to dispose of properties at prices which are substantially below the price we
desire, and in some cases, below the price we originally paid for the
properties.
We require government approvals for some of our properties which may take a
long time to obtain or which may not be granted
Some of our properties will require zoning and other approvals from local
government agencies. For example, our applications for re-zoning land in
Aurora, Canada and Ebreichsdorf, Austria are currently being considered. The
process of obtaining such approvals may take many months and there can be no
assurance that we will obtain the necessary approvals for either of those lands
or any other lands. Holding costs accrue while regulatory approvals are being
sought and delays can render a project economically unfeasible. Furthermore, in
the case of the land held by us in Aurora, Canada, the transfer of such land to
us is conditional on obtaining certain severance and zoning approvals. We
cannot give any assurance that we will obtain such approvals and thus we cannot
give any assurance that we will ultimately acquire such land.
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We may not be able to complete expansion projects successfully
We intend to develop our racetracks further and possibly expand our other
gaming properties. Numerous factors, including regulatory and financial
constraints, could cause us to alter, delay or abandon our existing plans. If
we proceed to develop new facilities or enhance our existing facilities, we
face numerous risks that could require substantial changes to our plans,
including time frames or projected budgets. These risks include the inability
to secure all required permits and the failure to resolve potential land use
issues, as well as risks typically associated with any construction project,
including possible shortages of materials or skilled labor, unforseen
engineering or environmental problems, delays and work stoppages, weather
interference and unanticipated cost overruns. For example, Santa Anita Park
recently completed upgrades to its facilities and is considering more upgrades
in the future. See "Business of the Company--Horse Racing and Pari-Mutuel
Wagering--Santa Anita Park". The disruption caused by these upgrades has
reduced the amount of wagering at Santa Anita Park's simulcast wagering
facilities and attendance at the 1999 Oak Tree Meet. Even if completed, our
expansion projects may not be successful, which could have a material adverse
effect on our financial condition and results of operations.
We face strict environmental regulation and may be subject to liability for
environmental damage that we did not cause
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 certain
hazardous materials released or deposited on or in properties now or previously
owned or managed by us or disposed of in other locations. Our ability to sell
properties with contamination or hazardous or toxic substances or borrow using
such property as collateral may also be adversely affected. We cannot give you
any assurance that all circumstances giving rise to exposure under
environmental laws are currently known to us. Changes to environmental laws and
regulations, resulting in more stringent terms of compliance, could have a
material adverse impact on our results of operations and financial condition.
Year 2000 Readiness
The year 2000 issue could affect our operations and financial results
Certain computer software and microprocessors use two digits rather than
four digits to identify years and therefore may recognize a date using "00" as
the year 1900 rather than the year 2000 (the "year 2000 issue"). There can be
no assurance that we will be "year 2000 ready" or that any parties dealing with
us will be year 2000 ready. If we or such third parties are not year 2000
ready, we may incur significant costs associated with rectifying any problems
and responding to any litigation which may be brought against us.
Our business operations depend on the year 2000 readiness of outside
parties, including our simulcast customers and infrastructure suppliers. Our
pari-mutuel operations rely upon software systems provided by outside
suppliers. We have no alternative system to handle pari-mutuel wagering if
these systems fail. Our simulcast operations and in-home wagering systems
depend upon telecommunication service providers. Totalizator services involve
the calculation of the amount wagered on each race, as well as the payouts to
racetrack operators, state governments and winning patrons. The failure of our
pari-mutuel wagering technology, simulcast technology, in-home wagering systems
and totalizator services and other systems, which we did not design, to be year
2000 ready may significantly disrupt or even shut down our operations.
We have reviewed our business systems, including those of certain of our
customers, and are asking our customers and suppliers about their progress in
identifying and addressing problems that their computer systems may face in
correctly interrelating and processing date information as the year 2000
approaches and is reached. However, we can give no assurance that we will
identify all such year 2000 problems in our computer systems or those of our
customers and suppliers in advance of their occurrence or that we will be able
to successfully remedy any problems that are discovered. Our expenses in
identifying and addressing such problems, or the expenses or liabilities to
which we may become subject as a result of such problems may be significant.
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THE SPECIAL DIVIDEND
Background and Reasons for the Special Dividend
The board of directors and management of our parent company, Magna, have
determined that it is in the best interests of its shareholders to separate our
non-automotive assets and operations from Magna's automotive assets and
operations by distributing approximately 20% of our current equity in the form
of shares of our Class A Subordinate Voting Stock to Magna's shareholders by
way of a special dividend. Magna has advised us that, in reaching its decision,
its board of directors and management considered a number of factors, including
that:
. the separation will permit Magna to focus on its core automotive
business;
. the separation will permit investors to choose whether to invest in the
automotive industry by retaining or purchasing Magna shares, invest in
the sports gaming industry by retaining or purchasing our stock, or
both;
. establishing our business as a separately traded public company will
enable us to respond better to the opportunities and challenges of the
sports gaming industry;
. in light of Magna's commitment to its shareholders not to make any
further debt or equity investment in us or any of our subsidiaries for a
period of seven years ending May 31, 2006, establishing our business as
a separately traded public company will facilitate future access to
capital and will allow us to acquire further racetracks through the
issuance of our publicly-traded stock; and
. as a public company, we will be better able to develop profit-based
compensation programs for our management and employees.
Description of the Special Dividend
Magna publicly indicated to its shareholders that it would distribute a
portion of our stock to its shareholders. Magna intends to declare on or about
. to holders of Magna's Class A Subordinate Voting Shares and Class B Shares
of record on . , a special dividend payable in our Class A Subordinate Voting
Stock, on the basis of one fifth of one share of our Class A Subordinate Voting
Stock for each Magna Class A Subordinate Voting Share or Magna Class B Share
held. Magna expects to distribute approximately 15.7 million shares of our
Class A Subordinate Voting Stock representing approximately 20% of our current
equity. Magna will concurrently distribute to those holders its regular
quarterly cash dividend of $ . per share of Magna.
As part of the distribution, we will be adopting a book-entry stock transfer
and registration system for our Class A Subordinate Voting Stock. Magna's
distribution agent will credit the shares of our stock distributed on the
distribution date to book-entry accounts established for all record holders of
our Class A Subordinate Voting Stock. Following the distribution, the
distribution agent will mail an account statement to each such holder stating
the number of shares of our Class A Subordinate Voting Stock distributed to
that holder in the distribution. After the distribution, registered holders of
our Class A Subordinate Voting Stock may request a transfer of their stock to a
brokerage or other account or physical stock certificates for their stock,
which will no longer be maintained in a book-entry account.
If you hold your Magna Class A Subordinate Voting Shares or Class B Shares
through a stockbroker, bank or other nominee, the distribution agent will
transfer our Class A Subordinate Voting Stock to the registered holders of
record whom we expect will make arrangements to credit your account with shares
of our Class A Subordinate Voting Stock. Magna anticipates that stockbrokers
and banks generally will credit their customers' accounts with shares of our
Class A Subordinate Voting Stock on the distribution date.
If you own a number of Magna Class A Subordinate Voting Shares or Magna
Class B Shares not evenly divisible by five, and therefore are entitled to
receive less than one whole share of our Class A Subordinate Voting Stock, you
will receive cash instead of your fractional share of our Class A Subordinate
Voting Stock in addition to any whole shares of Class A Subordinate Voting
Stock you may be entitled to receive. If you
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request a physical certificate after the distribution for your shares of our
Class A Subordinate Voting Stock, you will receive physical certificates for
all whole shares of our Class A Subordinate Voting Stock and cash for any
fractional share interest.
The distribution agent will aggregate the fractional shares to be cashed out
into whole shares and sell them in the open market at then prevailing prices on
behalf of those registered holders who will receive instead a cash payment in
the amount of their pro rata share of the total proceeds of those sales, less
any brokerage commissions. The distribution agent will pay the net proceeds
from sales of fractional shares based upon the average selling price per share
of our Class A Subordinate Voting Stock of all of those sales, less any
brokerage commissions. None of Magna, the distribution agent or us will
guarantee any minimum sale price for those fractional shares of our Class A
Subordinate Voting Stock, and no interest will be paid on the proceeds of those
shares.
Withholding Tax Liability of Non-Residents of Canada
A non-resident of Canada, for purposes of the Income Tax Act (Canada), will
be subject to Canadian withholding tax on the fair market value of the Class A
Subordinate Voting Stock at the time of distribution. (See "Certain Income Tax
Considerations--Certain Canadian Federal Income Tax Considerations"). In order
to satisfy this withholding tax liability, Magna will withhold from non-
residents of Canada the appropriate amount of the Magna quarterly cash dividend
otherwise payable which it intends to pay concurrently with the special
dividend.
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BUSINESS OF THE COMPANY
We acquire, develop and operate horse racetracks and related pari-mutuel
wagering operations. As a complement to our horse racing business, we are
exploring the development of media sports wagering operations, including
telephone account, interactive television and Internet-based wagering, as well
as certain leisure and real estate projects on the excess land around certain
of our racetracks, possibly in conjunction with business partners and subject
to regulatory requirements. In addition, we own a real estate portfolio which
includes a "gated" residential project under development, one operational golf
course and related recreational facilities, one golf course under development
and other real estate. We are currently considering a variety of options with
respect to our golf courses, including direct operation or leasing to third
party operators, as well as sale and leaseback transactions (which would
require that Magna not exercise its right of first refusal) or outright sales.
We intend gradually to sell the balance of our real estate portfolio in order
to provide capital to be used in our business; accordingly, we will take steps
such as servicing our land and obtaining zoning approval to enhance the value
of such properties and increase the revenues from resale. A brief description
of our horse racing business and real estate portfolio follows. In addition,
please refer to the Pro Forma Consolidated Financial Statements and
Consolidated Financial Statements, and the notes thereto, found below in this
Information Statement.
Pari-mutuel wagering on horse racing is pooled betting in which individuals
bet against each other as to what the outcome of a horse race will be. The
racetrack operator has no interest in the order of finish in any given race and
therefore has no risk in the outcome. A percentage of the pooled wagers is
retained by the operator of the wagering facility, a portion is paid to the
regulatory or taxing authorities and a portion is paid to the racetrack's
horsemen in the form of "purses" which encourage owners and trainers to enter
their horses in that track's live races. The balance of the pooled wagers is
paid to bettors as winnings. Pari-mutuel wagering on horse racing occurs at
horse racetracks on the races being conducted there as well as at those
racetracks on televised racing signals ("simulcasts") received or "imported" by
the simulcast wagering facilities located at the tracks (collectively, "on-
track wagering"). Pari-mutuel wagering on horse racing also occurs at wagering
establishments on horse races being conducted at tracks elsewhere ("off-track
wagering"). Horse racetracks generally have simulcast wagering facilities to
complement their live horse racing by enabling their patrons to wager on horse
races being held at other racetracks when there is no live racing occurring at
their tracks.
Horse Racing and Pari-Mutuel Wagering
We operate two horse racetracks and have entered into definitive agreements
to acquire a further three racetracks. Each of these racetracks includes a
facility that accepts wagers on races conducted at other racetracks, the live
television signals (or "simulcasts") of which are shown at our facilities. We
also broadcast, or "export", simulcasts of our races to a number of locations
across the United States, Canada, Mexico, the Caribbean region and Australia.
Our horse racing and related wagering operations include Santa Anita Park near
Los Angeles, California and Gulfstream Park near Miami, Florida. We also own
San Luis Rey Downs, a horse training track located outside of San Diego,
California. We have acquired all these racetracks since December 1998. In
addition, we have agreed to acquire the stock of the companies that own
Thistledown Racetrack near Cleveland, Ohio and Remington Park in Oklahoma City,
Oklahoma and we expect to complete these acquisitions in November 1999. We have
also entered into a definitive agreement to buy the stock of the companies
which own and operate Golden Gate Fields racetrack near San Francisco,
California, subject to obtaining the necessary regulatory and other approvals.
We expect to complete this acquisition in December 1999.
We own and operate some of the premier horse racing facilities in North
America and one of the horse racing industry's best simulcast products. For
example, Santa Anita Park has hosted the Breeder's Cup Championship twice since
the inception of the Breeder's Cup in 1984 and Gulfstream Park has hosted it
three times, the most recent being on November 6, 1999. Furthermore, by many
standard industry measures such as
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total "handle" (or total amount wagered), average daily attendance, average
daily handle, average daily on-track handle and average daily off-track handle,
we believe that Santa Anita Park and Gulfstream Park are two of the top ten
racetracks in North America. If the acquisition of Golden Gate Fields is
completed, we believe that we will own and operate three of the top ten
racetracks in North America in terms of total handle.
Santa Anita Park
Santa Anita Park is one of the premier horse racetracks in North America.
Santa Anita Park was the site of the Breeder's Cup Championship in both 1986
and 1993. Santa Anita Park is situated on approximately 300 acres of land,
located in the City of Arcadia, California, approximately 14 miles northeast of
Los Angeles. Over 10 million people are located within a 30 mile radius of
Santa Anita Park, providing us with one of North America's largest target
populations for live and simulcast horse racing. Santa Anita Park was opened
for thoroughbred horse racing in 1934 and The Santa Anita Meet has been held at
Santa Anita Park each year since its founding, except for three years during
World War II. The Santa Anita Meet runs through the prime winter racing season,
commencing December 26 and running into late April each year. In addition, we
lease Santa Anita Park to Oak Tree Racing Association which hosts The Oak Tree
Meet from the end of September through early November of each year. As a
result, Santa Anita Park has one of the longest racing schedules of the top
North American tracks, totaling approximately 115 days each year. There are
generally eight races scheduled per live racing day during the week and nine or
ten races per live racing day on the weekends. Santa Anita Park's average daily
attendance in 1998 was approximately 12,000 patrons per live racing day,
representing one of the highest average daily attendance figures of all North
American racetracks during that year.
Santa Anita Park had one of the highest total handles of all North American
racetracks in 1998, generating approximately $1.1 billion in wagers in such
year. In addition, Santa Anita Park's simulcast program generates significant
demand from other racetracks and off-track wagering establishments, generating
an average of approximately $7 million in off-track handle during each racing
day in 1998. Santa Anita Park exports its simulcast signal to approximately
1,000 off-track wagering facilities in 23 countries, including the United
States, Canada and Mexico. During periods in which there is no live racing,
Santa Anita Park operates as an off-track wagering facility where customers can
attend and wager on races via television from other California racetracks as
well as two racing programs from either New York, Florida, Kentucky or New
Orleans.
Santa Anita Park's facilities currently include a large art deco style
grandstand structure with seating for approximately 19,000 patrons as well as
standing room for additional patrons, a one-mile oval dirt track as well as a
natural turf course, stalls for approximately 2,000 horses and parking
facilities sufficient to accommodate approximately 20,000 cars. The grandstand
facilities include a clubhouse, a general admission area, and food and beverage
facilities, which range from fast food stands to restaurants, both at outdoor
terrace tables and indoor dining areas. The grounds surrounding the grandstand
are extensively landscaped and contain a European-style paddock and infield
accommodations, including picnic facilities for special groups and the general
public.
In September 1999, we completed an extensive capital renovation program at
Santa Anita Park in order to enhance our patrons' entertainment experience. The
improvements to Santa Anita Park include: the construction of a fully enclosed
750 seat restaurant and bar that will be used for racing and group functions
throughout the year; the installation of a large format light emitting diode
(LED) screen in the infield track area for racing patrons and for use by the
restaurant and bar to promote non-racing events, such as the Super Bowl, the
World Cup and other similar events; improvements to the Winners' Circle and
trackside apron to provide patrons with better views of the track; upgrades to
the grandstand to current seismic code requirements; completion of fire safety
installations as required by the Fire Marshall; and the initiation of
improvements to the entrance way and parking lot of the racetrack. These
renovations cost approximately $40 million. We are also considering a number of
other upgrades to further strengthen Santa Anita Park's ability to attract top
horses, trainers and jockeys, and to enable us to expand the market for Santa
Anita Park's simulcast signal.
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We are also currently considering a variety of themed entertainment and
retail-based development proposals for approximately 85 acres of available land
at Santa Anita Park, some of which could be developed in conjunction with
business partners. Such development would be intended to further enhance the
total entertainment experience at Santa Anita, attract new patrons from diverse
demographic backgrounds and strengthen the loyalty of existing patrons. These
proposals are only in their preliminary stages, as any development of this
nature would require the preparation of detailed feasibility studies and
business plans and extensive consideration by our management of all relevant
issues. If any proposal turns out to be commercially viable after such a
detailed review, additional time would be required to obtain the necessary
regulatory approvals, negotiate with potential business partners and obtain the
necessary project financing.
Gulfstream Park
Gulfstream Park is also one of the premier horse racing and pari-mutuel
wagering facilities in North America. Gulfstream Park is located on
approximately 255 acres of land in the cities of Hallandale and Aventura,
between Miami and Ft. Lauderdale in Florida. The Miami/Ft. Lauderdale area is
home to approximately 3.3 million people, thus providing Gulfstream Park with a
sizeable target market for live racing and off-track wagering. Gulfstream Park
first opened in February 1939 and has operated each year since with the
exception of the four years from 1940 to 1943. The annual meet at Gulfstream
Park lasts for approximately 63 days each year and is held between early
January and mid-March in each year. In addition, the Breeders' Cup Championship
has been held at Gulfstream Park three times--in 1989 and 1992, and most
recently on November 6, 1999. There are generally eleven races scheduled on
each racing day during the week and 11 or 12 races scheduled on each racing day
during the weekend. In 1998, Gulfstream Park's average daily attendance was
approximately 8,400 patrons per live racing day.
Gulfstream Park ranked as one of the five highest North American racetracks
in average daily off-track handle in 1998, generating an average daily off-
track handle of approximately $8.4 million in off-track wagers during each live
racing day in 1998. Gulfstream Park also had one of the highest total handles
of all North American racetracks in 1998, generating approximately $660 million
in wagers in that year. Gulfstream Park exports its simulcast program to
approximately 11 million people at approximately 800 off-track wagering
facilities in the United States, Canada, the Caribbean region and Mexico. Total
weekly viewership of Gulfstream Park's major racing events, including through
cable shows and satellite feeds, is estimated by us to be approximately 55
million.
Gulfstream Park's facilities currently include a grandstand with seating for
approximately 14,500 patrons, a clubhouse with seating for an additional 5,800
patrons, a one-mile main track, a seven-eighths mile turf track, stalls for
approximately 1,450 horses and parking for approximately 14,000 cars. The
grandstand consists of three levels of seating, a rooftop restaurant, casual
restaurants, snack bars and liquor bars. There are also three gourmet dining
rooms in the clubhouse. Gulfstream Park includes approximately 50 acres of land
which we are considering developing.
San Luis Rey Downs
We own San Luis Rey Downs, a horse boarding and training center located on
approximately 200 acres of land outside of San Diego, California. Due to its
proximity to Santa Anita Park, San Luis Rey Downs supplements Santa Anita
Park's facilities by providing thoroughbred stabling and training facilities
which we believe will enable us to continue to attract some of the top horses
in North America. San Luis Rey Downs can also provide overflow capacity for
horses at Santa Anita Park in the event of any renovation of Santa Anita Park's
barns, thereby ensuring minimal disruption to our live racing events at Santa
Anita Park.
Thistledown Racetrack Acquisition
We have entered into a stock purchase agreement as of October 21, 1999 to
acquire from The Edward J. DeBartolo Corporation the issued and outstanding
stock of Thistledown, Inc. for a purchase price of
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$14 million. Of this amount, $9.5 million will be paid in cash and $4.5 million
will be paid through the issuance of 650,695 shares of our Class A Subordinate
Voting Stock. We expect to complete this acquisition in November 1999.
Thistledown Racetrack is located on approximately 125 acres in North
Randall, Ohio, 10 miles southeast of downtown Cleveland. Thistledown has one of
the longest racing seasons of all North American racetracks, consisting of 187
racing days each year between mid-March and early December, encompassing the
Summit, Thistledown, Randall and Cranwood meets. In 1998, Thistledown generated
a total handle of approximately $230 million. Simulcasts from Thistledown are
exported to approximately 45 other racetracks in the United States and one race
each year is simulcast to Canada. Annually, Thistledown hosts the Ohio Derby,
which is the premier graded stakes race in Ohio and is one of the top three-
year old horse races in the United States. Prior to our acquisition of
Thistledown Racetrack, the simulcast product from Thistledown had not been
given the exposure necessary in order to generate growth in Thistledown's
attendance and handle. We intend to package the signal from Thistledown with
the signals from our other racetracks and market this "bundled" package under
our own brand name. We expect that this will result in an increase in the
number of off-track sites Thistledown's racing signal is exported to and strong
growth in Thistledown's handle, especially as we expand our distribution
channels, and that it will also enhance the quality of horse racing offered at
Thistledown. Thistledown's facilities include a grandstand with seating for
approximately 5,000 patrons, a luxury suite for corporate and group events, a
one-mile oval track, stalls for approximately 1,500 horses and parking for
approximately 2,000 cars. Thistledown also owns the rights to an additional 57
racing days plus a further 30 winter racing days which it uses entirely to host
simulcasting at other Ohio racetracks in exchange for a percentage of the
handle on such races.
Remington Park Racetrack Acquisition
We have entered into a stock purchase agreement as of October 21, 1999 to
acquire from Oklahoma Racing LLC the issued and outstanding stock of Remington
Park, Inc. for a purchase price of $10 million, all of which will be paid in
cash. We expect to complete this acquisition in November 1999.
Remington Park racetrack is situated on approximately 370 acres in Oklahoma
City, Oklahoma. Remington Park offers a total of 122 live racing days during
each year. The racing schedule consists of two meets, including a 40-day
Quarter Horse meet from April to mid-June and an 82-day thoroughbred meet
running four or five days per week, from August to December. In 1998, Remington
Park generated a total handle of approximately $178 million. Simulcasts from
Remington Park are exported to approximately 35 other racetracks in the United
States. As with Thistledown Racetrack, the simulcast product from Remington
Park has not been given the exposure necessary to generate growth in Remington
Park's attendance and handle. We expect that through bundling of Remington
Park's signal with the signals from our other racetracks, we will be able to
increase the number of off-track sites Remington Park's racing signal is
exported to and Remington Park's handle, especially as we expand our
distribution channels, and enhance the quality of horse racing offered at
Remington Park. Remington Park's facilities include a grandstand with seating
for approximately 25,000 patrons, 21 luxury suites for corporate and group
events, a one-mile dirt track, a seven-eighths mile turf course, stalls for
approximately 1,300 horses and parking facilities sufficient to accommodate
approximately 8,000 cars. The property on which Remington Park is located is
leased from Oklahoma Zoological Trust under a lease which extends through 2013,
with options to renew for five 10-year periods.
Golden Gate Fields Acquisition
We have entered into a stock purchase agreement dated as of November 5, 1999
to acquire from Ladbroke Racing Corporation all the issued and outstanding
stock of Ladbroke Land Holdings Inc. and Pacific Racing Association Inc. These
companies collectively own and operate Golden Gate Fields racetrack. The
purchase price for the stock of these companies is $87 million, of which $60
million is payable in cash, $7 million is payable through the issuance of
1,012,195 shares of our Class A Subordinate Voting Stock and $20 million is
payable by way of an interest-free promissory note, $10 million of which
matures on the first anniversary of the
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date of closing and $5 million of which matures on each of the second and third
anniversaries. The completion of this acquisition is subject to a number of
conditions, including obtaining all necessary regulatory approvals such as
antitrust approvals from the United States Federal Trade Commission and United
States Department of Justice and state licensing approvals from the California
Horse Racing Board and Nevada Gaming Commission. We expect to complete this
acquisition in December 1999.
Golden Gate Fields racetrack is one of the premier horse racing and pari-
mutuel wagering facilities in North America in terms of total handle. During
1998, Golden Gates Fields generated revenues of $25.7 million. Golden Gate
Fields is located on approximately 181 acres of land in the Cities of Albany
and Berkeley, California, approximately 8 miles from downtown Oakland and
approximately 11 miles from San Francisco. Golden Gate's racing season consists
of two meets, one of which runs for 60 days from late March to mid-June each
year and the other of which runs for approximately 45 days from mid-November of
each year to mid-January of the following year. This racing schedule
complements Santa Anita Park's racing schedule by adding racing days between
the end of The Oak Tree Meet and the beginning of The Santa Anita Meet. Golden
Gate Fields had one of the ten highest total handles of all North American
racetracks in 1998, generating approximately $610 million in wagers in 1998.
Golden Gate Fields' simulcast program also generates strong demand from other
racetracks and off-track wagering facilities, generating approximately $360
million in off-track handle in 1998. Golden Gate Fields exports its simulcast
program to approximately 559 sites in the United States, Canada, Mexico,
Jamaica and Panama. In addition, we expect to commence exporting Golden Gate
Fields' simulcast program to Australia and the Dominican Republic shortly. Over
2.5 million people are located within a 30 mile radius of Golden Gate Fields,
thus providing a large target market for live and simulcast horse racing.
Golden Gate Fields' facilities currently consist of a one-mile main track
and a nine-tenths mile turf course, stalls for over 1,400 horses, a main
grandstand with seating for approximately 8,000 patrons, a clubhouse with
seating for approximately 5,250 patrons and a turf club with seating for
approximately 1,500 patrons and parking for over 8,500 cars. Golden Gate Fields
also has over 700 closed-circuit television monitors to show races, odds,
probable payoffs, results and the previous day's races.
Media Sports Wagering
Media sports wagering is a term used to refer to sports wagering conducted
through a variety of different media, including telephone account, interactive
television and Internet-based wagering. We are currently exploring expansion
into each of these areas, possibly in conjunction with business partners and
subject to regulatory approvals (see "Risk Factors--Gaming risks--Our gaming
activities are extensively regulated and this could adversely affect our growth
prospects"), in order to expand the market for our simulcast horse racing
product. In the future, we may build on the experience we develop in horse
racing by expanding our operations to include sports wagering on other sports
as well.
Telephone Account Wagering
We are currently considering the establishment of a telephone account
wagering operation, possibly in conjunction with business partners and subject
to regulatory approval. Once established, such a system would involve patrons
opening an account with our strategic partner and depositing funds into this
account through the use of debit or credit cards. Patrons would then place
wagers over the telephone on horse races offered at our racetracks and on horse
races simulcast by other racetracks to our simulcast wagering facilities.
Wagers placed by patrons could not exceed the amounts on deposit in their
accounts and winnings would be credited to patrons' accounts and would be
available for future wagers. We would derive revenues from our share of the
wagers placed as well as fees charged to patrons for the service.
We expect that telephone account wagering will make wagering on horse racing
more convenient for our patrons and expand the market for our simulcast product
by enabling us to fully utilize an important distribution channel for our horse
racing product. A telephone account operator must be licensed and a
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telephone account wagering "hub" or base must be established in any one of
eight states in which telephone account wagering is permitted (Connecticut,
Kentucky, Maryland, Nevada, New York, Ohio, Oregon and Pennsylvania). Once an
operator has obtained the required licenses and established a hub, the operator
may accept wagers from patrons living in such eight states and in other states.
Internet and Interactive Television-Based Wagering
We are exploring the potential of Internet and interactive television-based
wagering on horse racing and possibly other sporting events, possibly in
conjunction with business partners and subject to regulatory approval.
Interactive television-based wagering involves the transmission of horse
racing-related television programming through cable or satellite delivery into
the homes of subscribers. These subscribers are able to use interactive "real-
time" television-based technology, generally through a remote controlled set-
top box, to wager on the live horse races being shown in the program. In order
to place wagers, patrons must deposit money with the sponsoring racetrack
through the use of debit or credit cards. We would derive revenue from our
patrons' subscriptions and our share of the wagers placed on the races
broadcast.
Interactive television-based wagering would allow us to increase the market
for our simulcast product by utilizing an important distribution channel for
this product. We currently have the non-exclusive right to broadcast races from
Santa Anita Park, although races from Gulfstream Park are subject to an
exclusive contract with a third party until 2003. Commencing in 2003, we will
have the exclusive right to broadcast races from both Santa Anita Park and
Gulfstream Park, two of the most sought-after racing signals in North America.
Interactive television-based wagering would significantly enhance our ability
to cross promote our live horse racing and we expect it would enable us to
attract new patrons to horse racing and cultivate their loyalty. We would aim
to show full racing cards and to develop an appealing, convenient and easy-to-
use format which would provide a fresh new look for horse racing. Furthermore,
we would aim to broadcast the programming we develop for interactive
television-based wagering through a variety of sources, including satellite
television, cable television and the Internet. As our operations expand, we
would apply the experience we gain in interactive television-based wagering on
horse races in expanding to wagering in other sports.
Due to the growth of the Internet as a medium of both communication and
commerce, we are exploring the possibility of establishing an Internet-based
gaming service, possibly in conjunction with a strategic partner and subject to
regulatory approval. Establishing such a service would enable us to increase
the market for our simulcast product by maximizing the opportunities presented
by the Internet as a distribution channel for our live horse racing product. It
would also enable us to achieve economies of scale since the programming we
would aim to broadcast on the Internet would be the same as that produced for
our interactive television-based wagering. As with interactive television-based
wagering, we would expect to develop a competitive position on the strength of
our live horse racing product and we would expect this competitive position to
strengthen by 2003 when we will have the exclusive right to broadcast races
from both Santa Anita Park and Gulfstream Park. As our operations expand, we
would likely be able to apply the experience we gain in Internet-based wagering
on horse races to other sports.
Real Estate Portfolio
We currently own a portfolio of real estate properties in North America and
Europe, including a "gated" residential community currently under development,
one operational golf course and related recreational facilities, a golf course
under development and other real estate. We intend gradually to sell the
balance of our real estate portfolio in order to provide capital to be used in
our horse racing business; accordingly, we will take steps such as servicing
such land and obtaining zoning approval to enhance the value of such properties
and increase the revenues from resale.
Our real estate portfolio includes land currently being developed in Austria
and undeveloped and partially developed land in both Austria and Canada. We are
currently developing a gated residential community, known as Fontana, situated
amidst the Fontana Sports golf course and related recreational facilities owned
and
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operated by us. This residential development consists of approximately 50
acres and is located in Oberwaltersdorf, Austria, approximately 15 miles south
of Vienna. The Fontana residential development is being developed in two
phases into a luxury residential community consisting of 250 apartment units
and 100 single family homes. We expect to complete the second phase of the
Fontana residential project by 2006. We also own approximately 1,000 acres of
undeveloped land in Ebreichsdorf, Austria located approximately 15 miles south
of Vienna which includes a golf course leased to a third party. In addition,
our real estate portfolio includes approximately 270 acres of mixed-use land
adjacent to the existing headquarters of Magna in Aurora, Canada,
approximately 30 miles north of Toronto. Part of the Aurora property could be
sold to a developer of a gated residential golf course community, while other
parts could be sold to developers of retail, office, commercial, light
industrial and other developments. We are currently servicing, improving and
seeking zoning for some of these properties in order to enhance their value on
resale.
Our real estate portfolio also includes two golf courses, Fontana Sports
which is in operation and located in Oberwaltersdorf, Austria and Aurora Downs
which is being completed in Aurora, Canada. Fontana Sports is a semi-private
sports facility adjacent to the Fontana residential community. The Fontana
Sports facility includes an 18-hole golf course, tennis club, fitness facility
and a restaurant. Aurora Downs is a private 18-hole golf course under
development and is adjacent to the lands we own in Aurora, Canada. Doug
Carrick, one of Canada's leading golf course architects, designed both Fontana
Sports and Aurora Downs. We expect that Aurora Downs will officially open in
May 2001. We expect that amenities will include a clubhouse with a restaurant,
a members' lounge, a spa and a pro shop. Our parent company, Magna, is
currently paying us an annual access fee pursuant to an arrangement effective
as of March 1, 1999 to access the Fontana Sports facility for Magna-sponsored
corporate and charitable events as well as for business development purposes.
Upon completion of Aurora Downs, Magna will pay us an annual access fee to use
Aurora Downs for Magna-sponsored corporate and charitable events and business
development purposes. These access arrangements are scheduled to expire five
years after their effective dates. We have also granted Magna a right of first
refusal to purchase these golf courses, if we decide to sell them. We are
currently considering a variety of options with respect to our golf courses,
including direct operation or leasing to third party operators, as well as
sale and leaseback transactions (which would require that Magna not exercise
its right of first refusal) or outright sales. See "Certain Relationships and
Related Transactions".
We also hold some of the land adjacent and in close proximity to both of
the above described golf courses and we expect that the ultimate resale value
of such adjacent and proximate lands will be significantly enhanced through
the presence of these golf courses.
Finally, we own a portfolio of other real estate in Austria, Canada and the
United States. We are currently servicing, improving and seeking zoning for
some of these properties in order to enhance their value on resale. We intend
to dispose of these properties gradually as market conditions permit.
For financial information on our operating segments see Note 9 to the
Consolidated Financial Statements.
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CORPORATE STRATEGY
There are four related components of our corporate strategy: (1) continuing
our consolidation of racetracks and enhancing the facilities at some of these
racetracks; (2) "bundling", or combining, our simulcast horse racing products
and marketing the signal under our own brand name; (3) leveraging our
competitive position in the horse racing industry and, ultimately, our brand
name, in expanding our distribution channels and range of sports wagering
products; and (4) developing total entertainment destinations centered on some
of our racetracks.
1.Continue our consolidation and enhancement of racetracks
Through our acquisitions of Santa Anita Park and Gulfstream Park and the
acquisitions of Thistledown Racetrack, Remington Park, and Golden Gate Fields
currently in progress, we have become one of the leading consolidators of
premier horse racetracks in North America. Being an industry consolidator means
that we have acquired multiple racetracks with the objective of maximizing
administrative and cost efficiencies at those tracks. We expect to acquire
other high-quality, geographically diverse racetracks which would increase the
number of racing days we offer, distribute the races we offer over more days in
each year, expand our simulcasting content and enhance the value of our
simulcast product. Through our ownership of multiple racetracks, we expect that
we will be able to achieve cost efficiencies in administration, purchasing and
other areas, which will have a positive impact on our financial condition and
results of operations. In addition, we expect to be able to offer advertisers
and sponsors higher value advertising and cross-promotional marketing
opportunities, signage rights at our racetracks, and ultimately, "virtual
signage" advertising opportunities through interactive television and Internet
distribution channels.
In addition, we have made certain enhancements to the facilities at some of
our racetracks and are examining further upgrades at some of our racetracks
which are intended to increase live attendance, strengthen our ability to
consistently attract some of the top horses, trainers and jockeys in North
America, increase the market for our simulcast product, improve racing
conditions and help to generate additional revenues per visitor. For example,
we recently completed a significant renovation at Santa Anita Park.
2.Bundling our simulcast horse racing products and marketing the signal under
our own brand name
As a result of our racetrack consolidation strategy, we believe that we
offer one of horse racing's leading simulcast products and we expect our
position to strengthen further through future acquisitions. Our annual racing
schedule currently consists of 126 race days broadcast from two of the top ten
U.S. racetracks, in terms of total handle. The acquisition of Thistledown
Racetrack, Remington Park and Golden Gate Fields will increase the number of
race days we broadcast during our annual racing schedule and will provide us
with another leading racetrack in North America in terms of total handle. Over
the next few years, we intend to "bundle", or combine, the signals from our
racetracks, and possibly also signals from racetracks not owned by us, and
market this bundled simulcast product through a single signal marketed under
our own brand name. This bundling would offer off-track wagering facilities
importing our signal greater convenience and lower operating costs and would
offer our wagering patrons more convenient access to our complete simulcast
product. We expect that bundling would also increase the exposure of, and the
handle at, our smaller racetracks, thereby increasing the revenues available to
us to further enhance the quality of the horse racing we offer at such tracks
through more attractive purses and enhanced facilities.
Bundling would also enhance our identity as an owner of some of the premier
horse racetracks in North America and a provider of one of the industry's
leading simulcast products. This branding would also enable us to cultivate a
loyal customer base for both our live racing and simulcast product.
3. Leveraging our competitive position in the horse racing industry and our
brand name in expanding our distribution channels and range of sports
wagering products
We intend to leverage our competitive position in the horse racing industry
and build on the brand name recognition we expect to develop, in order to
expand the distribution channels for our simulcast product and,
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ultimately, diversify the sports wagering products we offer, possibly in
conjunction with business partners and subject to regulatory requirements. As
part of our strategy, we intend to increase the market for our existing
simulcast product by establishing telephone account, interactive television and
Internet-based wagering operations as distribution channels for our simulcast
product. We also intend to explore the expansion of our sports wagering
products to sports other than horse racing, both in North America and in
Europe, through various distribution channels, including telephone account,
interactive television and Internet-based wagering, subject to regulatory
requirements. If we pursue such expansion, we expect that we would be able to
cross-sell new sports wagering products to our existing patrons. We expect that
our branding strategy would create merchandising, licensing and marketing
opportunities that would contribute to our revenues. More importantly, we
expect that our strategy would reinforce our ability to offer advertisers and
sponsors higher value advertising, marketing and signage opportunities.
4.Developing total entertainment destinations centered on some of our horse
racetracks
We are considering developing leisure and retail-based real estate
development projects on the excess land around some of our racetracks, possibly
in conjunction with business partners. Such developments could include
multiplex theaters, retail shopping, restaurants, hotels and entertainment
themed developments. Subject to regulatory approval, these developments may
also involve the integration of other gaming options, including video lottery
terminals or similar gaming devices, which have been demonstrated to increase
customer attendance at horse racetracks. These developments would be intended
to create total entertainment destinations centered on our horse racetracks and
could enhance the status of such racetracks, expand the demographic diversity
of our patrons, attract new pari-mutuel wagering customers and provide
additional revenue sources from our existing customer base.
There are a number of risks inherent in our corporate strategy, which will
take at least several years to implement fully. See "Risk Factors" for a
discussion of these and other risks.
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INDUSTRY OVERVIEW
Horse Racing and Pari-Mutuel Wagering
Background
Pari-mutuel wagering on horse racing is the largest form of pari-mutuel
wagering and a significant segment of the gaming industry generally. Pari-
mutuel wagering is currently authorized in 43 states in the United States, all
provinces of Canada and approximately 100 other countries in the world.
According to the National Gambling Impact Study Commission's report issued on
June 18, 1999, the total amount wagered on horse racing in the United States in
1997 was approximately $15 billion, of which approximately $11.8 billion, or
approximately 79%, resulted from off-track wagering. We expect that off-track
wagering will experience continued growth due to the increase of wagering
opportunities offered by the establishment of additional simulcast facilities,
as well as the anticipated growth of telephone account, interactive television
and Internet-based wagering.
Over the past 20 years, live attendance at, and on-track wagering on, horse
races at racetracks in the United States declined due to a number of factors,
including increased competition from other forms of gaming, the desire by
patrons to have more convenient access to horse racing and other factors. This
decline in live attendance resulted in a declining "handle", or amount wagered,
and resulted in track owners offering smaller purses for horse races. As purses
became smaller, the quality of horses being attracted to racetracks declined
and live attendance decreased further. In the 1980s, technological advances and
legislative changes facilitated the growth of simulcasting and off-track
wagering. These changes significantly increased the market for horse racing
products. The rise of off-track wagering has resulted in larger pools of wagers
on horse races and has more than off-set the decline in on-track wagering due
to declining live attendance. This in turn has resulted in larger purses being
offered, better quality horses being attracted to races and increased interest
in horse racing and pari-mutuel wagering.
Companies involved in pari-mutuel wagering on horse races derive pari-mutuel
revenues from wagers placed on: (1) live races conducted on their own tracks;
(2) simulcast races imported by the simulcast wagering facilities at the
racetrack; and (3) simulcasts exported to other racetracks. Other related
revenues are derived from fees charged to other racetracks in connection with
the exporting of simulcasts to such racetracks, the sale of racing dates to
other racetracks within the same state, fees charged for telephone account
betting and interactive television-based wagering services. Non-gaming revenues
are derived from admission and parking fees, concessions, sale of racing
programs, merchandising, group sales and corporate events.
Key Characteristics of the Industry
The horse racing industry is currently characterized by four key aspects:
(i) industry consolidation, (ii) expansion of simulcasting and off-track
wagering, (iii) competition from other forms of gambling and entertainment and
(iv) government regulation.
Industry Consolidation
The horse racing industry is a highly fragmented industry with relatively
few high-quality racetracks and relatively few operators owning more than two
facilities. The limited supply of high-quality horse racing tracks in North
America is due primarily to the high cost of constructing new racetracks and
the difficulty in obtaining financing. As a result, relatively few racetracks
have been built in the past 30 years. This trend is expected to continue as
small and medium size racetrack operators will likely continue to have
difficulty obtaining financing for such developments.
Since live attendance at horse racing tracks has been declining in North
America in recent years, racetrack operators have had to increase the
efficiency of their track management and maximize revenues from simulcast
operations and off-track wagering. These factors have contributed to
consolidation in the ownership and management of some of the premier racetracks
in the United States. We own and operate Santa Anita Park and
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Gulfstream Park, and we have entered into definitive agreements to acquire the
stock of the companies that own Thistledown Racetrack, Remington Park and
Golden Gate Fields racetrack. Similarly, our principal competitor, Churchill
Downs Inc., operates a number of racetracks, including Churchill Downs
Racetrack in Louisville, Kentucky, home of the Kentucky Derby, as well as
Hollywood Park in Inglewood, California, Calder Race Course in Miami, Florida,
Ellis Park in Henderson, Kentucky and Hoosier Park in Anderson, Indiana.
Churchill Downs has publicly stated its intention to continue to acquire more
tracks and seek to acquire the rights to simulcast races conducted at other
tracks.
Expansion of Simulcasting and Off-Track Wagering
Simulcasting involves the import of a televised signal from a live horse
racing event to an on-track simulcast wagering facility, as well as the export
of a televised racing signal from a live horse racing event to an off-track
wagering facility for a fee. Off-track facilities which import simulcasts
select simulcast products from various racetracks in order to create a program
of horse races for its patrons. Such off-track wagering facilities receive a
percentage of each wager placed and must pay a simulcasting fee consisting of a
percentage of each wager placed as compensation to the racetrack from which the
simulcast signal is imported. Off-track wagering facilities must import high-
quality racing simulcasts in order to maximize their revenues and, as a result,
operators of the premier racetracks exporting their racing signals experience
strong demand for simulcasts of their races. Racetracks exporting their signals
negotiate their simulcasting fee on the basis of the strength of the demand for
their simulcast races.
The growth in simulcasting and off-track wagering has been particularly
beneficial to operators of the premier racetracks which have multiple races and
large purses, but has not been of benefit to small and medium sized racetracks.
Operators of multiple racetracks are able to "bundle" the signals from races at
their various racetracks and sell such bundled signals as a package to off-
track wagering facilities. This has the effect of generating greater revenues
for such racetracks, thus enabling larger purses and higher quality racing to
be offered, even at the smaller racetracks owned by such operators. It is
expected that operators of the premier racetracks will continue to increase
their revenues at the expense of small and medium size operators.
Competition from Other Forms of Gaming and Entertainment
Gambling in casinos, riverboats and bingo halls, as well as through state
and provincial lotteries, has increased in recent years, thereby reducing some
revenues which had previously been directed at thoroughbred racing. Similarly,
alternative sources of entertainment, such as attendance at or wagering on
professional sports events, also create competition by diverting gaming
revenues to such other forms of activity.
Government Regulation
Thoroughbred horse racing is a highly regulated industry. Individual states
control the operations of racetracks located within such states with the aim of
protecting the public from unfair and illegal gambling practices, extracting
taxes, licensing racetracks and operators and preventing organized crime from
involvement in the industry. Although the specific form may vary, all states
that regulate horse racing 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 the necessary operating
licenses to such persons. 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 such details as the presence and placement of
specific race officials, such as timers, placing judges, starters and patrol
judges.
In addition to state regulation of horse racing, the United States
government regulates horse racing through the Interstate Horse Wagering Act of
1978 and the Interstate Wire Act of 1961. As a result of these two statutes,
racetracks can commingle wagers from different racetracks and wagering
facilities and broadcast horse racing events to other licensed establishments.
Furthermore, under the authority provided by these statutes,
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eight states (Connecticut, Kentucky, Maryland, Nevada, New York, Ohio, Oregon
and Pennsylvania) have permitted the pari-mutuel industry to broadcast races
into homes and have permitted account wagering.
We must satisfy the licensing requirements of various regulatory authorities
in each state where we maintain racetracks and carry on business, including The
California Horse Racing Board, the Nevada Gaming Commission, the Florida
Department of Business and Professional Regulation Division of Pari-Mutuel
Wagering, and, upon the completion of the acquisitions of Thistledown Racetrack
and Remington Park, the Oklahoma Horse Racing Commission and the Ohio State
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 such 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, Incorporated, and Oak Tree Racing
Association ("Oak Tree") to conduct racing meets at Santa Anita Racetrack. At
present, the California Horse Racing Board has not licensed other thoroughbred
racetracks in Southern California to conduct racing during these meets.
However, night harness racing and night quarterhorse meets are conducted at
other racetracks in Southern California during portions of these meets. The
California Horse Racing Board also licenses the operations of Golden Gate
Fields. Our financial condition and results of operations could be materially
adversely affected by legislative changes or action by The California Horse
Racing Board which would increase the number of competitive racing days, reduce
the number of racing days available to us and Oak Tree, or authorize other
forms of wagering.
In Florida, the Division of Pari-Mutuel Wagering considers applications for
annual licenses for thoroughbred, standardbred and quarter horse races. Tax
laws in Florida currently discourage the three Miami-area racetracks from
applying for race dates outside of their traditional racing season. Currently,
the race dates for the Miami-area racetracks do not overlap. As of July 1,
2001, we expect that a new tax structure will eliminate this deterrent. As a
result, Gulfstream Park racetrack may face direct competition from other Miami-
area racetracks in the future. Such competition could have a material adverse
effect on our financial condition and results of operations.
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 Racetrack's meets.
However, the Ohio State Racing Commission has licensed an operator of a night
harness racing track in the Cleveland area to conduct night harness racing.
In Oklahoma, the Oklahoma Horse Racing Commission approves annual licenses
for thoroughbred, standardbred and quarter horse races. There are currently no
racetracks other than Remington Park in the state of Oklahoma.
Media Sports Wagering
Telephone Account Wagering
Telephone account wagering involves the placing of wagers on live horse
racing events over the telephone. Currently, only eight states permit telephone
account wagering: Connecticut, Kentucky, Maryland, Nevada, New York, Ohio,
Oregon and Pennsylvania. According to the NGISC's June 1999 report, the amount
wagered through telephone account wagering systems in the United States in 1998
was approximately $550 million.
Licensed operators of telephone account wagering must open a "hub" in one of
the eight states in which such wagering is legal, establish accounts for
patrons (who pay their wagers through debit or credit cards) and receive wagers
from such patrons. States permitting telephone account wagering allow telephone
account
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wagering facilities to accept wagers placed by patrons residing in such states
as well as in states where telephone account wagering is not permitted.
Interactive Television-Based Wagering
Interactive television-based wagering involves the transmission of horse
racing-related television programming through cable or satellite delivery into
the homes of subscribers. These subscribers are able to use interactive "real-
time" television-based technology to wager on the live horse races being shown
in the program. In order to place wagers, patrons must deposit money with the
sponsoring racetrack through the use of debit or credit cards. Currently, the
same eight states which permit telephone account wagering also permit
interactive television-based wagering. The horse racetrack exporting its live
racing signal is entitled to a simulcast fee based on in-home wagers placed on
its races. There are risks associated with offering interactive television-
based wagering, including those described above in "Risk Factors--Gaming
Risks--Our gaming activities are extensively regulated and this could adversely
affect our growth prospects".
Internet Wagering
The proliferation of personal home computers and increased confidence in
conducting on-line commercial transactions, together with the growth of
Internet gambling opportunities, has resulted in an environment which we
believe is conducive to rapid growth of Internet-based wagering. The NGISC's
June 1999 report estimates that there are over 250 on-line casinos, 64
lotteries, 20 bingo games and 139 sports books offering gambling over the
Internet. The Internet gaming market is 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.
The Internet gaming opportunity is significant for several reasons. First,
the Internet operates worldwide and is ideally suited for gaming, which is also
recognized worldwide as a source of entertainment. Second, Internet gaming
provides access to a younger, better-educated segment of the population. Third,
Internet gaming offers a high level of convenience to patrons, in terms of the
ease with which patrons can access races, the audio and visual presentation of
the races and the ease and relative security of placing wagers over secure data
lines. Finally, Internet gaming involves lower investments and operating
expenses than traditional forms of gaming. However, there are risks associated
with offering Internet wagering, including those described above in "Risk
Factors--Gaming Risks--Our gaming activities are extensively regulated and this
could adversely affect our growth prospects".
36
<PAGE>
SELECTED FINANCIAL AND OPERATING INFORMATION
The following table sets forth certain of our consolidated and pro forma
consolidated financial data as at and for the periods indicated. The selected
consolidated financial data as at and for the eight months ended August 31,
1999 have been derived from our Unaudited Consolidated Financial Statements as
at and for the eight months ended August 31, 1999, which, in the opinion of
management, include all adjustments (consisting of normal recurring accruals)
necessary to present fairly the information set forth therein. Results for the
eight months ended August 31, 1999 are not necessarily indicative of the
results that may be expected for the full year. The selected consolidated
financial data as at and for the three years ended July 31, 1998 and the five
month period ended December 31, 1998 have been derived from and should be read
in conjunction with our Audited Consolidated Financial Statements for the
three-year period ended July 31, 1998 and the five-month period ended December
31, 1998. The pro forma selected consolidated financial data for the year ended
December 31, 1998 and eight months ended August 31, 1999 have been derived from
and should be read in conjunction with our Pro Forma Consolidated Financial
Statements as at and for the eight months ended August 31, 1999 and the year
ended December 31, 1998. The selected financial and operating information
should also be read in conjunction with the section entitled "Management's
Discussion and Analysis of Financial Condition and Operating Results" included
in this Information Statement.
Income Statement Data(1)
<TABLE>
<CAPTION>
Pro Forma
Eight Months Pro Forma Eight Months Five Months
Ended Year Ended Ended Ended Years Ended July 31,
August 31, December 31, August 31, December 31, ----------------------------------
1999 1998 1999 1998 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------- ------- ------- -------
(in thousands of U.S. dollars, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue
Racetrack.............. $122,600 $149,585 $57,557 $ 3,952 $ -- $ -- $ -- $ --
Real estate............ 10,974 21,239 10,974 6,597 20,486 15,276 2,460 1,166
-------- -------- ------- ------- ------- ------- ------- -------
Total revenue.......... 133,574 170,824 68,531 10,549 20,486 15,276 2,460 1,166
Costs and Expenses
Racetrack operating
costs................. 90,508 126,278 42,245 3,625 -- -- -- --
Real estate operating
costs................. 10,605 27,355 10,605 8,462 25,864 13,879 4,613 2,713
Depreciation and
amortization........... 12,061 19,288 4,041 1,649 1,852 1,824 330 21
Interest expense
(income), net.......... 377 1,615 522 1,221 1,380 955 (59) (26)
-------- -------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes........... 20,023 (3,712) 11,118 (4,408) (8,610) (1,382) (2,424) (1,542)
======== ======== ======= ======= ======= ======= ======= =======
Net income (loss)....... $ 11,304 $ (5,996) $ 5,776 $(4,231) $(8,610) $(1,382) $(2,424) $(1,542)
======== ======== ======= ======= ======= ======= ======= =======
Earnings (loss) per
share of Class A
Subordinate Voting and
Class B Stock
Basic and diluted(2)... $ 0.14 $ (0.07) $ 0.07 $ (0.05) $ (0.11) $ (0.02) $ (0.03) $ (0.02)
======== ======== ======= ======= ======= ======= ======= =======
Average number of shares
of Class A Subordinate
Voting and Class B
Stock outstanding
during the period
(in thousands):
Basic and diluted(2)... 80,198 80,198 78,535 78,535 78,535 78,535 78,535 78,535
======== ======== ======= ======= ======= ======= ======= =======
</TABLE>
- --------
(1) We prepare our financial statements in accordance with U.S. generally
accepted accounting principles ("U.S. GAAP") which differ in certain
respects from accounting principles generally accepted in Canada
37
<PAGE>
("Canadian GAAP"). For a discussion of the principal differences between
U.S. GAAP and Canadian GAAP, see Note 14, "Canadian Generally Accepted
Accounting Principles", to our Audited Consolidated Financial Statements.
(2) On November 5, 1999, Magna completed the reorganization described in this
Information Statement. As part of the reorganization, our capital
structure was established creating Class A Subordinate Voting Stock with
one vote per share and Class B Stock with 20 votes per share. As of
November 5, 1999, 78,535,328 shares of our Class B Stock and none of our
Class A Subordinate Voting Stock were issued and outstanding. Our
historical basic and diluted earnings (loss) per share has been calculated
assuming that 78,535,328 shares of our Class B Stock and none of our Class
A Subordinate Voting Stock were issued and outstanding at the beginning of
the periods presented. Our pro forma basic and diluted earnings (loss) per
share has been calculated assuming that 78,535,328 shares of our Class B
Stock and 1,662,890 shares of our Class A Subordinate Voting Stock (to be
issued in connection with the acquisitions of the Thistledown and Golden
Gate Fields racetracks) were issued and outstanding at the beginning of
the periods presented.
Balance Sheet Data(1)
<TABLE>
<CAPTION>
Pro Forma July 31,
August 31, August 31, December 31, ---------------------------------
1999 1999 1998 1998 1997 1996 1995
---------- ---------- ------------ -------- -------- ------- -------
(in thousands of U.S. dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............. $ 79,388 $ 15,629 $ 17,503 $ 295 $ 220 $ 133 $ 521
Total assets............. 739,145 377,390 364,142 184,802 113,175 76,219 51,636
Total debt(2)............ 46,840 57,942 32,335 19,495 18,938 22,614 12
Magna's net
investment/shareholder's
equity.................. 554,623 296,941 302,502 158,275 87,917 49,985 48,166
</TABLE>
- --------
(1) We prepare our financial statements in accordance with U.S. generally
accepted accounting principles ("U.S. GAAP") which differ in certain
respects from accounting principles generally accepted in Canada
("Canadian GAAP"). For a discussion of the principal differences between
U.S. GAAP and Canadian GAAP, see Note 14, "Canadian Generally Accepted
Accounting Principles", to our Audited Consolidated Financial Statements.
(2) Total debt includes Bank indebtedness, Long-term debt (including Long-term
debt due within one year) and Note payable to Magna.
The matters discussed under the heading "Reorganization" below may
materially affect the comparability of some of the foregoing selected
financial data. Accordingly, please refer to such section for details of the
terms of the Reorganization.
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND OPERATING RESULTS
The following discussion of our financial condition and operating results
should be read in conjunction with the Pro Forma Consolidated Financial
Statements, Unaudited Consolidated Financial Statements and Audited
Consolidated Financial Statements included elsewhere in this Information
Statement. This discussion contains forward-looking statements that involve
significant risks and uncertainties. Our actual results could differ materially
from those projected in or contemplated by the forward-looking statements due
to a number of factors, including, but not limited to those described under
"Risk Factors" elsewhere in this Information Statement. See "Special Note
Regarding Forward-Looking Information" in this Information Statement.
Overview
We acquire, develop and operate horse racetracks and related pari-mutuel
wagering operations. As a complement to our horse racing business, we are
exploring the development of media sports wagering operations, including
telephone account, interactive television and Internet-based wagering, as well
as certain leisure and retail-based real estate projects on the excess land
around certain of our racetracks, possibly in conjunction with business
partners and subject to regulatory requirements. In addition, we own a real
estate portfolio which includes a "gated" residential community currently under
development, one operational golf course and related recreational facilities, a
golf course under development and other real estate. We are currently
considering a variety of options with respect to our golf courses, including
direct operation or leasing to third party operators, as well as sale and
leaseback transactions or outright sales. We intend gradually to sell the
balance of our real estate portfolio in order to provide capital to be used in
our business; accordingly, we will take steps such as servicing such land and
obtaining zoning approval to enhance the value of such properties and increase
the revenues from resale.
Racetrack operations
We acquired Santa Anita Park located in Arcadia, California, approximately
14 miles northeast of Los Angeles, one of the premier horse racetracks in North
America, in December 1998. Santa Anita Park operates through the prime winter
racing season, commencing December 26 and running into late April each year. In
addition, we lease Santa Anita Park to Oak Tree Racing Association which hosts
The Oak Tree Meet from the end of September through early November of each
year.
We acquired Gulfstream Park, also one of the premier horse racetracks and
pari-mutuel wagering facilities in North America and the host site of the
Breeders Cup on November 6, 1999, located in the cities of Hallandale and
Aventura, Florida, between Miami and Fort Lauderdale, on September 1, 1999.
Gulfstream Park operates through early January to mid-March of each year.
We have entered into a stock purchase agreement to acquire the Thistledown
and Remington Park racetracks in North Randall, Ohio and Oklahoma City,
Oklahoma, respectively. We expect to complete these acquisitions in November
1999. Thistledown has one of the longest racing seasons of all North American
racetracks, consisting of 187 racing days each year between mid-March and early
December of each year. Remington Park offers both a 40-day Quarter Horse meet
from mid-April to mid-June and an 82-day Thoroughbred Horse meet from mid-
August to early December of each year. The aggregate purchase price is $24
million, of which $19.5 million is payable in cash and $4.5 million is payable
through the issuance of 650,695 shares of our Class A Subordinate Voting Stock.
Finally, we have entered into a stock purchase agreement to acquire the
Golden Gate Fields racetrack in Albany and Berkeley, California, approximately
8 miles from downtown Oakland and approximately 11 miles from San Francisco.
The completion of this acquisition is subject to a number of conditions,
including obtaining all necessary regulatory approvals such as anti-trust
approvals from the United States Federal Trade
39
<PAGE>
Commission and United States Department of Justice and state licensing
approvals from the California Horse Racing Board and Nevada Gaming Commission.
We expect to complete this purchase in December 1999. The purchase price is $87
million, of which $60 million is payable in cash, $7 million is payable through
the issuance of 1,012,195 shares of our Class A Subordinate Voting Stock and
$20 million is payable by way of an interest-free promissory note, $10 million
of which matures on the first anniversary of the date of closing and $5 million
of which matures on the second and third anniversaries. Golden Gate Field's
racing season consists of two meets, one of which runs from late March to mid-
June and the other of which runs from mid-November to mid-January of each year.
We refer you to our Pro Forma Consolidated Financial Statements which
consolidate on a pro forma basis the acquisitions of Gulfstream Park,
Thistledown, Remington Park and Golden Gate Fields with our operations as at
and for the eight months ended August 31, 1999 and the twelve months ended
December 31, 1998. On a pro forma basis, our revenues increased by $65.0
million and our net income increased by $5.5 million for the eight months ended
August 31, 1999 resulting in total pro forma consolidated revenues of
$133.6 million and net income of $11.3 million. On a pro forma basis, our
revenues increased by $145.6 million and our net loss was reduced by $4.5
million for the twelve months ended December 31, 1998, resulting in total pro
forma consolidated revenues of $170.8 million and a net loss of $6.0 million.
Because of the seasonal nature of our racetrack business, revenues and
operating results for any interim quarter are not indicative of the revenues
and operating results for the year. Our live racing schedule also dictates that
we earn a substantial portion of our net earnings in the first quarter of each
year which is when The Santa Anita Park Meet and the annual meet at Gulfstream
Park occur as well as the fourth quarter of each year, which is when the Oak
Tree Meet and one of the two annual meets at Golden Gate Fields occurs.
Our primary sources of racetrack revenues are commissions earned from pari-
mutuel wagering. Pari-mutuel wagering on horse racing is pooled betting in
which individuals bet against each other as to what the outcome of a horse race
will be. We have no interest in the order of finish in any given race and
therefore have no risk in the outcome. A percentage of the pooled wagers is
retained by us. Our share of pari-mutuel wagering revenues is based on pre-
determined percentages of various categories of the pooled wagers at our
racetracks. The pre-determined percentages are set by state regulators. Pari-
mutuel wagering on horse racing occurs at horse racetracks on the races being
conducted at such tracks as well as at such racetracks on televised racing
signals ("simulcasts") received or "imported" by the simulcast wagering
facilities located at such tracks (collectively, "on-track wagering"). Pari-
mutuel wagering on horse racing also occurs at wagering establishments on horse
races being conducted at tracks elsewhere ("off-track wagering"). Our
racetracks have simulcast wagering facilities to complement our live horse
racing by enabling our patrons to wager on horse races being held at other
racetracks when there is no live racing occurring at our racetracks. We also
generate non-wagering revenues consisting primarily of admissions, parking,
food and beverage and other amounts.
Real estate operations
We are currently developing a gated residential community, known as Fontana,
situated amidst a golf course and related recreational facilities owned and
operated by us. This residential development consists of approximately 50 acres
and is located in Oberwaltersdorf, Austria, approximately 15 miles south of
Vienna. The Fontana residential development is being developed in two phases
into a luxury residential community consisting of 250 apartment units and 100
single-family homes. We expect to complete the second phase of the Fontana
residential project by 2006. We hold two golf courses, including Fontana
Sports, which is part of the Fontana residential development property and is in
operation, and the other, Aurora Downs in Aurora, Canada is currently under
construction. We are currently considering a variety of options with respect to
our golf courses, including direct operation or leasing to third party
operators, as well as sale and leaseback transactions (which would require that
Magna not exercise its right of first refusal) or outright sales. We intend
gradually to sell the balance of our real estate portfolio, excluding lands
adjacent to our racetracks, in order to provide capital to be used in our
business; accordingly we are currently servicing, improving and seeking zoning
for some of these properties in order to enhance their value on resale.
40
<PAGE>
Results of operations
Eight month periods ended August 31, 1999 and 1998
Racetrack operations
Revenues from our racetrack operations were $57.6 million for the eight
month period ended August 31, 1999. Santa Anita Park and San Luis Rey Downs
contributed revenues of $57.2 million and $0.4 million, respectively. We
earned no revenues from our racetrack operations in the comparable 1998 period
as Santa Anita Park was acquired in December 1998 and San Luis Rey Downs in
May 1999.
In the current period, our share of total pari-mutuel wagering revenues for
Santa Anita Park were $39.5 million and non-wagering revenues were $17.7
million.
We derive our pari-mutuel wagering revenues at Santa Anita Park from the
following primary sources:
(a) Live race days
. wagers made by patrons at Santa Anita Park on races held at Santa
Anita Park;
. wagers made by patrons at Santa Anita Park on imported simulcast
signals for races held at other tracks in Southern California,
Northern California and at tracks out-of-state;
. wagers made by patrons at Southern California Off-track Wagering,
Inc. ("SCOTWINC") sites on exported simulcast signals for races held
at Santa Anita Park and on races held at tracks in Northern
California and on races held at tracks out-of-state in each case when
the Santa Anita Park or Oak Tree meets are operating; and
. wagers made by patrons at an out-of-state site on exported simulcast
signals for races held at Santa Anita Park.
(b) Non-live race days
. we participate in the revenues of SCOTWINC sites - SCOTWINC is an
organization formed by representatives of the racing associations,
fairs and satellite wagering facilities of Southern California to
promote off-track wagering and to equitably divide expenses
associated with off-track betting. We also receive a percentage of
the net profit of SCOTWINC - this helps defray the costs of off-track
wagering, such as pari-mutuel departments, television and satellite
costs, and supplies. The excess SCOTWINC funds that are not
distributed are split equally between the track and the horsemen.
Santa Anita owns 25% of the stock of SCOTWINC.
The distribution of pari-mutuel wagering for the eight months ended August
31, 1999 is summarized below (in millions except number of live race days):
<TABLE>
<CAPTION>
Eight months ended
August 31, 1999
------------------
<S> <C>
Total live race day handle................................... $857.2
======
Number of live race days..................................... 81
======
Our share of live race day handle............................ $ 36.1
Our share of non-live race day handle and other.............. 3.4
------
Total pari-mutuel wagering revenue........................... $ 39.5
======
</TABLE>
Our total handle has been positively impacted by the development of
SCOTWINC and betting at Santa Anita Park on out-of-state races. With the
exception of 1997, total wagering has shown an increase since 1994.
Our share of pari-mutuel handle improved in 1999 primarily as a result of
recent changes in the allocation of the handle. On August 11, 1998, the
California Senate passed Bill Number SB27, which gave racetracks in California
a reduction in the state license fees to be paid from the handle and
permission to import up to
41
<PAGE>
20 races per day from out-of-state. The reduction in the amount of handle
allocated to the state resulted in an increase in allocation to us as well as
to purses. The permission to import out-of-state races is significant, as
previously, the only imported races which were wagered on in California were
from outside the U.S., primarily Hong Kong and Australia.
Racetrack operating costs were $42.2 million. Santa Anita Park and San Luis
Rey Downs incurred operating costs of $41.8 million and $0.4 million,
respectively. The major components of the Santa Anita Park operating costs were
payroll costs ($25.0 million) and marketing and advertising costs
($5.0 million) representing approximately 72% of our total costs. With the
acquisition of Gulfstream Park and the pending acquisitions of Thistledown,
Remington Park and Golden Gate Fields, we intend to continue to implement our
corporate strategy which includes the consolidation of our racetrack
acquisitions with the objective of maximizing administrative and other cost
efficiencies at our racetracks.
Real estate operations
Revenues from our real estate operations were $11.0 million for the eight
month period ended August 31, 1999 compared to $16.4 million for the eight
month period ended August 31, 1998. The decrease is primarily attributable to a
reduction in housing activity at the Fontana residential development which is
nearing completion of the first phase of a two phase development plan.
Partially offsetting the decrease in revenues was increased membership and
other usage revenue at Fontana Sports, including $1.3 million related to
Magna's access fee agreement with Fontana Sports which commenced March 1, 1999.
We also generated increased rental revenues on certain properties acquired
during the comparative period. Revenues from our remaining real estate
operations were substantially unchanged.
Real estate operating costs were $10.6 million for the eight-month period
ended August 31, 1999 compared to $20.7 million for the eight-month period
ended August 31, 1998. The reduction is attributable to the decrease in housing
activity at the Fontana residential development. In addition, we incurred costs
in the eight-month period ended August 31, 1998 related to the potential
development of a theme park on approximately 670 acres of our land in
Ebreichsdorf near Vienna, Austria which was acquired by us during the year
ended July 31, 1997. Costs included consultants' fees associated with
feasibility studies, alternative theme park designs, market analysis,
presentation brochures, site models and alternative site investigations. In May
1999, we announced that we were unable to obtain the various permits and
approvals that would have been required to potentially develop this property as
a theme park. As a result, we are re-assessing the potential uses for the
property. Costs incurred in the eight month period ended August 31, 1999 were
substantially reduced.
Costs of our remaining real estate operations were substantially unchanged.
Depreciation and amortization
Depreciation and amortization increased by $2.6 million to $4.0 million for
the eight month period ended August 31, 1999, primarily as a result of
depreciation related to our acquisitions of Santa Anita Park on December 10,
1998 and San Luis Rey Downs on May 1, 1999 and a full eight months of
depreciation on properties acquired in calendar 1998. As of August 31, 1999,
certain properties have been classified as available for sale and depreciation
has now ceased on such properties.
Interest expense
Our interest expense decreased by $0.5 million to $0.5 million for the eight
month period ended August 31, 1999 compared to the eight month period ended
August 31, 1998. The reduction in interest expense is attributable to a
reduction in external borrowings principally related to the Fontana residential
development which is nearing completion of the first phase of a two phase
development plan.
42
<PAGE>
Income tax provision
We recorded an income tax provision of $5.3 million on pre-tax income of
$11.1 million for the eight month period ended August 31, 1999 compared to nil
on a pre-tax loss of $6.8 million for the eight month period ended August 31,
1998. Our income tax provision relates solely to the income of our racetrack
operations. The losses of our other operations have not been tax benefited for
accounting purposes.
Five month periods ended December 31, 1998 and 1997
Racetrack operations
Revenues from our racetrack operations were $4.0 million for the five month
period ended December 31, 1998, all of which related to the operations of Santa
Anita Park. There were only five racing days during the five month period ended
December 31, 1998 as the Santa Anita Park meet did not commence until December
26, 1998. We earned no revenues from our racetrack operations in the comparable
1997 period as Santa Anita Park was acquired in December 1998.
Our share of pari-mutuel wagering was $2.5 million and non-wagering revenues
were $1.5 million.
The distribution of pari-mutuel wagering for the last five racing days of
1998 is summarized below (in millions except number of live race days):
<TABLE>
<CAPTION>
Five racing
days ended
December 31,
1998
------------
<S> <C>
Total live race day handle......................................... $61.4
=====
Number of live race days........................................... 5
=====
Our share of live race day handle.................................. $ 2.2
Our share of non-live race day handle and other.................... 0.3
-----
Total pari-mutuel wagering revenue................................. $ 2.5
=====
</TABLE>
Racetrack operating costs were $3.6 million, all of which related to our
operation of Santa Anita Park. The major components of the Santa Anita Park's
operating costs were payroll costs ($1.8 million) and marketing and advertising
costs ($0.3 million) representing approximately 58% of our total costs.
Real estate operations
Revenues from our real estate operations were $6.6 million for the five
month period ended December 31, 1998 compared to $5.8 million for the five
month period ended December 31, 1997. The increase in revenues is primarily
attributable to rental revenues earned on recently acquired properties.
Revenues from the Fontana residential development, Fontana Sports and other
real estate operations were substantially unchanged between the periods.
Real estate operating costs were $8.5 million for the five month period
ended December 31, 1998 compared to $7.0 million for the five-month period
ended December 31, 1997. The increase in costs is attributable to a change in
the mix between apartment and housing sales at the Fontana residential
development. The costs of our remaining real estate operations were
substantially unchanged between the periods.
Depreciation and amortization
Depreciation and amortization increased by $0.9 million to $1.6 million for
the five month period ended December 31, 1998, primarily as a result of
depreciation related to our acquisition of Santa Anita Park on December 10,
1998 and a full five months of depreciation on properties acquired in calendar
1998.
43
<PAGE>
Interest expense
Our interest expense increased by $0.7 million to $1.2 million for the five
month period ended December 31, 1998 compared to the five month period ended
December 31, 1997. The increase in interest expense is primarily attributable
to an increase in interest bearing borrowings from Magna to finance the
acquisition of Santa Anita Park. Such borrowings were converted to equity in
1999.
Income tax recovery
We recorded an income tax recovery of $0.2 million on a pre-tax loss of $4.4
million for the five month period ended December 31, 1998 compared to nil on a
pre-tax loss of $2.4 million for the five month period ended December 31, 1997.
Our income tax recovery relates solely to the losses of Santa Anita Park from
the date of acquisition to December 31, 1998. The losses of our other
operations have not been tax benefited for accounting purposes. The tax
benefits of certain of these losses have been utilized by Magna and are not
available to us and valuation allowances have been recorded against the
remaining tax loss carryforward benefits.
Years ended July 31, 1998 and 1997
Real estate operations
Revenues from our real estate operations were $20.5 million for the year
ended July 31, 1998 compared to $15.3 million for the year ended July 31, 1997.
Substantially all of the increase is attributable to an increase in housing
activity at the Fontana residential development and increased membership and
usage at Fontana Sports. Revenues from our remaining real estate operations
were substantially unchanged.
Real estate operating costs were $25.9 million for the year ended July 31,
1998 compared to $13.9 million for the year ended July 31, 1997. The increase
relates to costs at the Fontana residential development and Fontana Sports. In
addition, we incurred costs in the year ended July 31, 1998 related to the
potential development of a theme park on approximately 670 acres of our land in
Ebreichsdorf near Vienna, Austria. We acquired this property during the year
ended July 31, 1997. Costs in the acquisition year were insignificant.
Depreciation and amortization
Depreciation and amortization was substantially unchanged between the years
ended July 31, 1998 and 1997.
Interest expense
Our interest expense increased by $0.4 million to $1.4 million for the year
ended July 31, 1998 compared to the year ended July 31, 1997. The increase is
attributable to an increase in external debt and interest bearing debt due to
Magna related to properties acquired in the years ended July 31, 1998 and 1997.
Income tax recovery
We did not record a tax benefit on pre-tax losses of $8.6 million and $1.4
million for the years ended July 31, 1998 and 1997, respectively. The tax
benefits of certain of these losses have been utilized by Magna and are not
available to us and valuation allowances have been recorded against the
remaining tax loss carryforward benefits.
Years ended July 31, 1997 and 1996
Real estate operations
Revenues from our real estate operations were $15.3 million for the year
ended July 31, 1997 compared to $2.5 million for the year ended July 31, 1996.
The year ended July 31, 1997 was the first year of substantial sales activity
at the Fontana residential development and at Fontana Sports.
44
<PAGE>
Real estate operating costs were $13.9 million for the year ended July 31,
1997 compared to $4.6 million for the year ended July 31, 1996. The increase in
costs is primarily attributable to building activity at the Fontana residential
development and the opening of Fontana Sports.
Depreciation and amortization
Depreciation and amortization increased by $1.5 million to $1.8 million for
the year ended July 31, 1997 compared to the year ended July 31, 1996,
primarily as a result of the opening of Fontana Sports.
Interest expense
Our interest expense was $1.0 million for the year ended July 31, 1997
compared to net interest income of $0.1 million for the year ended July 31,
1996. The $1.1 million increase in interest expense is attributable to external
debt associated with the Fontana residential development and Fontana Sports,
which debt was drawn late in the year ended July 31, 1996, and an increase in
interest bearing debt due to Magna.
Income tax recovery
We did not record any tax benefit on pre-tax losses of $1.4 million and $2.4
million for the years ended July 31, 1997 and 1996, respectively. The tax
benefits of certain of these losses have been utilized by Magna and are not
available to us and valuation allowances have been recorded against the
remaining tax loss carryforward benefits.
Liquidity and Capital Resources
We have financed our operations primarily through contributions by our sole
shareholder, Magna. Magna has made a commitment to its shareholders that for a
period of seven years ending May 31, 2006, it will not without the prior
consent of the holders of a majority of Magna's Class A Subordinate Voting
Shares: (i) make additional debt or equity investments in us or any of our
subsidiaries; or (ii) invest in any non-automotive related businesses or assets
other than through its investment in us. With the exception of the eight month
period ended August 31, 1999, we have generated negative cash flow from
operations since inception.
At August 31, 1999, we had debt net of cash and cash equivalents of $42.3
million and total shareholder's equity of $296.9 million.
On September 1, 1999, Magna invested an additional $250.0 million in cash in
the Company.
On September 1, 1999, we acquired Gulfstream Park for cash consideration of
$80.2 million, net of cash acquired.
On October 29, 1999, we repaid our short-term note due to Magna in the
amount of $35.2 million.
We have entered into a stock purchase agreement to acquire the Thistledown
and Remington Park racetracks for a total purchase price of $24.0 million. Of
the total purchase price, $19.5 million is payable in cash and $4.5 million is
payable through the issuance of 650,695 shares of our Class A Subordinate
Voting Stock. We expect to complete these acquisitions in November 1999.
We have also entered into a stock purchase agreement to acquire the Golden
Gate Fields racetrack for a total purchase price of $87 million. Of the total
purchase price, $60.0 million is payable in cash, $7.0 million is payable
through the issuance of 1,012,195 shares of our Class A Subordinate Voting
Stock and $20.0 million is payable by way of an interest-free promissory note,
$10.0 million of which matures on the first anniversary of the date of closing
and $5.0 million of which matures on the second and third anniversaries. We
expect to complete this acquisition in December 1999.
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After giving pro forma effect, as of August 31, 1999, to the various
transactions described above and in the notes to the Pro Forma Consolidated
Financial Statements, we had cash and cash equivalents, net of debt of $32.5
million and total shareholder's equity of $554.6 million.
We are currently negotiating two credit facilities--a $63 million three year
term loan facility and a $10 million revolving operating line of credit, both
of which would bear interest at LIBOR plus 2.25%.
As of August 31, 1999, our real estate portfolio totals $345.7 million.
Included in this amount are properties available for sale totaling $80.5
million and properties under or held for development totaling $147.9 million,
components of which could be made available for sale. In addition, revenue
producing properties total $99.1 million and include the Fontana Sports
facilities. We are currently considering a variety of options with respect to
our golf courses, including direct operation or leasing to third party
operators, as well as sale and leaseback transactions (which would require that
Magna not exercise its right of first refusal) or outright sales.
Excluding the costs of the acquisitions described earlier, we currently
anticipate capital expenditures of approximately $30.0 million during the
remaining four months of 1999. Most of the capital expenditures relate to
completion of the capital renovation program at Santa Anita Park and completion
of Aurora Downs.
We believe that our current cash resources, together with cash flow from
operations from our racetrack activities, cash proceeds to be realized on
successful completion of the credit facilities and cash proceeds to be realized
upon sale of a portion of our real estate portfolio will be sufficient to
finance our capital expenditure and acquisition program during the next year.
However, we can provide no assurance that we will not be required to seek
additional capital at an earlier date. We may, from time to time, seek
additional debt and/or equity financing through public or private sources.
There is no assurance that adequate financing will be available to us as needed
or, if available, on terms acceptable to us. If additional funds are raised or
future acquisitions are effected by issuing our shares, you will experience
dilution of your interest.
Operating activities
Cash provided by (used in) operations was $3.1 million, $(1.3) million,
$(7.9) million, $(3.9) million and $(3.6) million for the eight month period
ended August 31, 1999, the five month period ended December 31, 1998, and the
years ended July 31, 1998, 1997, and 1996, respectively. Cash provided by
operations in the eight-month period ended August 31, 1999 is a result of cash
generated by our Santa Anita Park operations of $8.9 million, offset by cash
usages at our other operations. For all periods prior to January 1, 1999, we
incurred losses resulting in negative cash flow from operations.
Investing activities
Cash used in investing activities was $28.4 million, $136.7 million, $72.6
million, $43.6 million and $25.1 million for the eight month period ended
August 31, 1999, the five month period ended December 31, 1998, and the years
ended July 31, 1998, 1997, and 1996, respectively.
During the eight month period ended August 31, 1999, $6.4 million was used
to acquire the real estate assets of San Luis Rey Downs and $21.9 was spent on
real estate property additions which include spending on the capital renovation
program at Santa Anita Park. During the five month period ended December 31,
1998, $118.6 million was used to acquire Santa Anita Park and related real
estate and $17.9 was spent on real estate property additions which include land
and related development spending in connection with the Aurora Downs project.
During the year ended July 31, 1998, $72.5 was spent on real estate property
additions primarily in Austria and Canada. During the year ended July 31, 1997,
real estate property additions totaled $41.5 million including the purchases of
a 250 hectare parcel of land near Vienna, Austria and various other properties
in Canada. During the year ended July 31, 1996, $24.2 million was spent on real
estate property additions including development costs at Fontana Sports.
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Financing activities
Cash provided by financing activities was $23.5 million, $155.2 million,
$80.6 million, $47.6 million and $28.4 million for the eight month period ended
August 31, 1999, the five month period ended December 31, 1998, and the years
ended July 31, 1998, 1997, and 1996, respectively. Cash provided by financing
activities has been primarily through contributions by Magna. During the eight
month period ended August 31, 1999, Magna provided financing of $35.2 million
through a short-term note. Other sources of cash include a bank term line of
credit for 240 million Austrian Schillings ($18.8 million), and mortgages with
various Austrian banks and local governments totaling $5.8 million at August
31, 1999. The bank term line of credit was used to finance the Fontana
residential and Fontana Sports developments, and is repayable in six annual
installments of 40 million Austrian Schillings, which began July 31, 1997. The
mortgages arose during the year ended July 31, 1998 and are repayable over
various periods to the year 2037.
Outlook
Through the implementation of our corporate strategy, we have become one of
the leading consolidators of premier racetracks in North America. We expect
that the ownership of multiple racetracks will result in cost efficiencies in
administration, purchasing and other areas. We expect growth in the revenues of
our racetracks through an increase in our simulcast programming to telecast
horse racing throughout the year and the bundling of simulcast signals from all
of our racetracks. The bundling of our simulcast signals will increase the
exposure of, and the handle at, our smaller racetracks, thereby increasing the
revenues available to us to further enhance the quality of the horse racing we
offer at such tracks.
We intend to market our bundled simulcast product through a single signal
marketed under the MI Entertainment Corp. brand name. In addition, we intend to
explore the expansion of our sports wagering products to sports other than
horse racing as we expand our involvement in telephone account, interactive
television and Internet-based wagering, possibly in conjunction with strategic
partners and subject to regulatory approval. Finally, we expect that our role
as a horse racing industry consolidator and our branding strategy will open up
potentially lucrative merchandising, licensing and marketing opportunities
which will increase our revenues.
We currently own a diverse portfolio of real estate properties in North
America and Europe. We intend to complete the second phase of the Fontana
residential property development by 2006 and complete the Aurora Downs golf
course by May 2001. We expect that the Aurora Downs golf course and Fontana
Sports facility will significantly enhance the resale value of lands adjacent
to both of these facilities. We intend to sell some of our real estate
properties as market conditions permit and are taking steps to maximize the
revenues derived from these properties on future resale.
For further information as to our business outlook, see "Corporate Strategy"
in this Information Statement.
Year 2000 Issue
Certain computer software and microprocessors use two digits rather than
four digits to identify years and therefore may recognize a date using "00" as
the year 1900 rather than the year 2000 (the "year 2000 issue"). There can be
no assurance that we will be "year 2000 ready" or that any parties dealing with
us will be year 2000 ready. If we or such third parties are not year 2000
ready, we may incur significant costs associated with rectifying any problems
and responding to any litigation which may be brought against us.
Our business operations depend on the year 2000 readiness of outside
parties, including our simulcast customers and infrastructure suppliers. Our
pari-mutuel operations rely upon software systems provided by outside
suppliers. We have no alternative system to handle pari-mutuel wagering if
these systems fail. Our simulcast operations and in-home wagering systems
depend upon telecommunication service providers.
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Totalizator services involve the calculation of the amount wagered on each
race, as well as the payouts to racetrack operators, state governments and
winning patrons. The failure of our pari-mutuel wagering technology, simulcast
technology, in-home wagering systems and totalizator services and other
systems, which we did not design, to be year 2000 ready may significantly
disrupt or even shut down our operations.
We have reviewed our business systems, including those of certain of our
customers, and are asking our customers and suppliers about their progress in
identifying and addressing problems that their computer systems may face in
correctly interrelating and processing date information as the year 2000
approaches and is reached. However, we can give no assurance that we will
identify all such year 2000 problems in our computer systems or those of our
customers and suppliers in advance of their occurrence or that we will be able
to successfully remedy any problems that are discovered. Our expenses in
identifying and addressing such problems, or the expenses or liabilities to
which we may become subject as a result of such problems may be significant.
Accounting Developments
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.133, "Accounting for Derivative Instruments"
("SFAS No. 133"). SFAS No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 requires that we recognize all derivatives either as assets or
liabilities and measure those instruments at fair market value. We have not
determined the impact, if any, of this pronouncement on our financial position
and results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary exposure to market risk (or the risk of loss arising from
adverse changes in market rates and prices, such as interest rates, foreign
currency exchange rates and commodity prices) is with respect to our
investments in companies with a functional currency other than the U.S. dollar.
Fluctuations in the U.S. dollar exchange rate relative to the Canadian dollar
and Euro will result in fluctuations in shareholder's equity and comprehensive
income. We do not enter into derivative financial instruments for hedging or
trading purposes.
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CONSOLIDATED CAPITALIZATION
The following table sets out our unaudited consolidated and pro forma
consolidated capitalization as at August 31, 1999 and October 31, 1999. The
table should be read in conjunction with the Unaudited Consolidated Financial
Statements and the Pro Forma Consolidated Financial Statements and related
notes found elsewhere in this Information Statement.
<TABLE>
<CAPTION>
Actual Pro Forma Actual Pro Forma
August 31, August 31, October 31, October 31,
1999 1999 1999 1999
---------- ---------- ----------- -----------
(in thousands of U.S. dollars)
<S> <C> <C> <C> <C>
Short-term debt
Bank indebtedness.......... $ 7,339 $ 7,339 $ . $ .
Note payable to Magna...... 35,240 -- -- --
Long-term debt due within
one year.................. 3,323 10,131 . .
Long-term debt............... 12,040(1) 29,370(2) . (1) . (2)
Shareholder's Equity
Magna's net investment..... 296,941 -- . --
Share capital.............. -- 554,623 -- .
-------- -------- ---- ----
Total capitalization......... $354,883 $601,463 $ . $ .
======== ======== ==== ====
</TABLE>
- --------
(1) Our actual Long-term debt (including amounts due within one year) consists
of: (i) a line of credit with permitted borrowings of $18.8 million
(Austrian Schillings 240 million) bearing interest at VIBOR plus 0.625% per
annum, of which $9,250,000 and $ . was drawn as at August 31, 1999 and
October 31, 1999, respectively; (ii) mortgages outstanding with various
Austrian banks and local governments bearing interest at rates ranging from
0.5% to 6.75% per annum, in respect of which $5,839,000 and $ . was owed
at August 31, 1999 and October 31, 1999, respectively; and (iii) a term
loan bearing interest at a fixed rate of 4% per annum, in respect of which
$274,000 was owed at August 31, 1999.
(2) Our Pro Forma Long-term debt (including amounts due within one year)
includes the amounts referred to in note (1) above plus $17,330,000
representing the discounted value of the $20,000,000 non-interest bearing
note issued on the acquisition of Golden Gate Fields based on a discount
rate of 8.7%.
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REORGANIZATION
On November 5, 1999 , Magna completed a reorganization of our corporate
structure (the "Reorganization") under which Magna's North American and
European non-automotive businesses and real estate assets were transferred to
us, including the following:
1. All the outstanding capital stock of The Santa Anita Companies, Inc.,
which owns all the outstanding capital stock of the Los Angeles Turf
Club, Inc., the operator of the Santa Anita Park racetrack in
California, and approximately 305 acres of related real estate.
2. All the outstanding capital stock of Magna Vierte Beteiligungs AG, which
operates the Fontana Sports golf course and related recreational
facilities and is developing the adjacent Fontana residential
development in Oberwaltersdorf, Austria.
3. All the outstanding capital stock of Magna Projektentwicklungs AG,
which, through a subsidiary, owns a parcel of land held for development
in Ebreichsdorf, Austria.
4. Rights to acquire approximately 160 acres of land and improvements in
Aurora, Ontario under a conditional sale agreement with Magna, which is
subject to the successful severance of the affected properties. An
additional 200 acres, which comprise Aurora Downs, the 18-hole golf
course currently under construction, is also subject to a conditional
sale agreement with a company associated with the members of the family
of Frank Stronach, our Chairman and Chief Executive Officer.
5. Various other parcels of land and improvements and other non-automotive
assets located in North America and Europe.
During the course of the Reorganization, Magna transferred assets and
cancelled certain intercompany indebtedness in consideration for the issuance
of approximately $300 million of shares of our stock. Magna also subscribed for
shares of our stock by way of a cash payment of $250 million. Our Certificate
of Incorporation was then amended to add share provisions for our Class A
Subordinate Voting Stock and Class B Stock and our outstanding stock was then
reclassified and further subdivided into shares of Class B Stock. Upon
completion of the Reorganization on November 5, 1999, there were 78,535,328
shares of our Class B Stock outstanding and no shares of our Class A
Subordinate Voting Stock outstanding. In connection with our agreements to
acquire Golden Gate Fields and Thistledown Racetrack, we have agreed to issue a
total of 1,662,890 additional shares of our Class A Subordinate Voting Stock.
Upon completion of the distribution, Magna will own all our Class B Stock,
which means that Magna will be entitled to exercise approximately 99% of the
total votes attached to all our outstanding stock. Magna will therefore
continue to be able to elect all our directors and continue to control us. See
"Corporate Structure" for a chart illustrating our corporate structure after
giving effect to the Reorganization.
Corporate Structure
We were incorporated on March 4, 1999 under the laws of the State of
Delaware as MI Venture Inc. Our certificate of incorporation was amended by
certificate of amendment on August 30, 1999 to reclassify our Common Stock into
Class A Common Stock and 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 two new classes of stock
designated as Class A Subordinate Voting Stock and Class B Stock, reclassify
our issued and outstanding Class A Common Stock into Class A Subordinate Voting
Stock, reclassify our issued and outstanding Class C Common Stock into Class B
Stock, and further subdivide the outstanding shares of our Class B Stock. Our
registered and corporate office is located at 1209 Orange Street, Wilmington,
Delaware, 19801 and our principal executive office is located at 285 West
Huntington Drive, Arcadia, California 90017.
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The following chart shows our organizational structure and that of our
material subsidiaries, each of which is directly or indirectly wholly-owned,
after taking into account the Reorganization which was completed on November 5,
1999, together with the jurisdiction of incorporation of each of the entities
shown thereon.
MI Entertainment Corp.
(Delaware)
Horse Racing and Pari-Mutuel Real Estate
Wagering Operations
The Santa Anita Companies, Inc. 5321 Industries Inc.
-----
(Delaware) (Delaware)
Los Angeles Turf Club,
Inc. MI Venture (Canada) Inc.
- --
(California) (Ontario)
Gulfstream Park Racing Magna Ventures Holding AG
Association, Inc. -----
(Florida) (Austria)
SLRD Thoroughbred Training Magna Vierte Beteiligungs AG
Center, Inc. -----
(Delaware) (Austria)
Magna Projektentwicklungs AG
--
(Austria)
Environmental Matters
We are subject to a wide range of environmental laws and regulations imposed
by governmental authorities relating to wastewater discharge, waste management
and storage of hazardous substances. Upon completion of the distribution, we
will adopt a Health, Safety and Environmental Policy pursuant to which we will
commit to:
. conducting our operations in a manner that complies with or exceeds all
legal requirements regarding health, safety and the environment;
. regularly evaluating and monitoring past and present business activities
affecting health, safety and the environment;
. ensuring that a systematic health, safety and environmental review
program is implemented and monitored at all times for each of our
operations, with a goal of continued improvement in health, safety and
environmental matters; and
. ensuring that adequate reports on health, safety and environmental
matters are presented to our Board of Directors, at a minimum, on an
annual basis.
We are currently subject to Magna's Health, Safety and Environmental Policy,
which is substantially similar to the policy we intend to adopt.
To date, compliance with environmental laws and regulations has not had a
material adverse effect on our financial condition and results of operations,
however, changes in such governmental laws and regulations are ongoing and may
make environmental compliance increasingly expensive. We cannot predict future
costs that we may incur to meet environmental obligations.
A subsidiary of Magna has agreed to indemnify us in respect of environmental
remediation costs and expenses relating to existing conditions in certain of
our Austrian real estate properties.
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Employees
As of September 30, 1999, we employed approximately 870 employees,
approximately 420 of whom are represented by a union. Since our inception, we
have not had a work stoppage. We consider our relations with our employees to
be good. We also believe that our future success will depend in part on our
continued ability to attract, integrate, retain and motivate highly qualified
technical and managerial personnel, and upon the continued service of our
senior management.
Our contract with the Service Employees International Union, Local 280,
which represents approximately 400 pari-mutuel employees at Santa Anita Park
during our racing season, will expire on July 24, 2000 and union executives
have notified management that union demands will be significant due to changes
in working conditions resulting from full card simulcasting and the increased
usage of self-service terminals for placing wagers which has reduced staffing
and union dues.
Competition
We generally do not compete directly with other racetracks or off-track
wagering facilities for customers because of geographic separation of
facilities and differences in seasonal timing of meets. In some cases, the
differences in seasonal timing of meets results from the regulatory environment
in which racetracks operate. In California, The California Horse Racing Board
has annually licensed us and Oak Tree Racing Association to conduct racing
meets at Santa Anita Park and it has not licensed other thoroughbred racetracks
in Southern California to conduct racing during these meets. However, night
harness racing and night quarterhorse meets are conducted at other racetracks
in Southern California during portions of these meets. In Florida, tax laws
currently discourage the three Miami-area racetracks from applying for race
dates outside of their traditional racing season. Currently, the race dates for
the three Miami-area racetracks do not overlap. However, commencing July 1,
2001 a new tax structure affecting Florida racetracks is expected to eliminate
this deterrent. As a result, Gulfstream Park racetrack may face direct
competition from other Miami-area racetracks in the future. We currently
compete for customers with other forms of gaming and entertainment and attempt
to attract customers by providing high quality racing in appealing facilities,
value for money spent and good customer service.
If we implement our strategy to increase the distribution channels for our
simulcast horse racing product to include telephone account, interactive
television and Internet-based wagering, we will likely face competition from
competitors with greater experience and advanced market penetration in these
distribution channels, such as TVG, which is owned by TV Guide, Inc., and The
Racing Network. TVG currently markets the signals of approximately 45
racetracks, ten of which are under exclusive contract, including the signal
from Churchill Downs' racetracks and the signals from Gulfstream Park and The
Oak Tree Meet. TVG's exclusive right to market the signals from Gulfstream Park
and The Oak Tree Meet expires in December, 2003. We expect that TVG's initial
competitive advantage may be off-set by the fact that in 2003 we will have
exclusive rights to market the signal for both Santa Anita Park and Gulfstream
Park. In addition, we may be able to eliminate this competitive disadvantage by
pursuing this element of our corporate strategy in conjunction with an
experienced strategic partner.
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RECENT ACQUISITIONS
A significant proportion of our assets were acquired from our parent
company, Magna, and certain of its subsidiaries on a non-arm's length basis
pursuant to the Reorganization (see "Reorganization" above). Details of the
acquisition of Santa Anita Park by certain of Magna's subsidiaries are provided
below. In addition, details of material acquisitions made by us are also
provided below:
Pursuant to an asset purchase agreement dated as of November 13, 1998, with
Meditrust Corporation, Meditrust Operating Company, The Santa Anita Companies,
Inc. and Santa Anita Enterprises, Inc. (collectively, "Meditrust"), the assets
of Santa Anita Park and the stock of Los Angeles Turf Club, Inc. were acquired
by one of Magna's subsidiaries, The Santa Anita Companies, Inc., as of December
10, 1998 and the transaction closed on December 11, 1998. The purchase price
for the assets acquired was approximately $119 million, all of which was paid
in cash. We acquired the shares of The Santa Anita Companies from Magna in the
course of the Reorganization (see "Reorganization").
Pursuant to an asset purchase agreement dated as of March 8, 1999, one of
our indirect, wholly-owned subsidiaries, SLRD Thoroughbred Training Center,
Inc. ("SLRD") agreed to acquire from San Luis Rey Downs Enterprises LLC the
assets of San Luis Rey Downs for a purchase price of approximately $6.4
million, all of which was paid in cash. This transaction was completed on May
1, 1999.
Pursuant to a stock purchase agreement dated as of June 30, 1999 between us
and Gulfstream Holdings, Inc. of Illinois ("Gulfstream Holdings") and
Gulfstream Park Racing Association Inc. ("Gulfstream Park"), we agreed to
acquire from Gulfstream Holdings all the issued and outstanding stock of
Gulfstream Park for a purchase price of $88.2 million. Gulfstream Park owns all
the assets of Gulfstream Park racetrack in Hallandale, Florida. We completed
the acquisition on September 1, 1999.
Pursuant to a stock purchase agreement dated as of October 21, 1999, we
agreed to acquire from The Edward J. DeBartolo Corporation and Oklahoma Racing
LLC, all the issued and outstanding stock of Thistledown, Inc. and Remington
Park, Inc. for a total purchase price of $24 million. Thistledown, Inc. owns
all the assets of Thistledown racetrack in North Randall, Ohio. Remington Park,
Inc. owns all the assets of Remington Park racetrack in Oklahoma City,
Oklahoma. Of the total purchase price of $24 million, the stock of Thistledown
will cost $14 million, $9.5 million of which will be paid in cash and the
balance of which will be paid through the issuance of 650,695 shares of our
Class A Subordinate Voting Stock. The stock of Remington Park, Inc. will cost
$10 million, all of which will be paid in cash. We expect to complete this
acquisition in November 1999.
Pursuant to a stock purchase agreement dated as of November 5, 1999, we
agreed to acquire from Ladbroke Racing Corporation, all the issued and
outstanding stock of Ladbroke Land Holdings Inc. and Pacific Racing Association
Inc. These companies collectively own and operate Golden Gate Fields racetrack
in Albany, California. The purchase price for the stock of these companies is
$87 million, of which $60 million is payable in cash, $7 million is payable
through the issuance 1,012,195 shares of our Class A Subordinate Voting Stock
and $20 million is payable by way of an interest-free promissory note, $10
million of which matures on the first anniversary of the date of closing and
$5 million of which matures on each of the second and third anniversaries. We
expect to complete this acquisition in December 1999.
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CERTAIN INCOME TAX CONSIDERATIONS
Certain Canadian Federal Income Tax Considerations
This summary is applicable to persons who receive the special dividend of
Class A Subordinate Voting Stock (the "Special Dividend"), who, for purposes of
the Income Tax Act (Canada) (the "Tax Act") and at all relevant times, deal at
arm's length with Magna, are not and will not be resident or deemed to be
resident in Canada and do not and will not use and are not and will not be
deemed to use their Class A Subordinate Voting Stock in or in the course of
carrying on a business in Canada (each such holder referred to as a "non-
resident holder"). Special rules which are not discussed in this summary may
apply to a non-resident that is an insurer carrying on business in Canada and
elsewhere.
This summary is based on the current provisions of the Tax Act, the
regulations thereunder (the "Regulations"), the current published
administrative practices of Revenue Canada and the current provisions of the
Canada-U.S. Income Tax Convention (the "Tax Treaty"). This summary also takes
into account all specific proposals to amend the Tax Act and the Regulations
publicly announced prior to the date hereof (the "Draft Amendments") and
assumes the Draft Amendments will be enacted substantially as proposed,
although no assurance in this regard can be given. This summary does not
otherwise take into account or anticipate any changes in law, whether by way of
legislative, judicial or governmental action or interpretation, nor does it
address any provincial or foreign income tax considerations.
This summary is of a general nature only and is not intended to be, nor
should it be construed to be, legal or tax advice to any particular holder.
Accordingly, shareholders are advised to consult their own tax advisors
concerning the income tax consequences to them of the Special Dividend.
Special Dividend
A non-resident holder who receives Class A Subordinate Voting Stock in
payment of the Special Dividend will be subject to Canadian withholding tax at
a rate of 25% of the fair market value thereof at the time the Special Dividend
is paid subject to reduction by an applicable tax treaty. Pursuant to the
provisions of the Tax Treaty, the non-resident withholding tax is generally
reduced to a rate of 15% if the beneficial owner of the dividend is a U.S.
resident. Also, dividends paid or credited to a non-resident holder that is a
tax exempt organization as described in Article XXI of the Tax Treaty will not
be subject to withholding tax.
Magna will make a determination of the fair market value of the Special
Dividend for the purposes of determining the amount of the withholding tax and
for preparing the information statements in respect of the Special Dividend
which are required to be mailed by Magna to the non-resident holders. Any
determination of the fair market value by Magna is not binding on Revenue
Canada. The withholding tax liability will be satisfied by Magna withholding
the appropriate amount from the Magna regular quarterly cash dividend otherwise
payable to shareholders.
Certain United States Federal Income Tax Considerations
The following describes certain U.S. federal income tax considerations of
(i) the distribution of shares of our Class A Subordinate Voting Stock to a
person that is a citizen or resident of the United States or a U.S. domestic
corporation or that otherwise is subject to U.S. federal income tax on a net
basis (a "U.S. Holder") and (ii) the ownership and disposition of shares of our
Class A Subordinate Voting Shares by a stockholder that is not a U.S. Holder (a
"Non-U.S. Holder"). This summary is based on the U.S. Internal Revenue Code of
1986, as amended (the "Code"), administrative pronouncements, judicial
decisions and existing and proposed Treasury Regulations, changes to any of
which may affect the tax consequences described herein. This summary discusses
only the principal U.S. federal income tax consequences to those beneficial
owners holding our Class A Subordinate Voting Stock as capital assets within
the meaning of Section 1221 of the Code.
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Tax Treatment to U.S. Holders of the Distribution of Class A Subordinate
Voting Stock
A U.S. Holder will realize, to the extent of Magna's current and accumulated
earnings and profits, foreign source ordinary income on the receipt of shares
of our Class A Subordinate Voting Stock in an amount equal to the fair market
value of Class A Subordinate Voting Stock distributed (with the value of such
dividend computed before any reduction for any Canadian withholding tax).
Subject to the requirements and limitations imposed by the Code, a U.S. Holder
may elect to claim the Canadian tax withheld or paid with respect to the
distribution of shares of our Class A Subordinate Voting Stock as a foreign tax
credit against the U.S. federal income tax liability of the U.S. Holder. The
foreign tax credit will be allowable in respect of the distribution of our
Class A Subordinate Voting Stock only if the U.S. Holder has held Magna Class A
Subordinate Voting Shares for at least 16 days during the 30-day period
beginning 15 days before the ex-dividend date for the dividend of our Class A
Subordinate Voting Stock. The distribution of our Class A Subordinate Voting
Stock generally will constitute "passive income" or, in the case of certain
U.S. Holders, "financial services income" for U.S. foreign tax credit purposes.
U.S. Holders who do not elect to claim any foreign tax credits may claim a
deduction for Canadian income tax withheld.
Tax Treatment to Non-U.S. Holders of Owning Class A Subordinate Voting Stock
Dividends. In general, if we were to make distributions with respect to our
Class A Subordinate Voting Stock, such distributions would be treated as
dividends to the extent of our current or accumulated earnings and profits as
determined under the Code. Any distribution that is not a dividend will be
applied in reduction of the Non-U.S. Holder's basis in the Class A Subordinate
Voting Stock. To the extent the distribution exceeds such basis, the excess
will be treated as gain from the disposition of our Class A Subordinate Voting
Stock.
Dividends paid to a Non-U.S. Holder of Class A Subordinate Voting Stock
generally will be subject to withholding of U.S. federal income tax at a 30%
rate or such lower rate as may be provided by an applicable income tax treaty
between the United States and the country of which the Non-U.S. Holder is a tax
resident, unless (i) the dividends are effectively connected with the conduct
of a trade or business of the Non-U.S. Holder within the United States or (ii)
if a tax treaty applies, the dividends are effectively connected with the
conduct of a trade or business of the Non-U.S. Holder within the United States
and attributable to a United States permanent establishment (or a fixed base
through which certain personal services are performed) maintained by the Non-
U.S. Holder. For dividend payments made prior to the effective date of certain
pending United States Treasury Regulations, currently expected to be January 1,
2001, a Non-U.S. Holder may file IRS Form 4224, or successor form thereto, in
order to avoid withholding with respect to dividends that are effectively
connected with such Non-U.S. Holder's conduct of a trade or business in the
United States. However, for purposes of determining whether tax is to be
withheld at a rate of 30% of the gross amount of such dividends or at a reduced
rate as specified by an applicable tax treaty, we ordinarily will presume that
dividends paid to a holder with an address in a foreign country are paid to a
resident in such country absent knowledge that such presumption is not
warranted, and dividends paid to a holder with an address within the United
States generally will be presumed to be paid to a holder that is a U.S. person
and will not be subject to such withholding unless we have actual knowledge
that the holder is a Non-U.S. Holder. Under certain circumstances, a Non-U.S.
Holder is required to file IRS Form 1001, or successor form thereto, to claim
the benefit of a reduced withholding rate provided by an applicable income tax
treaty.
Dividends received by a Non-U.S. Holder that are effectively connected with
the conduct of a trade or business within the United States or, if a tax treaty
applies, are effectively connected with the conduct of a trade or business
within the United States and attributable to a U.S. permanent establishment (or
a fixed base through which certain personal services are performed), are
subject to U.S. federal income tax on a net income basis (that is, after
allowance for applicable deductions) at applicable graduated individual or
corporate rates. Any such dividends received by a Non-U.S. Holder that is a
corporation may, under certain circumstances, be subject to an additional
"branch profits tax" at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty.
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<PAGE>
A Non-U.S. Holder eligible for a reduced rate of withholding of U.S. federal
income tax may obtain a refund of any excess amounts withheld by timely filing
an appropriate claim for refund with the U.S. Internal Revenue Service.
Gain on Disposition of Class A Subordinate Voting Stock. A Non-U.S. Holder
generally will not be subject to U.S. federal income tax with respect to gain
recognized on a sale, exchange, or other disposition of Class A Subordinate
Voting Stock (including a redemption of Class A Subordinate Voting Stock
treated as a sale for federal income tax purposes) unless (i) the gain is
effectively connected with the conduct of a United States trade or business of
the Non-U.S. Holder, (ii) the Non-U.S. Holder is an individual who holds the
Class A Subordinate Voting Stock as a capital asset, is present in the United
States for 183 or more days in the taxable year of the sale or other
disposition, and either the individual has a "tax home" in the United States or
the sale is attributable to an office or other fixed place of business
maintained by the individual in the United States, or (iii) we are or have been
a "United States real property holding corporation" within the meaning of
Section 897(c)(2) of the Code at any time within the shorter of the five-year
period ending on the date of disposition or the Non-U.S. Holder's holding
period and certain other conditions are met. Assuming the shares of our Class A
Subordinate Voting Stock are regularly traded on an established securities
market, these conditions include your ownership of more than 5 percent of the
outstanding Class A Subordinate Voting Stock at any time during the 5-year
period ending on the date you sell any shares of your Class A Subordinate
Voting Stock.
Backup Withholding Tax and Information Reporting. Generally, we must report
to the IRS the amount of dividends paid, the name and address of the recipient,
and the amount, if any, of tax withheld. A similar report is sent to the
holder. Pursuant to tax treaties or other agreements, the IRS may make its
reports available to tax authorities in the recipient's country of residence.
Backup withholding at the rate of 31% may apply to payments subject to
information reporting (including dividends and proceeds of sale) made to
persons that fail to furnish certain identifying information in accordance with
the U.S. information reporting requirements.
Backup withholding and information reporting will not apply to payments of
dividends on the Class A Subordinate Voting Stock or gross proceeds of a sale
of Class A Subordinate Voting Stock if (i) the beneficial owner of Class A
Subordinate Voting Stock certifies under penalty of perjury that it is a Non-
U.S. Holder (for example, by providing the payor IRS Form W-8), (ii) payment is
made to an "exempt recipient" (which term includes corporations) or (iii) an
exemption is otherwise established.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to 31% backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the IRS.
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DIRECTORS AND EXECUTIVE OFFICERS
The names of our directors and senior officers and their ages, positions and
principal occupations are set forth below.
Directors
<TABLE>
<CAPTION>
Position with the Company and Principal
Name and Address Age Occupation
---------------- --- ---------------------------------------
<C> <C> <S>
J. Brian Colburn(1)...... 56 Executive Vice-President and Secretary (interim)
Toronto, Ontario of the Company and Executive Vice-President,
Special Projects and Secretary of Magna
Vincent Galifi(1)........ 39 Executive Vice-President, Finance (interim) of
Woodbridge, Ontario the Company and Executive Vice-President,
Finance and Chief Financial Officer of Magna
James Nicol.............. 45 Vice-Chairman and President (interim) of the
Toronto, Ontario Company and Vice-Chairman of Magna International
Inc.
Frank Stronach........... 67 Chairman and Chief Executive Officer (interim)
Oberwaltersdorf, Austria of the Company and Partner, Frank Stronach & Co.
</TABLE>
- --------
(1) Messrs. Colburn and Galifi intend to resign as directors effective on or
prior to the completion of the distribution upon the appointment of
replacement directors.
The term of office for each director expires at the conclusion of the next
annual meeting of our stockholders.
All of our directors have held the principal occupations identified above
(or another position with the same employer) for not less than five years, with
the exception of Mr. Nicol. Mr. Nicol served as a Vice-Chairman of Magna since
1998, prior to which time he served as Chairman and Chief Executive Officer of
TRIAM Automotive Inc. since February 1994. Prior to November 1992, Mr. Nicol
held various senior management positions within Magna and its subsidiaries.
Magna, as our sole stockholder, intends to appoint additional independent
directors forming a majority of our board of directors, in order to comply with
our Corporate Constitution, which we intend to implement prior to the
distribution, to take effect upon completion of the distribution. Upon
appointment of these additional independent directors, we will constitute an
Audit Committee and a Corporate Governance, Human Resources and Compensation
Committee. A majority of the members of each such committee will be comprised
of independent directors.
Primary Officers
<TABLE>
<CAPTION>
Position with the Company and Principal
Name and Address Age Occupation
---------------- --- ---------------------------------------
<C> <C> <S>
James Bromby............ 40 Corporate Controller of the Company
Toronto, Ontario
J. Brian Colburn(1)..... 56 Executive Vice-President and Secretary
Toronto, Ontario (interim) of the Company and Executive Vice-
President, Special Projects (since May 1992)
and Secretary (since January 1994) of Magna
Frank De Marco, Jr...... 74 Vice-President, Regulatory Affairs of the
Studio City, California Company and Executive Director, Secretary and
General Counsel of Los Angeles Turf Club, Inc.
(since April 1998)
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Position with the Company and Principal
Name and Address Age Occupation
---------------- --- ---------------------------------------
<C> <C> <S>
Vincent Galifi(1)........ 39 Executive Vice-President, Finance (interim) of
Woodbridge, Ontario the Company and Executive Vice-President,
Finance (since September 1996) and Chief
Financial Officer (since December 1997) of
Magna
James Nicol(1)........... 45 Vice-Chairman and President (interim) and
Toronto, Ontario Vice-Chairman of Magna (since May 1998)
Graham Orr(1)............ 53 Executive Vice-President and Chief Financial
Woodbridge, Ontario Officer (interim) of the Company and Executive
Vice-President, Corporate Development of Magna
(since October 1994)
Lonny Powell............. 39 Vice-President, Racetrack Operations of the
Glendora, California Company and President and Chief Executive
Officer of Los Angeles Turf Club, Inc. (since
July 1999)
Frank Stronach(1)........ 67 Chairman and Chief Executive Officer (interim)
Oberwaltersdorf, Austria of the Company and Partner, Frank Stronach &
Co.
</TABLE>
- --------
(1) Messrs. Colburn, Galifi, and Orr each intend to resign as officers
effective on or prior to the completion of the distribution upon the
appointment of replacement officers. Messrs. Stronach and Nicol intend to
resign as Chief Executive Officer and President, respectively, effective on
or prior to the completion of the distribution upon the appointment of
replacement officers.
All of our officers have held the principal occupations identified above (or
another position with the same employer) for the last five years, with the
exception of Lonny Powell, Frank DeMarco and James Bromby. Mr. Powell served as
the President of Turf Paradise from 1994 to 1999, the President of Multnomah
Greyhound Park from 1992 to 1994, Executive Vice-President and Chief Executive
Officer of Longacres Park from 1990 to 1992, General Manager of Woodlands in
1990, Coordinator and Director of the University of Arizona Racetrack Industry
Program from 1986 to 1990 and Assistant General Manager of Longacres Park from
1982 to 1986. Mr. De Marco has been a practicing attorney in Los Angeles County
since 1951. Mr. Bromby has served in various capacities at Magna since 1998 and
served as Senior Manager at PricewaterhouseCoopers in Toronto from 1994 to 1998
and in London, England from 1989 to 1994.
Prior to the date of this Information Statement, none of our directors or
officers owned beneficially any of our Class A Subordinate Voting Stock or
Class B Stock. Following the distribution, all of our directors and officers as
a group ( . persons) will beneficially own . of shares of our Class A
Subordinate Voting Stock, representing approximately . % of our Class A
Subordinate Voting Stock on a fully-diluted basis and none of our Class B
Stock. See "Security Ownership of Certain Beneficial Owners and Management".
Employment Agreements
We expect to enter into employment contracts with senior management
effective on or prior to the distribution date. These employment contracts will
generally provide for base salaries and annual bonuses (in most cases based on
a specified percentage of our pre-tax profits before profit sharing), continued
ownership of a minimum amount of our Class A Subordinate Voting Stock,
confidentiality obligations and non-competition covenants. Each such employment
contract will provide that we may terminate the senior officer's employment by
giving minimum advance written notice of termination or by paying a retiring
allowance in lieu thereof.
Once adopted, our Corporate Constitution will provide that aggregate
incentive bonuses (which may be paid in cash or deferred for payment in future
years or which may be paid in our Class A Subordinate Voting Stock) paid or
payable to senior management in respect of any fiscal year shall not exceed 6%
of our pre-tax profits before profit sharing for such fiscal year. See
"Description of Securities--Corporate Constitution" below.
We are not required to make payments under any employment contract with our
senior officers in the event of a change in control.
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Stock Option Plan
We intend to adopt an incentive stock option plan (the "Stock Option Plan")
in order to provide incentive stock options and stock appreciation rights in
respect of our Class A Subordinate Voting Stock to our eligible senior officers
and employees. Certain persons engaged by us to provide management or
consulting services to us or for our benefit would also be eligible to receive
stock options and stock appreciation rights under the Stock Option Plan.
Under the Stock Option Plan, stock options and stock appreciation rights may
be granted in respect of a maximum of . shares of our Class A Subordinate
Voting Stock, subject to customary anti-dilution adjustments. The option price
for any option granted under the Stock Option Plan will be established at the
time of the grant, but must be at least equal to the closing price of shares of
our Class A Subordinate Voting Stock on the trading day immediately prior to
the date of the grant. Each option is exercisable in such manner as determined
at the date of grant and options will not be granted for terms exceeding 10
years. The Stock Option Plan will provide that:
(a) the number of shares of our Class A Subordinate Voting Stock reserved
for issuance pursuant to stock options granted to insiders may not
exceed 10% of our then outstanding Class A Subordinate Voting Stock and
Class B Stock;
(b) the number of shares of our Class A Subordinate Voting Stock issuable
to insiders within a one-year period may not exceed 10% of our then
outstanding Class A Subordinate Voting Stock and Class B Stock; and
(c) the number of shares of our Class A Subordinate Voting Stock issuable
to any one insider and that insider's associates within a one-year
period may not exceed 5% of our then outstanding Class A Subordinate
Voting Stock and Class B Stock.
The Stock Option Plan will be administered by the Corporate Governance,
Human Resources and Compensation Committee of our board of directors. The
option price will be payable in cash at the time of exercise or, at the
discretion of the Corporate Governance, Human Resources and Compensation
Committee, by delivery to us of other consideration or securities.
Our Corporate Governance, Human Resources and Compensation Committee may
also grant a stock appreciation right which will permit an optionee to elect to
surrender an unexercised option, or any portion thereof, and to receive from us
in exchange therefor an amount equal to the difference between the market price
and the option exercise price of shares of our Class A Subordinate Voting Stock
subject to such option. This grant may be made either at the time of the grant
of an option under the Stock Option Plan or prior to the expiry or exercise of
such option. The number of shares of our Class A Subordinate Voting Stock
subject to a stock appreciation right may not exceed the number of shares of
our Class A Subordinate Voting Stock subject to such option. In general, stock
appreciation rights will be exercisable only at such times as the options in
respect of which they are granted are exercisable. The amount payable as a
result of the exercise of a stock appreciation right may, at the discretion of
our Corporate Governance, Human Resources and Compensation Committee, be paid
in shares of our Class A Subordinate Voting Stock, cash or a combination of our
Class A Subordinate Voting Stock and cash.
No options or stock appreciation rights granted under the Stock Option Plan
will be transferable other than by will or by the laws of descent and
distribution and each option or stock appreciation right will be exercisable
during the lifetime of the holder only by him or her.
Subject to regulatory approval and (where required) stockholder approval,
our board of directors may amend, revise, suspend or discontinue the Stock
Option Plan in whole or in part. However, such amendment, revision, suspension
or discontinuance may not without the consent of a participant, alter or impair
such participant's previously granted rights under the Stock Option Plan.
59
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of November 5, 1999 regarding
the beneficial ownership of our Class A Subordinate Voting Stock and Class B
Stock by each person known by us to own more than five percent of the issued
and outstanding shares of our Class A Subordinate Voting Stock and our Class B
Stock.
The number and percentage of shares of our stock beneficially owned are
based on:
. no outstanding shares of our Class A Subordinate Voting Stock as of
November 5, 1999
. 78,535,328 shares of Class B Stock outstanding as of November 5,
1999.
<TABLE>
<CAPTION>
Name and Address Amount and Nature of
Class of Securities of Beneficial Holder Beneficial Ownership Percent of Class
- ------------------- -------------------- -------------------- ----------------
<S> <C> <C> <C>
Class B Stock........... Magna International Inc.(1) 78,535,328 100%
337 Magna Drive
Aurora, Ontario
L4G 7K1
</TABLE>
- --------
(1) Magna directly owns 73,322,336 (or 93.36%) of these shares of our Class B
Stock. The remaining shares are owned through direct or indirect wholly
owned subsidiaries of Magna.
As of November 5, 1999, none of our directors or officers owned any shares
of our Class A Subordinate Voting Stock or Class B Stock.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Relationship with Magna
Magna was incorporated under the laws of Ontario, Canada. The Class A
Subordinate Voting Shares of Magna are listed for trading on the NYSE, the TSE
and the ME. Magna's Class B Shares are listed on the TSE. Magna is currently
our sole stockholder. Upon completion of the distribution, Magna will own all
our Class B Stock (and none of our Class A Subordinate Voting Stock), which
means that Magna will be entitled to exercise approximately 99% of the total
votes attached to all our outstanding stock. Magna will therefore continue to
be able to elect all our directors and continue to control us.
Once implemented prior to the distribution, our Corporate Constitution will
require that a minimum of two directors be individuals who are not our officers
or employees, officers or employees of any of our affiliates (including Magna),
directors of any of our affiliates (including Magna), or persons related to any
such officers, employees or directors. Our Corporate Constitution will also
require that a majority of our directors be individuals who are not our
officers or employees or individuals related to such persons. See "Description
of Securities--Corporate Constitution--Board of Directors". Policies of
applicable securities regulatory authorities also recommend that issuers
involved in a "related party transaction" have such transaction approved by a
special committee of directors, consisting only of directors who are
independent of the interested party and, in certain circumstances, that an
independent valuation and the approval of such transaction by a majority of the
disinterested stockholders be obtained. We intend to constitute such a special
committee of directors in appropriate circumstances and to comply with such
other requirements as may be opposed under applicable law.
Magna has made a commitment to its shareholders that it will not, for a
period of seven years ending May 31, 2006, without the prior consent of the
holders of a majority of Magna's Class A Subordinate Voting Shares: (i) make
any further debt or equity investment in us or any of our subsidiaries; or (ii)
invest in any non-automotive-related businesses or assets other than through
its investment in us. Magna has also stated to its
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<PAGE>
shareholders that it intends to convert some shares of our Class B Stock to
shares of our Class A Subordinate Voting Stock and dispose of additional shares
of our Class A Subordinate Voting Stock when market conditions for doing so are
favorable, with the ultimate intention of retaining only a minority equity
position. This may occur through a combination of: (i) secondary sales by Magna
of such stock held by it; and/or (ii) the dilution of its interest through the
issuance of Class A Subordinate Voting Stock by us in connection with capital
market transactions, acquisitions and/or other investments by business partners
in us.
See Note 10 to the Consolidated Financial Statements regarding certain
transactions between us and Magna.
Control of the Company
After giving effect to the distribution, Magna will continue to be able to
elect all our directors and will continue to control us. Therefore, Magna will
continue to be able to cause us to effect certain corporate transactions
without the consent of our minority stockholders, subject to applicable law. In
addition, Magna will continue to be able to cause or prevent a change in our
control. The Stronach Trust controls Magna through the right to direct the
votes attaching to Class B Shares of Magna which carry a majority of the votes
attaching to the outstanding voting shares of Magna. Frank Stronach, one of our
directors, and the founder, a director and Chairman of the Board of Directors
of Magna, together with three other members of his family, are the trustees of
the Stronach Trust. Mr. Stronach is also one of the members of the class of
potential beneficiaries of the Stronach Trust.
Purchase of Land in Aurora, Canada
During the five month period ended December 31, 1998, Magna entered into an
agreement to purchase from a company associated with members of the family of
Frank Stronach, the Chairman of the Board of Magna, approximately 200 acres of
land and improvements in Aurora, Ontario for a purchase price of approximately
$11.0 million. This land is adjacent to land currently owned by Magna and other
land subject to a conditional sale agreement by Magna to us. As at August 31,
1999, Magna had paid $9.0 million to the vendor in connection with this
transaction. The rights to acquire this land and improvements, as well as golf
course construction in progress funded by Magna, have been transferred to us as
part of the Reorganization (see "Reorganization" above).
Access Fees
Magna is currently paying us an annual fee to access the Fontana Sports golf
course and related recreational facilities for Magna-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. Upon completion of
Aurora Downs, Magna will enter into an agreement to pay us an annual access fee
to use Aurora Downs for Magna-sponsored corporate and charitable events and
business development purposes. The access fee agreement relating to Aurora
Downs will expire five years from the date of such agreement. We have also
granted Magna a right of first refusal to purchase these two golf courses, if
we decide to sell them.
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<PAGE>
LEGAL PROCEEDINGS
One of our subsidiaries has been named as a defendant in a class action
brought in a United States District Court by Gutwillig et al. The plaintiffs in
this class action claim unspecified compensatory and punitive damages, for
restitution and disgorgement of profits, all in relation to forced labor
performed by the plaintiffs for such subsidiary and certain other Austrian and
German corporate defendants at their facilities in Europe during World War II.
As a result of the transactions described under the heading "Reorganization"
above, we acquired the stock of such subsidiary. Under Austrian law, such
subsidiary would be jointly and severally liable for the damages awarded in
respect of this class action claim. We cannot predict the final outcome of this
class action suit, or establish a reasonable estimate of possible damages or a
range of possible damages that could be awarded to the plaintiffs if their
claims are successful. However, an Austrian subsidiary of Magna has agreed to
indemnify such subsidiary for any damages or expenses associated with this
claim.
From time to time, various routine claims incidental to our business are
made against us. None of these claims have had, and we believe that none of the
current claims, if successful, will have, a materially adverse effect upon us.
TRADING HISTORY AND DIVIDEND RECORD AND POLICY
There has been no market for the shares of our Class A Subordinate Voting
Stock or Class B Stock.
Holders of shares of our Class A Subordinate Voting Stock and our Class B
Stock are entitled to receive their proportionate shares of dividends as may be
declared by our board of directors, subject to the prior rights attaching to
any other stock ranking in priority to our Class A Subordinate Voting Stock and
our Class B Stock.
Subject to applicable law, we intend to pay dividends starting with the
fiscal year commencing January 1, 2004 in respect of the quarter commencing on
that date and each succeeding quarter on our Class A Subordinate Voting Stock
and our Class B Stock. We will declare future dividends on our Class A
Subordinate Voting Stock and our Class B Stock in accordance with our articles
of incorporation and our Corporate Constitution. See "Description of
Securities--Corporate Constitution--Dividends".
We were incorporated on March 4, 1999 and have not declared any dividends to
date.
RECENT SALES OF UNREGISTERED SECURITIES
In connection with the transactions described under the heading
"Reorganization", Magna received approximately $300 million of shares of our
stock in consideration for the transfer to us of certain assets and the
cancellation of certain intercompany indebtedness. In addition, Magna
subscribed for shares of our stock in consideration for a cash payment of
approximately $250 million. These issuances, totalling 78,535,328 shares of our
Class B Stock, were made in reliance on the exemption from registration
provided in Section 4(2) of the United States Securities Act of 1933 for
transactions by an issuer not involving any public offering and in reliance
upon exemptions from Canadian prospectus requirements.
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<PAGE>
DESCRIPTION OF SECURITIES
Our authorized stock consists of 310,000,000 shares of Class A Subordinate
Voting Stock, par value $0.01, and 90,000,000 shares of Class B Stock, par
value $0.01.
Neither Delaware law nor our articles of incorporation or by-laws limit the
right of non-resident or foreign owners of our Class A Subordinate Voting Stock
or Class B Stock to hold or to vote such stock.
Class A Subordinate Voting Stock
Holders of our Class A Subordinate Voting Stock are entitled:
. to one vote for each share of Class A Subordinate Voting Stock held at
all meetings of our stockholders, excluding meetings of the holders of
another class or series of stock; holders of shares of our Class B Stock
are entitled to vote at such meetings on the basis of 20 votes per share
of Class B Stock held;
. to receive a proportionate share of dividends that may be declared by
our Board of Directors, other than certain stock dividends described
below, and subject to the prior rights of stock ranking prior to our
Class A Subordinate Voting Stock and our Class B Stock; and
. to receive a proportionate share of proceeds from the sale of our
property and net assets available for distribution in the event of our
liquidation, dissolution, winding-up or any other distribution of our
assets among our stockholders for the purpose of winding-up our affairs.
Under our articles of incorporation, our Board of Directors may declare a
simultaneous stock dividend payable on our Class A Subordinate Voting Stock in
Class A Subordinate Voting Stock and on our Class B Stock in Class A
Subordinate Voting Stock or Class B Stock (which would cause additional voting
dilution to holders of our Class A Subordinate Voting Stock). No dividend
payable in Class B Stock may be declared on our Class A Subordinate Voting
Stock.
Holders of our Class A Subordinate Voting Stock have certain additional
voting rights under our Corporate Constitution. See "Description of
Securities--Corporate Constitution" below.
Our articles of incorporation state that where such articles (including the
Corporate Constitution) require the approval of the holders of our Class A
Subordinate Voting Stock voting as a separate class, such approval means the
approval given by a majority of the votes cast at a meeting of such holders
other than the votes attaching to shares of Class A Subordinate Voting Stock
beneficially owned directly or indirectly by Magna or by any person who, by
agreement, is acting jointly with Magna or over which Magna or any such person
exercises direct or indirect control or direction. No such limitations would
apply to any other holder of shares of Class A Subordinate Voting Stock.
Class B Stock
The holders of our Class B Stock are entitled:
. to 20 votes for each share of Class B Stock held at all meetings of our
stockholders, other than meetings of the holders of another class or
series of stock; holders of our Class A Subordinate Voting Stock are
entitled to vote at such meetings on the basis of one vote per share
held;
. to receive a proportionate share of any dividends that may be declared
by our board of directors other than certain stock dividends as
described above and subject to the prior rights of stock ranking in
priority to our Class B Stock and our Class A Subordinate Voting Stock;
. to receive a proportionate share of the proceeds from the sale of our
property and net assets available for distribution in the event of our
liquidation, dissolution, winding-up or any other distribution of our
assets among our stockholders for the purpose of winding-up our affairs;
and
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<PAGE>
. from time to time, to convert the Class B Stock into Class A Subordinate
Voting Stock on a one-for-one basis. Our Class B Stock cannot be issued
without the approval by ordinary resolution of the holders of our Class
B Stock voting separately as a class, other than in connection with a
stock dividend.
Corporate Constitution
We have adopted certain organizational and operating policies and
principles, some of which will be embodied in our Corporate Constitution. Our
Corporate Constitution, which will form part of our charter documents, defines
the rights of employees and investors to participate in our profits and growth
and imposes discipline on our management. The following description summarizes
the material terms and provisions of our Corporate Constitution. These features
cannot be amended or varied without the prior approval of the holders of our
Class A Subordinate Voting Stock (other than Magna or any person who, by
agreement, is acting jointly with Magna or over which Magna or any such person
exercises direct or indirect control or direction) and our Class B Stock, each
voting as a separate class.
Board of Directors
Our Corporate Constitution provides that, unless otherwise approved by the
holders of our Class A Subordinate Voting Stock and our Class B Stock, each
voting as a separate class, a majority of the members of our Board of Directors
shall be individuals who are not our officers or employees or individuals
related to such persons and that a minimum of two directors shall be persons
who are not officers or employees of us or any of our affiliates (including
Magna) or directors of any of our affiliates (including Magna), nor persons
related to any such officers, employees or directors.
Employee Profit Sharing Plan
Our Corporate Constitution requires that 10% of our pre-tax profits before
profit sharing for each fiscal year commencing in respect of our fiscal year
commencing January 1, 2004 be allocated to our employee profit sharing plan
and/or otherwise be distributed to our employees or the employees of our
affiliates who do not participate in a similar plan, and who do not receive
management incentive bonuses, during such year or the immediately following
fiscal year. See "Incentive Bonuses" below.
Dividends
Our Corporate Constitution provides that, commencing in respect of our
fiscal year commencing January 1, 2004, unless otherwise approved by ordinary
resolution of the holders of each of our Class A Subordinate Voting Stock and
our Class B Stock, voting as separate classes, the holders of our Class A
Subordinate Voting Stock and our Class B Stock will be entitled to receive and
we will pay, as and when declared by our Board of Directors out of funds
properly applicable to the payment of dividends, non-cumulative dividends in
respect of such fiscal years so that the aggregate of the dividends paid or
payable in respect of such year is at least equal to 10% of our after-tax
profits for our fiscal years commencing January 1, 2004 and 2005. In respect of
each fiscal year thereafter, holders of our Class A Subordinate Voting Stock
and Class B Stock will be entitled to receive dividends in respect of such
fiscal years so that the aggregate of the dividends paid or payable in respect
of such year is (i) equal to at least 10% of our after-tax profits and (ii) on
average, equal to at least 20% of our after-tax profits for such fiscal year
and the two immediately preceding fiscal years.
Authorized Capital
Except as otherwise approved by the holders of at least a majority of each
of our Class A Subordinate Voting Stock and our Class B Stock, voting as
separate classes, our Corporate Constitution prohibits: (i) an increase in the
maximum number of authorized shares of any class of our capital stock; and (ii)
the creation of any new class or series of stock having voting rights (other
than on default in the payment of dividends) or
64
<PAGE>
having rights to participate in our profits (other than securities convertible
into existing classes of stock or a class or series of stock having fixed
dividends or dividends determined without regard to profits).
Social Objectives
Beginning in respect of our fiscal year commencing January 1, 2004, pursuant
to our Corporate Constitution, a maximum of 2% of our pre-tax profits for any
fiscal year shall be allocated to the promotion of certain social objectives
during such fiscal year or the immediately following fiscal year. The term
"social objectives" is defined to mean objectives which, in the sole opinion of
our executive management, are of a political, patriotic, philanthropic,
charitable, educational, scientific, artistic, social or other useful nature to
the communities in which we operate.
Incentive Bonuses
Our Corporate Constitution provides that, effective in our fiscal year
commencing January 1, 2004, incentive bonuses (which may be paid in cash or in
our Class A Subordinate Voting Stock) paid or payable to our corporate
management in respect of each fiscal year shall not exceed 6% of our pre-tax
profits before profit sharing for such fiscal year and that base salaries
payable to such corporate management shall be comparable to those in the
industry generally. "Corporate management" is defined to mean our chief
executive officer, chief operating officer, chief marketing officer and chief
administrative officer and any other employee designated by such persons from
time to time to be included within "corporate management".
INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 145 of the Delaware General Corporation Law, our by-
laws require us to indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending or completed action, suit or
proceeding by reason of the fact that such person is or was or has agreed to
become one of our directors, officers, employees or agents, or has agreed to
serve at our request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise. Our
indemnification obligation extends to costs, charges, expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by any such person or on his or her behalf in connection
with such an action, suit or proceeding and any appeal therefrom, if any such
person acted in good faith in a manner he or she reasonably believed to be in
or not opposed to our best interests and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his or her conduct was
unlawful. Our certificate of incorporation also provides that, to the extent
permitted by law, our directors will have no liability to us or our
stockholders for monetary damages for breach of fiduciary duty as a director.
We are covered under Magna's liability insurance which provides for coverage
for our officers and directors and officers and directors of our subsidiaries,
subject to a deductible for executive indemnification. The policy does not
provide coverage for losses arising from violations of, or the enforcement of,
environmental laws and regulations.
AUDITORS, TRANSFER AGENT AND REGISTRAR
Our auditors are Ernst & Young LLP, 2049 Century Park East, Suite 1700, Los
Angeles, California 90067.
The transfer agent and registrar for our Class A Subordinate Voting Stock is
. at its principal office in . .
PROMOTER
Since Magna took the initiative in substantially reorganizing our business
and capital, Magna may be a promoter of us within the meaning of the securities
laws of certain provinces of Canada. See "Relationship with Magna", "Security
Ownership of Certain Beneficial Owners and Management", "Certain Relationships
and Related Transactions" and "Reorganization".
65
<PAGE>
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Unaudited Pro Forma Consolidated Financial Statements of MI Entertainment
Corp. as at and for the eight months ended August 31, 1999 and the year
ended December 31, 1998................................................. F-2
Audited Consolidated Financial Statements of MI Entertainment Corp. as at
and for the five month period ended December 31, 1998 and July 31, 1998
and the years ended July 31, 1997 and 1996.............................. F-12
Audited Financial Statements of Los Angeles Turf Club, Inc. as at
December 10, 1998 and
December 31, 1997 and for the periods from January 1, 1998 through
December 10, 1998, January 1, 1997 through November 5, 1997, November 6,
1997 through December 31, 1997 and for the year ended December 31,
1996.................................................................... F-38
Audited Consolidated Financial Statements of Gulfstream Park Racing
Association, Inc. and Subsidiary as at December 31, 1998 and 1997 and
for each of the years in the three year period ended
December 31, 1998....................................................... F-53
Audited Financial Statements of Remington Park, Inc. as at December 31,
1998 and 1997 and for each of the years in the three year period ended
December 31, 1998....................................................... F-64
Audited Financial Statement of Thistledown, Inc. as at December 31, 1998
and 1997 and for each of the years in the three year period ended
December 31, 1998....................................................... F-77
Audited Combined Financial Statements of Golden Gate Fields (consisting
of Pacific Racing Association's operations subject to licensing
provisions of the California Horse Racing Board, Ladbroke Racing
California, Inc. and Ladbroke Landholdings, Inc. (wholly-owned
subsidiaries of Ladbroke Racing Corporation)) as at December 31, 1998
and 1997 and for each of the years in the three year period ended
December 31, 1998....................................................... F-89
</TABLE>
F-1
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
MI ENTERTAINMENT CORP.
For the eight month period ended August 31, 1999 and
the year ended December 31, 1998
F-2
<PAGE>
MI ENTERTAINMENT CORP.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME (LOSS) AND COMPREHENSIVE INCOME
(LOSS)
for the Year Ended December 31, 1998
[Unaudited]
[U.S. dollars in thousands, except per share information]
<TABLE>
<CAPTION>
MI
Entertainment Santa
Corp. Anita LATC
Year Ended Real Adjustments Gulfstream
December 31, LATC Estate (Notes 2(a)(iii) Gulfstream Adjustments Remington
1998 (Note 2(a)(i)) (Note 2(a)(ii)) thru (vi)) (Note 2(b)(i)) (Note 2(b)(iii)) (Note 2(c)(i))
------------- -------------- --------------- ---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Racetrack........ $ 3,952 $63,162 $ $ $23,648 $ $15,492
Real estate...... 21,239
------- ------- ------- ------ ------- ------ -------
25,191 63,162 23,648 15,492
------- ------- ------- ------ ------- ------ -------
Costs and
expenses
Racetrack
operating
costs............ 3,625 62,586 (10,184) (303) 16,392 16,994
Real estate
operating
costs............ 27,355
Impairment of
long-lived
assets........... 2,837
Depreciation and
amortization..... 2,759 1,200 695 982 1,860 4,033 2,707
Interest expense
(income), net.... 2,075 1,089 (924) 3,308 (3,231) 2,182
------- ------- ------- ------ ------- ------ -------
35,814 64,875 (9,489) (245) 21,560 802 24,720
------- ------- ------- ------ ------- ------ -------
Income (loss)
before income
taxes............ (10,623) (1,713) 9,489 245 2,088 (802) (9,228)
Income tax
provision
(recovery)....... (177) 3,269 861 (331)
------- ------- ------- ------ ------- ------ -------
Net income
(loss)........... (10,446) (1,713) 9,489 (3,024) 1,227 (471) (9,228)
Other
comprehensive
income:
Foreign currency
translation
adjustment....... 2,866
------- ------- ------- ------ ------- ------ -------
Comprehensive
income (loss).... (7,580) (1,713) 9,489 (3,024) 1,227 (471) (9,228)
======= ======= ======= ====== ======= ====== =======
Basic and diluted
earnings (loss)
per share of
Class A
Subordinate
Voting and
Class B Stock....
Average number of
shares of Class A
Subordinate
Voting and Class
B Stock
outstanding
during the period
[in thousands]:
Basic and
diluted......... 78,535
=======
<CAPTION>
Other
Golden Pro Forma Pro Forma
Remington Thistledown Golden Gate Adjustments Consolidated
Adjustments Thistledown Adjustments Gate Adjustments (Notes 2(f) Statement of
(Note 2(c)(iii)) (Note 2(d)(i)) (Note 2(d)(iii)) (Note 2(e)(i)) (Note 2(e)(iii)) thru (i)) Income
---------------- -------------- ---------------- -------------- ---------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue
Racetrack........ $ $17,680 $ $25,651 $ $ $149,585
Real estate...... 21,239
---------------- -------------- ---------------- -------------- ---------------- ----------- ------------
17,680 25,651 170,824
---------------- -------------- ---------------- -------------- ---------------- ----------- ------------
Costs and
expenses
Racetrack
operating
costs............ 16,027 21,677 (536) 126,278
Real estate
operating
costs............ 27,355
Impairment of
long-lived
assets........... (2,837)
Depreciation and
amortization..... 91 1,465 215 3,621 (340) 19,288
Interest expense
(income), net.... (2,308) 487 (576) 1,697 (359) (1,825) 1,615
---------------- -------------- ---------------- -------------- ---------------- ----------- ------------
(5,054) 17,979 (361) 26,995 (1,235) (1,825) 174,536
---------------- -------------- ---------------- -------------- ---------------- ----------- ------------
Income (loss)
before income
taxes............ 5,054 (299) 361 (1,344) 1,235 1,825 (3,712)
Income tax
provision
(recovery)....... (1,461) 253 (228) 202 (104) 2,284
---------------- -------------- ---------------- -------------- ---------------- ----------- ------------
Net income
(loss)........... 6,515 (552) 589 (1,546) 1,339 1,825 (5,996)
Other
comprehensive
income:
Foreign currency
translation
adjustment....... 2,866
---------------- -------------- ---------------- -------------- ---------------- ----------- ------------
Comprehensive
income (loss).... 6,515 (552) 589 (1,546) 1,339 1,825 (3,130)
================ ============== ================ ============== ================ =========== ============
Basic and diluted
earnings (loss)
per share of
Class A
Subordinate
Voting and
Class B Stock.... $ (0.07)
============
Average number of
shares of Class A
Subordinate
Voting and Class
B Stock
outstanding
during the period
[in thousands]:
Basic and
diluted......... 651 1,012 80,198
================ ================ ============
</TABLE>
See accompanying notes
F-3
<PAGE>
MI ENTERTAINMENT CORP.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME (LOSS) AND COMPREHENSIVE INCOME
(LOSS)
for the Eight Months Ended August 31, 1999
[Unaudited]
[U.S. dollars in thousands, except per share information]
<TABLE>
<CAPTION>
MI Entertainment
Corp.
Eight Months
Ended Gulfstream Remington
August 31, Gulfstream Adjustments Remington Adjustments Thistledown
1999 (Note 2(b)(i)) (Note 2(b)(iii)) (Note 2(c)(i)) (Note 2(c)(iii)) (Note 2(d)(i))
---------------- -------------- ---------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenue
Racetrack....... $57,557 $24,030 $ $8,748 $ $11,971
Real estate..... 10,974
------- ------- ------- ------ ----- -------
68,531 24,030 8,748 11,971
------- ------- ------- ------ ----- -------
Costs and
expenses
Racetrack
operating
costs........... 42,245 13,614 8,916 10,743
Real estate
operating
costs........... 10,605
Depreciation and
amortization.... 4,041 1,292 2,689 432 61 960
Interest expense
(income), net... 522 2,041 (1,980) (83) 218
------- ------- ------- ------ ----- -------
57,413 16,947 709 9,265 61 11,921
------- ------- ------- ------ ----- -------
Income (loss)
before income
taxes........... 11,118 7,083 (709) (517) (61) 50
Income tax
provision
(recovery)...... 5,342 2,810 (281) (202) 16
------- ------- ------- ------ ----- -------
Net income
(loss).......... 5,776 4,273 (428) (517) 141 34
Other
comprehensive
loss:
Foreign currency
translation
adjustment...... (5,631)
------- ------- ------- ------ ----- -------
Comprehensive
income (loss)... 145 4,273 (428) (517) 141 34
======= ======= ======= ====== ===== =======
Basic and
diluted earnings
per share of
Class A
Subordinate
Voting and Class
B Stock.........
Average number
of shares of
Class A
Subordinate
Voting and
Class B Stock
outstanding
during the
period [in
thousands]:
Basic and
diluted......... 78,535
=======
<CAPTION>
Golden Other Pro Forma
Thistledown Golden Gate Pro Forma Consolidated
Adjustments Gate Adjustments Adjustments Statement of
(Note 2(d)(iii)) (Note 2(e)(i)) (Note 2(e)(iii)) (Notes 2(f) thru (i)) Income
---------------- -------------- ---------------- --------------------- ------------
<S> <C> <C> <C> <C> <C>
Revenue
Racetrack....... $ $20,294 $ $ $122,600
Real estate..... 10,974
---------------- -------------- ---------------- --------------------- ------------
20,294 133,574
---------------- -------------- ---------------- --------------------- ------------
Costs and
expenses
Racetrack
operating
costs........... 15,114 (124) 90,508
Real estate
operating
costs........... 10,605
Depreciation and
amortization.... 143 1,691 752 12,061
Interest expense
(income), net... (308) 1,631 (1,189) (475) 377
---------------- -------------- ---------------- --------------------- ------------
(165) 18,436 (561) (475) 113,551
---------------- -------------- ---------------- --------------------- ------------
Income (loss)
before income
taxes........... 165 1,858 561 475 20,023
Income tax
provision
(recovery)...... 66 2,300 (1,332) 8,719
---------------- -------------- ---------------- --------------------- ------------
Net income
(loss).......... 99 (442) 1,893 475 11,304
Other
comprehensive
loss:
Foreign currency
translation
adjustment...... (5,631)
---------------- -------------- ---------------- --------------------- ------------
Comprehensive
income (loss)... 99 (442) 1,893 475 5,673
================ ============== ================ ===================== ============
Basic and
diluted earnings
per share of
Class A
Subordinate
Voting and Class
B Stock......... $ 0.14
============
Average number
of shares of
Class A
Subordinate
Voting and
Class B Stock
outstanding
during the
period [in
thousands]:
Basic and
diluted......... 651 1,012 80,198
================ ================ ============
</TABLE>
See accompanying notes
F-4
<PAGE>
MI ENTERTAINMENT CORP.
PRO FORMA CONSOLIDATED BALANCE SHEET
as at August 31, 1999
[Unaudited]
[U.S. dollars in thousands]
<TABLE>
<CAPTION>
MI Gulfstream Remington
Entertainment Gulfstream Adjustments Remington Adjustments
Corp. (Note 2(b)(ii)) (Note 2(b)(iii)) (Note 2(c)(ii)) (Note 2(c)(iii))
------------- --------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.... $ 15,629 $ 7,996 $(89,200) $ 3,934 $(10,250)
Accounts
receivable..... 6,963 250 444
Inventories.... 597 166
Prepaid
expenses and
other.......... 1,329 911 302
-------- -------- -------- -------- --------
24,518 9,157 (89,200) 4,846 (10,250)
Real estate
properties and
fixed assets,
net............. 352,872 12,845 63,883 8,804
Deferred income
taxes...........
Other assets.... 16 69,142 1,331 1,816
-------- -------- -------- -------- --------
377,390 22,018 43,825 14,981 (8,434)
======== ======== ======== ======== ========
<CAPTION>
Golden Other Pro Forma
Thistledown Golden Gate Pro Forma Consolidated
Thistledown Adjustments Gate Adjustments Adjustments Balance
(Note 2(d)(ii)) (Note 2(d)(iii)) (Note (2(e)(ii)) (Note 2(e)(iii)) (Notes 2(f) thru (h)) Sheet
--------------- ---------------- ---------------- ---------------- --------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.... $ 4,517 $ (9,750) $ 48,141 $(106,389) $214,760 $ 79,388
Accounts
receivable..... 2,658 988 11,303
Inventories.... 169 932
Prepaid
expenses and
other.......... 73 288 2,903
--------------- ---------------- ---------------- ---------------- --------------------- ------------
7,417 (9,750) 49,417 (106,389) 214,760 94,526
Real estate
properties and
fixed assets,
net............. 9,806 48,554 36,142 532,906
Deferred income
taxes........... 3,041 3,041
Other assets.... 1,099 4,292 2,537 28,439 108,672
--------------- ---------------- ---------------- ---------------- --------------------- ------------
18,322 (5,458) 100,508 (41,808) 217,801 739,145
=============== ================ ================ ================ ===================== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
liabilities:
Bank
indebtedness... $ 7,339 $ $ $ $
Accounts
payable........ 6,050 751 1,579
Accrued
salaries and
wages.......... 676
Refundable
deposits....... 2,048
Other accrued
liabilities.... 5,257 1,037 4,354
Income taxes
payable........ 4,300 1,507
Long-term debt
due within one
year........... 3,323 6,800 8
Deferred
revenue........ 2,337 1,844 587
Note payable to
Magna.......... 35,240
-------- -------- -------- -------- --------
66,570 11,939 6,528
-------- -------- -------- -------- --------
Long-term debt.. 12,040 48,000 (48,000)
-------- -------- -------- -------- --------
Other long-term
liabilities..... 1,317 19
-------- -------- -------- -------- --------
Deferred income
taxes........... 522 694 53,210
-------- -------- -------- -------- --------
Magna's net
investment...... 296,941
Share capital... 21,238 (21,238) 48,149 (48,149)
Deficit......... (59,853) 59,853 (39,715) 39,715
-------- -------- -------- -------- --------
296,941 (38,615) 38,615 8,434 (8,434)
-------- -------- -------- -------- --------
377,390 22,018 43,825 14,981 (8,434)
======== ======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current
liabilities:
Bank
indebtedness... $ $ $ $ $ $ 7,339
Accounts
payable........ 3,758 22,378 (19,864) 14,652
Accrued
salaries and
wages.......... 676
Refundable
deposits....... 2,048
Other accrued
liabilities.... 1,597 3,451 (34) 15,662
Income taxes
payable........ 5,807
Long-term debt
due within one
year........... 2,594 (2,594) 10,131
Deferred
revenue........ 23 4,791
Note payable to
Magna.......... (35,240)
--------------- ---------------- ---------------- ---------------- --------------------- ------------
5,378 28,423 (22,492) (35,240) 61,106
--------------- ---------------- ---------------- ---------------- --------------------- ------------
Long-term debt.. 61,530 (61,530) 59,435 (42,105) 29,370
--------------- ---------------- ---------------- ---------------- --------------------- ------------
Other long-term
liabilities..... 1,336
--------------- ---------------- ---------------- ---------------- --------------------- ------------
Deferred income
taxes........... 1,269 1,717 28,439 6,859 92,710
--------------- ---------------- ---------------- ---------------- --------------------- ------------
Magna's net
investment...... (296,941)
Share capital... 100 4,400 14,854 (7,854) 543,123 554,623
Deficit......... (49,955) 49,955 (2,204) 2,204
--------------- ---------------- ---------------- ---------------- --------------------- ------------
(49,855) 54,355 12,650 (5,650) 246,182 554,623
--------------- ---------------- ---------------- ---------------- --------------------- ------------
18,322 (5,458) 100,508 (41,808) 217,801 739,145
=============== ================ ================ ================ ===================== ============
</TABLE>
See accompanying notes
F-5
<PAGE>
MI ENTERTAINMENT CORP.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
[Unaudited]
1. BASIS OF PRESENTATION
The pro forma consolidated balance sheet has been prepared from the
unaudited consolidated balance sheet of MI Entertainment Corp. (the "Company")
as at August 31, 1999 and the unaudited balance sheets of Gulfstream Park
Racing Association, Inc. ("Gulfstream"), Remington Park, Inc. ("Remington"),
Thistledown, Inc. ("Thistledown") and Golden Gate Fields ("Golden Gate") as at
August 31, 1999. The pro forma consolidated statement of income (loss) and
comprehensive income (loss) for the eight months ended August 31, 1999 has been
prepared from the unaudited consolidated statement of income (loss) and
comprehensive income (loss) of the Company and the unaudited consolidated
statement of income of Gulfstream, the unaudited statements of operations and
accumulated deficit of Remington and Thistledown and the unaudited combined
statement of operations of Golden Gate each for the eight months ended August
31, 1999. The pro forma consolidated statement of income (loss) and
comprehensive income (loss) for the year ended December 31, 1998 has been
prepared from the audited consolidated statements of income (loss) and
comprehensive income (loss) of the Company for the five months ended December
31, 1998 and the year ended July 31, 1998 and the unaudited consolidated
statement of income (loss) and comprehensive income (loss) for the five months
ended December 31, 1997 as well as the audited statement of operations for the
Los Angeles Turf Club, Inc. ("LATC") for the period from January 1, 1998 to
December 10, 1998 and the audited consolidated statement of income of
Gulfstream, the audited statements of operations and accumulated deficit of
Remington and Thistledown and the audited combined statement of operations of
Golden Gate each for the year ended December 31, 1998. Results of operations
for the Company for the year ended December 31, 1998 were calculated by adding
the audited results of operations for the five months ended December 31, 1998
and the year ended July 31, 1998 less the unaudited results of operations for
the five months ended December 31, 1997. These pro forma consolidated financial
statements should be read in conjunction with the historical financial
statements of the Company, LATC, Gulfstream, Remington, Thistledown and Golden
Gate including the related notes thereto, presented elsewhere herein.
The pro forma consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
("U.S. GAAP") which are also in conformity, in all material respects, with
accounting principles generally accepted in Canada ("Canadian GAAP") except as
described in note 3 to these pro forma consolidated financial statements.
These pro forma consolidated financial statements are not necessarily
indicative of the financial position or results of operations that would have
resulted had the relevant transactions taken place at the respective dates
referred to below.
2. PRO FORMA ASSUMPTIONS AND ADJUSTMENTS
The pro forma consolidated financial statements have been presented assuming
that the Reorganization as described elsewhere herein and the other items
described below had been completed as of January 1, 1998 for the pro forma
consolidated statements of income (loss) and comprehensive income (loss), and
as of August 31, 1999 for the pro forma consolidated balance sheet. The pro
forma consolidated financial statements give effect to the following items:
[a] The acquisition of the Santa Anita racetrack including LATC and
approximately 305 acres of related real estate.
i] The Company acquired the Santa Anita racetrack on December 10, 1998.
Accordingly, the Company's financial position and results of operations
include the Santa Anita racetrack from December 10, 1998. The pro forma
consolidated statement of income (loss) and comprehensive income (loss) for
the year ended December 31, 1998 includes the results of operations for
LATC from January 1, 1998 to December 10, 1998.
F-6
<PAGE>
MI ENTERTAINMENT CORP.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
ii] Historically, the Santa Anita real estate was leased by LATC. Under
the lease agreement, LATC was responsible for all operating costs
associated with the real estate (including property taxes, utilities,
insurance, repairs and maintenance) and such costs are included in the LATC
statement of operations. Given that the Company acquired the Santa Anita
real estate, the historic rents paid by LATC from January 1, 1998 to
December 10, 1998 in the amount of $10,184,000 have been reversed in the
pro forma consolidated statement of income (loss) and comprehensive income
(loss) and replaced with depreciation expense of $695,000 based on the
purchase price paid by the Company for the Santa Anita real estate and the
allocation of the purchase price to land and depreciable real estate
assets.
iii] The pro forma consolidated statement of income (loss) and
comprehensive income (loss) for the year ended December 31, 1998 includes
an adjustment to remove $303,000 related to expenses recorded with respect
to a defined benefit deferred compensation obligation of LATC's previous
owner. Such obligation has not been transferred to LATC or the Company.
iv] The pro forma consolidated statement of income (loss) and
comprehensive income (loss) for the year ended December 31, 1998 includes
an increase in depreciation expense of $982,000 as a result of the purchase
price allocation to the assets of LATC.
v] The pro forma consolidated statement of income (loss) and
comprehensive income (loss) for the year ended December 31, 1998 includes
an adjustment to remove $924,000 of interest expense on balances which were
due to the previous owner of LATC. Such balances were eliminated under the
purchase agreement and have not been replaced with other interest bearing
financing.
vi] The pro forma consolidated statement of income (loss) and
comprehensive income (loss) for the year ended December 31, 1998 has been
adjusted by $3,269,000 to reflect the tax expense, effected at a combined
federal and state tax rate of 40%, that would have been incurred on the
earnings for the year of LATC after the above noted pro forma adjustments.
[b] On September 1, 1999, the Company acquired all the outstanding capital
stock of Gulfstream for a purchase price, including estimated transaction
costs, of $89,200,000 payable in cash.
i] The pro forma consolidated statements of income (loss) and
comprehensive income (loss) for the year ended December 31, 1998 and the
eight months ended August 31, 1999 includes the results of operations of
Gulfstream for the same periods.
ii] The pro forma consolidated balance sheet as at August 31, 1999
includes the financial position of Gulfstream as at the same date.
iii] The pro forma consolidated balance sheet as at August 31, 1999
includes an adjustment to record the application of purchase accounting to
the August 31, 1999 Gulfstream balance sheet. Real estate properties
(comprising land, improvements and buildings) are increased by $63,883,000,
other assets (comprising the racing licence) are increased by $69,142,000,
deferred tax liabilities are increased by $53,210,000, long-term debt is
reduced by $48,000,000 as the debt was repaid by the vendor on the
Company's acquisition of Gulfstream, cash and cash equivalents are reduced
by the Company's purchase price paid of $89,200,000, and the share capital
and deficit of Gulfstream of $21,238,000 and $59,853,000 are eliminated.
The pro forma consolidated statements of income (loss) and comprehensive
income (loss) for the year ended December 31, 1998 and the eight months
ended August 31, 1999 include adjustments that arise as a result of the
acquisition of Gulfstream and the application of purchase accounting. The
adjustments for the year ended December 31, 1998 and eight months ended
August 31, 1999 are:
--additional depreciation and amortization expense of $4,033,000 and
$2,689,000, respectively, as a result of the increase in the book
value of the buildings by $23,040,000 and racing licence by
F-7
<PAGE>
MI ENTERTAINMENT CORP.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
$69,142,000, based on the purchase price allocation, and an accounting
policy to amortize the racing licence over 20 years;
--reversal of interest expense of $3,156,000 and $1,933,000,
respectively, as a result of the repayment of $48,000,000 of long-
term debt;
--reversal of long-term debt related fees (reflected in interest
expense (income), net) of $75,000 and $47,000, respectively, paid to
the former owner of Gulfstream; and
--reduction of the tax expense by $331,000 and $281,000, respectively,
as a result of the above noted adjustments effected at a combined
federal and state tax rate of 40%.
[c] On October 21, 1999, the Company entered into a binding agreement to
acquire all the outstanding capital stock of Remington for a purchase price,
including estimated transaction costs, of $10,250,000 payable in cash. This
acquisition is expected to close in November 1999.
[i] The pro forma consolidated statements of income (loss) and
comprehensive income (loss) for the year ended December 31, 1998 and the
eight months ended August 31, 1999 includes the results of operations of
Remington for the same periods.
[ii] The pro forma consolidated balance sheet as at August 31, 1999
includes the financial position of Remington as at the same date.
[iii] The pro forma consolidated balance sheet as at August 31, 1999
includes an adjustment to record the application of purchase accounting to
the August 31, 1999 Remington balance sheet. Other assets (comprising the
racing licence) are increased by $1,816,000, cash and cash equivalents are
reduced by the Company's purchase price paid of $10,250,000 and the share
capital and deficit of Remington of $48,149,000 and $39,715,000 are
eliminated.
The pro forma consolidated statements of income (loss) and comprehensive
income (loss) for the year ended December 31, 1998 and the eight months
ended August 31, 1999 include adjustments that arise as a result of the
acquisition of Remington and the application of purchase accounting. The
adjustments for the year ended December 31, 1998 and eight months ended
August 31, 1999 are:
--reversal of an impairment of long-lived assets charge in the amount
of $2,837,000 as such assets for pro forma consolidated statement of
income (loss) and comprehensive income (loss) purposes have been
recorded at a value based on the Company's purchase price paid for
the acquisition of Remington effective January 1, 1998 and not
Remington's historical book value;
--additional depreciation and amortization expense of $91,000 and
$61,000, respectively, as a result of the increase in the book value
of the racing licence by $1,816,000, based on the purchase price
allocation, and an accounting policy to amortize the racing licence
over 20 years;
--reversal of interest expense of $2,308,000 and nil, respectively, as
a result of the repayment of long-term debt of $30,000,000 which was
due to the previous owner of Remington and repaid on December 1, 1998
through a capital contribution; and
--additional tax recovery of $1,461,000 and $202,000, respectively, as
a result of the above noted adjustments and the losses of Remington
being available to be applied against the earnings of Santa Anita,
Gulfstream and Golden Gate for federal income tax filing purposes,
both effected at the federal tax rate of 35%.
[d] On October 21, 1999, the Company entered into a binding agreement to
acquire all the outstanding capital stock of Thistledown for a purchase price,
including estimated transaction costs, of $14,250,000 of
F-8
<PAGE>
MI ENTERTAINMENT CORP.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
which $9,750,000 is payable in cash and $4,500,000 is payable through the
issuance of shares of the Company. This acquisition is expected to close in
November 1999.
[i] The pro forma consolidated statements of income (loss) and
comprehensive income (loss) for the year ended December 31, 1998 and the
eight months ended August 31, 1999 includes the results of operations of
Thistledown for the same periods.
[ii] The pro forma consolidated balance sheet as at August 31, 1999
includes the financial position of Thistledown as at the same date.
[iii] The pro forma consolidated balance sheet as at August 31, 1999
includes an adjustment to record the application of purchase accounting to
the August 31, 1999 balance sheet. Other assets (comprising the racing
licence) are increased by $4,292,000, cash and cash equivalents are reduced
by the Company's purchase price paid of $9,750,000, deferred tax
liabilities are increased by $1,717,000, long-term debt is reduced by
$61,530,000, the share capital and deficit of Thistledown of $100,000 and
$49,955,000 are eliminated and the issuance of share capital of the Company
in the amount of $4,500,000 is recorded.
The pro forma consolidated statements of income (loss) and comprehensive
income (loss) for the year ended December 31, 1998 and the eight months
ended August 31, 1999 include adjustments that arise as a result of the
acquisition of Thistledown and the application of purchase accounting. The
adjustments for the year ended December 31, 1998 and eight months ended
August 31, 1999 are:
--additional depreciation and amortization expense of $215,000 and
$143,000, respectively, as a result of the increase in the book value
of the racing licence by $4,292,000, based on the purchase price
allocation, and an accounting policy to amortize the racing licence
over 20 years;
--reversal of interest expense of $576,000 and $308,000, respectively,
as a result of the repayment of long-term debt of $61,530,000;
--additional tax recovery of $228,000 for the year ended December 31,
1998 as a result of the above noted adjustments effected at the
federal tax rate of 35% since state tax cannot be included in a tax
sharing arrangement; and
--additional tax expense of $66,000 for the eight months ended August
31, 1999 as a result of the above noted adjustments effected at a
combined federal and state tax rate of 40%.
[e] On November 5, 1999, the Company entered into a binding agreement,
subject to regulatory approval, to acquire all the outstanding capital stock of
Golden Gate for a purchase price, including estimated transaction costs, of
$88,000,000 of which $61,000,000 is payable in cash, $7,000,000 is payable
through the issuance of shares of the Company and $20,000,000 is payable
through the issuance of a non-interest bearing note, $10 million of which
matures on the first anniversary of the date of closing and $5 million on each
of the second and third anniversaries. This acquisition is expected to close in
December 1999.
[i] The pro forma consolidated statements of income (loss) and
comprehensive income (loss) for the year ended December 31, 1998 and the
eight months ended August 31, 1999 includes the results of operations of
Golden Gate for the same periods.
[ii] The pro forma consolidated balance sheet as at August 31, 1999
includes the financial position of Golden Gate as at the same date.
[iii] The pro forma consolidated balance sheet as at August 31, 1999
includes an adjustment to record the application of purchase accounting to
the August 31, 1999 Golden Gate balance sheet. Real estate properties
(comprising land) are increased by $36,142,000, other assets (comprising
the racing licence) are increased by $28,439,000, cash and cash equivalents
are reduced by the purchase price paid of
F-9
<PAGE>
MI ENTERTAINMENT CORP.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
$61,000,000 and by $45,389,000 in respect of cash not acquired, deferred
tax liabilities are increased by $28,439,000, current liabilities are
reduced by $22,492,000, long-term debt is reduced by $59,435,000 less
$17,330,000 (the discounted value of the $20,000,000 non-interest bearing
note issued on acquisition of Golden Gate using a discount rate of 8.7%),
the share capital and deficit of Golden Gate of $14,854,000 and $2,204,000
are eliminated and the issuance of share capital of the Company in the
amount of $7,000,000 is recorded.
The pro forma consolidated statements of income (loss) and comprehensive
income (loss) for the year ended December 31, 1998 and the eight months ended
August 31, 1999 include adjustments that arise as a result of the acquisition
of Golden Gate and the application of purchase accounting. The adjustments for
the year ended December 31, 1998 and eight months ended August 31, 1999 are:
--reversal of racetrack operating costs of $536,000 and $124,000,
respectively, related to assets not acquired;
--additional depreciation and amortization expense of $1,422,000 and
$752,000, respectively, as a result of the increase in the book value
of the racing licence by $28,439,000, based on the purchase price
allocation, and an accounting policy to amortize the racing licence
over 20 years;
--reversal of depreciation expense of $1,762,000 and nil, respectively,
on a prepaid lease with the previous owner of Golden Gate which was
cancelled and the value of the lease was added to assets not acquired
in 1998;
--reversal of interest expense of $3,845,000 and $3,108,000,
respectively, as a result of the repayment of long-term debt of
$59,435,000;
--reversal of interest income of $1,983,000 and $1,408,000,
respectively, as a result of the removal of cash not acquired of
$45,389,000;
--additional interest expense accrued of $1,503,000 and $511,000,
respectively, on the discounted $20,000,000 non-interest bearing note
issued;
--additional tax recovery of $38,000 for the year ended December 31,
1998 as a result of the above noted adjustments effected at the
federal tax rate of 35% since state tax can not be included in a tax
sharing arrangement, and reversal of $66,000 of state tax expense
related to operations not acquired; and
--additional tax expense of $968,000 for the eight months ended August
31, 1999 as a result of the above noted adjustments, effected at a
combined federal and state tax rate of 40%, less $2,300,000 tax
expense related to operations not acquired.
[f] The components included in Magna's net investment in the Company's
consolidated balance sheet as at August 31, 1999 have been separately disclosed
in their respective balance sheet lines based on the Reorganization as defined
in the historical consolidated financial statements of the Company.
[g] A cash contribution by Magna of $250,000,000 in exchange for shares of
the Company. The pro forma consolidated balance sheet also reflects the use of
$170,200,000 of this cash contribution to acquire Gulfstream, Remington,
Thistledown and Golden Gate as described in items [b][iii], [c][iii], [d][iii]
and [e][iii] above.
[h] The repayment of the note payable to Magna of $35,240,000.
[i] Interest expense has been adjusted to reflect the components of Magna's
net investment as defined under the Reorganization from January 1, 1998.
F-10
<PAGE>
MI ENTERTAINMENT CORP.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
[j] The allocations of the purchase prices paid to the assets and
liabilities acquired in each of the Gulfstream, Remington, Thistledown and
Golden Gate acquisitions are preliminary and could change as further
information (including real estate appraisals) is obtained subsequent to the
closing dates.
3. RECONCILIATION TO ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN CANADA
The Company's accounting policies as reflected in these pro forma
consolidated financial statements do not materially differ from Canadian GAAP
except for:
[a] For purposes of reconciling to Canadian GAAP, the Company has early
adopted the provisions of The Canadian Institute of Chartered Accountants
Handbook Section 3461 "Employee Future Benefits" on a retroactive basis.
Accordingly, net pension expense and accrued pension liabilities are the
same as those determined by the application of U.S. GAAP.
[b] Under Canadian GAAP, there is no requirement to disclose
comprehensive income (loss).
F-11
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
MI ENTERTAINMENT CORP.
For the five-month period ended December 31, 1998
and the years ended July 31, 1998, 1997 and 1996.
F-12
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholder and Directors of
MI Entertainment Corp.
We have audited the accompanying consolidated balance sheets of MI
Entertainment Corp. as of December 31, 1998, July 31, 1998 and 1997, and the
related consolidated statements of income (loss) and comprehensive income
(loss), changes in Magna's net investment and cash flows for the five-month
period ended December 31, 1998 and for each of the years in the three-year
period ended July 31, 1998. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MI
Entertainment Corp. at December 31, 1998, July 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for the five-month
period ended December 31, 1998 and for each of the years in the three-year
period ended July 31, 1998 in conformity with accounting principles generally
accepted in the United States.
Los Angeles, California Ernst & Young LLP
November 8, 1999 Certified Public Accountants
F-13
<PAGE>
MI ENTERTAINMENT CORP.
SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in U.S. dollars
following accounting principles generally accepted in the United States ("U.S.
GAAP"). These policies are also in conformity, in all material respects, with
accounting policies generally accepted in Canada, except as described in note
14 to the consolidated financial statements.
Principles of Consolidation
MI Entertainment Corp. (the "Company") was formed to hold and operate all of
the non-automotive related assets (including non-automotive real estate)
currently owned by Magna International Inc. and its subsidiaries ("Magna").
Such assets were reorganized under the Company in various stages, and the
capital structure was established (see Note 15[a]), over the period to November
5, 1999 (the "Reorganization"). The Company is a wholly owned subsidiary of
Magna International Inc.
These consolidated financial statements present the historic financial
position and operating results of the assets and liabilities reorganized under
the Company on a carve out basis from Magna. To give effect to the continuity
of Magna's interest in the assets and liabilities of the Company, all assets
and liabilities have been recorded in the consolidated balance sheets at
Magna's book values and have been included from the date they were acquired by
Magna. All significant intercompany balances and transactions have been
eliminated.
The assets and liabilities reorganized under the Company include the
following:
Racetrack Operations
. All the outstanding capital stock of The Santa Anita Companies, Inc.
("SAC"). On December 10, 1998, SAC (formerly 234567 Development Inc., a
wholly owned inactive subsidiary of Magna) acquired all of the
outstanding capital stock of the Los Angeles Turf Club, Inc. ("LATC")
which operates the Santa Anita racetrack in California. SAC also acquired
305 acres of related real estate.
. The real estate assets of SLRD Thoroughbred Training Center, Inc.
("SLRD"). SLRD, a horse boarding and training center located in San Diego
California, owns approximately 202 acres of real estate.
Real Estate Operations
. All the outstanding capital stock of Magna Vierte Beteiligungs AG
("MVB"). Effective January 1, 1999, the assets and liabilities of Magna
Liegenschaftsverwaltungs GmbH ("MLV") were demerged into two companies.
Under the demerger, all of the assets, liabilities, operations and
employees of MLV were transferred to MVB except for two real estate
properties and an equivalent amount of debt financing due to Magna. The
two real estate properties not transferred to MVB were, from their
original acquisition date by MLV, leased back to Magna on a triple net
lease basis such that Magna was responsible for the operating costs
related to the properties. The assets and operations of MLV transferred
to MVB include a golf course and adjacent residential development in
Oberwaltersdorf, Austria.
. All the outstanding capital stock of Magna Projektentwicklungs AG which
owns all of the outstanding capital stock of Magna
Grundstucksentwicklungs GmbH (collectively "MGE"). MGE's primary asset is
a parcel of land held for development in Ebreichsdorf, Austria.
. Land and improvements in Aurora, Ontario (the "Aurora lands") which is
subject to a conditional sale agreement by Magna to the Company. The
conditional sale agreement is subject to the successful severance of the
effected properties.
F-14
<PAGE>
. Various other parcels of land and improvements (the "vacant land
portfolio") and other non-automotive properties, including any incidental
operations associated with such properties. Two of these properties are
subject to conditional sale agreements.
. Rights to acquire, from an affiliated company (see Note 10[a]),
approximately 200 acres of land and improvements in Aurora, Ontario. An
18-hole golf course is currently under construction on the property. To
date, such construction has been funded by Magna. Construction in
progress has also been transferred to the Company. This project is
referred to as the Aurora Downs golf course.
The consolidated statements of income (loss) and comprehensive income (loss)
include the following: (a) the historic revenues and expenses of SAC and LATC
from December 10, 1998, the date of Magna's acquisition of the Santa Anita
racetrack and surrounding property; (b) the historic revenues and expenses of
MLV adjusted to exclude the rental revenues earned, depreciation expense and
interest on debt due to Magna all related to the two MLV properties not
transferred to MVB; (c) the historic revenues and expenses of MGE; and (d) the
historic revenues and expenses (which are limited to incidental costs of
ownership the most significant of which is property taxes), net of amounts
capitalized, related to the Aurora Downs golf course, the Aurora lands and the
vacant land portfolio and other non-automotive properties transferred to the
Company.
The historic administrative costs associated with managing the Aurora lands,
the vacant land portfolio and other non-automotive properties were borne by
Magna International Inc.'s real estate management division (the "Division").
The Division was also responsible for administering Magna's industrial real
estate portfolio, none of which has been transferred to the Company. The
administrative costs of the Division include personnel costs (salary, benefits,
travel), administration office costs and other overheads. Further, the Company
has paid no fees to Magna International Inc. for services provided (including
accounting, tax, legal, treasury services and other incidental costs associated
with establishing the Company and its operations). An allocation of the
Division and Magna International Inc.'s historic administrative costs has been
included in these consolidated financial statements based on an estimate of the
services provided.
Interest expense as presented in the consolidated statements of income
(loss) and comprehensive income (loss) includes interest on external debt and
amounts due to Magna (included in Magna's net investment) held by SAC, LATC,
MLV (adjusted as described above), and MGE. No interest has been charged on
Magna's net investment in the Aurora Downs golf course, the Aurora lands and
the vacant land portfolio and the other non-automotive properties transferred
to the Company. Under the Reorganization, the transfer of these assets by Magna
to the Company is by way of an equity investment.
Income taxes for SAC, LATC, MVB (from January 1, 1999), MGE and other
separate tax paying legal entities at August 31, 1999 have been recorded based
on their separate tax positions using the liability method of tax allocation.
Income taxes with respect to the other components of the consolidated
statements of income (loss) and comprehensive income (loss) have been recorded
at statutory rates based on income before taxes as included in the consolidated
statements of income (loss) and comprehensive income (loss) as though such
components were separate tax paying entities. Given that the revenues and
expenses of this latter component of the consolidated statements of income
(loss) and comprehensive income (loss) have been prepared on a carve out basis
from Magna, the resulting income taxes payable and deferred income tax assets
and liabilities have been included in Magna's net investment.
Magna's net investment also includes Magna's net long term debt and equity
investments in the Company created as part of the Reorganization, the
accumulated net income (loss) of the Company, contributions by less
distributions to Magna and the currency translation adjustment.
As a result of the basis of presentation described above, the consolidated
statements of income (loss) and comprehensive income (loss) may not necessarily
be indicative of the revenues and expenses that would have resulted had the
Company historically operated as a stand alone entity.
F-15
<PAGE>
As of November 5, 1999, the Company and its subsidiaries are comprised of
the following entities:
<TABLE>
<CAPTION>
% Included
----------
<S> <C>
United States
MI Entertainment Corp......................................... 100
The Santa Anita Companies, Inc............................... 100
Los Angeles Turf Club, Inc................................. 100
SLRD Thoroughbred Training Center, Inc....................... 100
Gulfstream Park Racing Association, Inc. (see note 15[b]).... 100
5321 Industries Inc.......................................... 100
DLR, Inc..................................................... 100
OTL, Inc..................................................... 100
Vista Hospitality, Inc....................................... 100
Canada
MI Venture (Canada) Inc....................................... 100
1180482 Ontario Inc........................................... 100
Europe
Magna Ventures Holding AG..................................... 100
Magna Ventures Management GmbH............................... 100
Steyr Daimler-Puch AG ("SDP")............................... 100
Steyr-Barter Handels GmbH.................................. 100
Steyr Industrie Commerz GmbH.............................. 100
Gemeinniitzige Wohnungs GmbH & Co. KG....................... 100
MI Air Flugbetriets GmbH.................................... 100
Magna Vierte Beteiligungs AG.................................. 100
Magna Projektentwicklungs AG.................................. 100
Magna Grundstucksentwicklungs GmbH........................... 100
</TABLE>
Magna changed its fiscal year end from July 31 to December 31, effective
December 31, 1998. The periods presented in these consolidated financial
statements conform to those presented by Magna.
Cash and Cash Equivalents
Cash and cash equivalents include cash on account, demand deposits and
short-term investments with original maturities of less than three months and
excludes outstanding cheques, which are classified as accounts payable.
Impairment of Long-Lived Assets
Statement of Financial Accounting Standards No. 121 ("SFAS 121") "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of" establishes accounting standards for the impairment of long-lived
assets, including real estate properties, fixed and other assets. The Company
evaluates impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable.
For long-lived assets not held for sale, the Company assesses the
recoverability by determining whether the carrying value of such assets can be
recovered through projected undiscounted cash flows. If the sum of expected
future cash flows, undiscounted and without interest charges, is less than net
book value, the excess of the net book value over the estimated fair value is
charged to operations in the period in which such impairment is determined by
management.
When long-lived assets are identified by the Company as held for sale, the
Company discontinues depreciating the asset and the carrying value is reduced,
if necessary, to the estimated fair value less costs of disposal. Fair value is
determined based upon discounted cash flows of the assets at rates deemed
reasonable
F-16
<PAGE>
for the type of property and prevailing market conditions, appraisals and, if
appropriate, current estimated net sales proceeds from pending offers.
Real Estate Properties
Residential development inventory
Residential development inventory is valued at cost which includes
acquisition and construction costs. Construction costs include all direct
construction costs, capitalized interest and indirect costs wholly attributable
to construction.
Revenue producing properties
Revenue producing properties are valued at cost which includes acquisition
and development costs. Development costs include all direct construction costs,
capitalized interest and indirect costs wholly attributable to development.
Buildings are depreciated on a straight-line basis over 40 years.
Properties under and held for development
Properties under and held for development are valued at cost which includes
acquisition and development costs. Development costs include all direct
construction costs, capitalized interest and indirect costs wholly attributable
to development.
Properties available for sale
Properties available for sale are valued at the lower of cost, which
includes acquisition and development costs, and fair value less costs of
disposal ("fair value"). The Company evaluates the lower of cost and fair value
whenever events or changes in circumstance indicate possible impairment.
Fixed Assets
Fixed assets are recorded at cost less accumulated depreciation.
Depreciation is provided on a straight-line basis over the estimated useful
lives of fixed assets at annual rates of 7% to 20% for furniture and fixtures,
leasehold improvements and equipment.
Revenue Recognition
Revenues from the sale of residential development inventory are recognized
when the collection of the sale proceeds is reasonably assured and all other
significant conditions are met. Properties which have been sold, but for which
these criteria have not been satisfied, are included in residential development
inventory.
The Company records operating revenues associated with thoroughbred horse
racing at Santa Anita racetrack on a daily basis, except for season admissions
which are recorded ratably over the racing season. Horse racing revenues and
direct operating costs are shown net of state and local taxes, stakes, purses
and awards.
Golf course annual membership fee revenues are recognized as revenue ratably
over the applicable season. Member deposits received on admission to membership
to the Austrian golf course are refundable and are, therefore, not recognized
in revenues but are recorded as refundable deposits.
Deferred Revenues
Deferred revenues associated with racetrack operations consist of prepaid
admission tickets and parking associated with thoroughbred horse racing at
Santa Anita racetrack, which are recognized as revenue ratably over the period
of the related race meet. Also, deferred revenue includes prepaid rent from
another thoroughbred horse racing corporation, Oak Tree Racing Association,
which utilizes the Company's racetrack for a portion of the year. Prepaid rent
is recognized over the remaining term of the lease.
F-17
<PAGE>
Deferred revenues of the real estate operations consist of advance payments
received from the purchaser relating to new home construction.
Seasonality of Revenues
The racetrack industry is seasonal in nature. Generally, horseracing
revenues are greater in the first and fourth quarters of the calendar year than
in the second and third quarters of the calendar year. This seasonality can be
expected to cause quarterly fluctuations in revenue, profit margins and net
income.
Advertising
Costs incurred for producing and communicating advertising associated with
thoroughbred horse racing at Santa Anita racetrack are generally expensed when
incurred. Advertising costs for the eight-month period ended August 31, 1999
and the five-month period ended December 31, 1998 were $2.3 million and $0.2
million, respectively. Costs incurred with respect to promotions for specific
live race days are expensed on the applicable race day.
Foreign Exchange
Assets and liabilities of self-sustaining foreign operations are translated
using the exchange rate in effect at the period-end and revenues and expenses
are translated at the average rate during the period. Exchange gains or losses
on translation of the Company's net equity investment in these operations are
deferred in Magna's net investment. The appropriate amounts of exchange gains
or losses accumulated in Magna's net investment are reflected in income when
there is a sale or partial sale of the Company's investment in these operations
or upon a complete or substantially complete liquidation of the investment.
Income Taxes
The Company follows the liability method of tax allocation for accounting
for income taxes. Under the liability method of tax allocation, deferred tax
assets and liabilities are determined based on differences between financial
reporting and tax bases of assets and liabilities are measured using
substantially enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
that affect the amounts reported and disclosed in the consolidated financial
statements. Actual results could differ from those estimates.
Interim Financial Statements
In the opinion of management, the unaudited interim consolidated financial
statements reflect all adjustments, which consist only of normal and recurring
adjustments, necessary to present fairly the financial position at August 31,
1999 and the results of operations and cash flows for the eight-month periods
ended August 31, 1999 and 1998, in accordance with U.S. GAAP.
Impact of Recently Issued Accounting Standards
Under Staff Accounting Bulletin 74, the Company is required to disclose
certain information related to new accounting standards, which have not yet
been adopted due to delayed effective dates.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities". This Statement is effective for the Company's first quarter ended
March 31, 2001. SFAS 133 requires that an entity recognize all derivative
instruments either as assets or liabilities and measure those instruments at
fair value. The Company has not determined the impact, if any, of this
pronouncement on its consolidated financial statements.
F-18
<PAGE>
MI ENTERTAINMENT CORP.
CONSOLIDATED BALANCE SHEETS
Incorporated under the laws of the State of Delaware
[U.S. dollars in thousands]
<TABLE>
<CAPTION>
July 31,
August 31, December 31, -----------------
1999 1998 1998 1997
Note ----------- ------------ -------- --------
[unaudited]
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents... $ 15,629 $ 17,503 $ 295 $ 220
Accounts receivable......... 6,963 8,979 1,088 788
Inventories................. 597 1,050 461 438
Prepaid expenses and other.. 1,329 1,522 69 70
-------- -------- -------- --------
24,518 29,054 1,913 1,516
-------- -------- -------- --------
Real estate properties, net... 3 345,695 326,690 181,003 109,500
-------- -------- -------- --------
Fixed assets, net............. 4 7,177 8,221 1,886 2,159
-------- -------- -------- --------
Deferred income taxes......... 5 -- 177 -- --
-------- -------- -------- --------
377,390 364,142 184,802 113,175
======== ======== ======== ========
LIABILITIES AND MAGNA'S NET
INVESTMENT
Current liabilities:
Bank indebtedness........... 7,339 11,889 165 4,277
Accounts payable............ 6,050 15,409 2,700 1,823
Accrued salaries and wages.. 676 518 410 334
Refundable deposits......... 2,048 2,008 1,695 989
Other accrued liabilities... 5,257 6,955 2,067 1,718
Income taxes payable........ 5 4,300 -- -- --
Long-term debt due within
one year................... 6 3,323 3,655 3,446 3,052
Deferred revenue............ 2,337 3,098 160 1,456
Note payable to Magna....... 10 35,240 -- -- --
-------- -------- -------- --------
66,570 43,532 10,643 13,649
-------- -------- -------- --------
Long-term debt................ 6 12,040 16,791 15,884 11,609
-------- -------- -------- --------
Other long-term liabilities... 12 1,317 1,317 -- --
-------- -------- -------- --------
Deferred income taxes......... 5 522 -- -- --
-------- -------- -------- --------
Magna's net investment........ 296,941 302,502 158,275 87,917
-------- -------- -------- --------
$377,390 $364,142 $184,802 $113,175
======== ======== ======== ========
</TABLE>
- --------
Commitments and contingencies [notes 6, 10 and 11]
See accompanying notes
F-19
<PAGE>
MI ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN MAGNA'S NET INVESTMENT
[U.S. dollars in thousands]
<TABLE>
<CAPTION>
Eight-month
periods ended Five-month
August 31, period ended Years ended July 31,
------------------ December 31, --------------------------
Note 1999 1998 1998 1998 1997 1996
---- -------- -------- ------------ -------- ------- -------
[unaudited]
<S> <C> <C> <C> <C> <C> <C> <C>
Magna's net investment,
beginning of period.... $302,502 $ 97,702 $158,275 $ 87,917 $49,985 $48,166
Net income (loss)....... 5,776 (6,759) (4,231) (8,610) (1,382) (2,424)
Net contribution by
(distribution to)
Magna.................. (5,706) 69,394 143,634 80,919 46,498 5,554
Change in currency
translation
adjustment............. 7 (5,631) (348) 4,824 (1,951) (7,184) (1,311)
-------- -------- -------- -------- ------- -------
Magna's net investment,
end of period.......... $296,941 $159,989 $302,502 $158,275 $87,917 $49,985
======== ======== ======== ======== ======= =======
</TABLE>
See accompanying notes
F-20
<PAGE>
MI ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND
COMPREHENSIVE INCOME (LOSS)
[U.S. dollars in thousands]
<TABLE>
<CAPTION>
Eight-month
periods ended Five-month
August 31, period ended Years ended July 31,
---------------- December 31, --------------------------
Note 1999 1998 1998 1998 1997 1996
----- ------- ------- ------------ -------- ------- -------
[unaudited]
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue 9, 10
Racetrack............... $57,557 $ -- $ 3,952 $ -- $ -- $ --
Real estate............. 10,974 16,375 6,597 20,486 15,276 2,460
------- ------- ------- -------- ------- -------
68,531 16,375 10,549 20,486 15,276 2,460
------- ------- ------- -------- ------- -------
Costs and expenses
Racetrack operating
costs.................. 42,245 -- 3,625 -- -- --
Real estate operating
costs.................. 10,605 20,694 8,462 25,864 13,879 4,613
Depreciation and
amortization........... 4,041 1,430 1,649 1,852 1,824 330
Interest expense
(income), net.......... 6 522 1,010 1,221 1,380 955 (59)
------- ------- ------- -------- ------- -------
57,413 23,134 14,957 29,096 16,658 4,884
------- ------- ------- -------- ------- -------
Income (loss) before
income taxes........... 9 11,118 (6,759) (4,408) (8,610) (1,382) (2,424)
Income tax provision
(recovery)............. 5 5,342 -- (177) -- -- --
------- ------- ------- -------- ------- -------
Net income (loss)....... 5,776 (6,759) (4,231) (8,610) (1,382) (2,424)
Other comprehensive
income (loss):
Foreign currency
translation
adjustment........... (5,631) (348) 4,824 (1,951) (7,184) (1,311)
------- ------- ------- -------- ------- -------
Comprehensive income
(loss)................. $ 145 $(7,107) $ 593 $(10,561) $(8,566) $(3,735)
======= ======= ======= ======== ======= =======
</TABLE>
See accompanying notes
F-21
<PAGE>
MI ENTERTAINMENT CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[U.S. dollars in thousands]
<TABLE>
<CAPTION>
Eight-month
periods ended Five-month
August 31, period ended Years ended July 31,
---------------- December 31, -------------------------
Note 1999 1998 1998 1998 1997 1996
---- ------- ------- ------------ ------- ------- -------
[unaudited]
<S> <C> <C> <C> <C> <C> <C> <C>
Cash provided from (used
for):
OPERATING ACTIVITIES
Net income (loss)....... $ 5,776 $(6,759) $ (4,231) $(8,610) $(1,382) $(2,424)
Items not involving
current cash flows
Depreciation and
amortization.......... 4,041 1,430 1,649 1,852 1,824 330
Deferred taxes......... 5 699 -- (177) -- -- --
------- ------- -------- ------- ------- -------
10,516 (5,329) (2,759) (6,758) 442 (2,094)
------- ------- -------- ------- ------- -------
Changes in non-cash
items related to
operations
Residential development
inventory............. (3,131) 4,213 (1,797) (1,256) (7,620) (1,608)
Accounts receivable.... 1,797 (4) (7,285) (262) (297) (319)
Inventories............ 421 70 (570) (8) (354) (10)
Prepaid expenses and
other................. 190 (276) 244 3 (10) 20
Accounts payable....... (9,206) 741 8,526 786 693 (264)
Accrued salaries and
wages................. 207 137 84 61 195 134
Refundable deposits.... 224 450 207 654 1,140 --
Other accrued
liabilities........... (1,595) 353 681 266 758 602
Income taxes payable... 4,300 -- -- -- -- --
Deferred revenue....... (637) (5,520) 1,381 (1,354) 1,159 (73)
------- ------- -------- ------- ------- -------
3,086 (5,165) (1,288) (7,868) (3,894) (3,612)
------- ------- -------- ------- ------- -------
INVESTMENT ACTIVITIES
Acquisition of
businesses............. 2 (6,375) -- (118,617) -- -- --
Real estate property
additions, net of
change in residential
development inventory.. (21,873) (63,264) (17,944) (72,460) (41,470) (24,180)
Fixed asset additions... (180) (50) (124) (183) (2,109) (939)
------- ------- -------- ------- ------- -------
(28,428) (63,314) (136,685) (72,643) (43,579) (25,119)
------- ------- -------- ------- ------- -------
FINANCING ACTIVITIES
Increase (decrease) in
bank indebtedness...... (2,841) (4,521) 11,602 (4,280) 3,716 1,322
Issues of long-term
debt................... -- 6,274 48 6,553 -- 21,491
Repayment of long-term
debt................... (3,195) (2,674) (114) (2,608) (2,638) --
Increase in note payable
to Magna............... 35,240 -- -- -- -- --
Net contribution by
(distribution to)
Magna.................. (5,706) 69,394 143,634 80,919 46,498 5,554
------- ------- -------- ------- ------- -------
23,498 68,473 155,170 80,584 47,576 28,367
------- ------- -------- ------- ------- -------
Effect of exchange rate
changes on cash and
cash equivalents....... (30) 38 11 2 (16) (24)
------- ------- -------- ------- ------- -------
Net increase (decrease)
in cash and cash
equivalents during the
period................. (1,874) 32 17,208 75 87 (388)
Cash and cash
equivalents, beginning
of period.............. 17,503 233 295 220 133 521
------- ------- -------- ------- ------- -------
Cash and cash
equivalents, end of
period................. $15,629 $ 265 $ 17,503 $ 295 $ 220 $ 133
======= ======= ======== ======= ======= =======
</TABLE>
See accompanying notes
F-22
<PAGE>
MI ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all amounts in U.S. dollars unless otherwise noted and all tabular amounts in
thousands, except per share amounts)
(all amounts as at August 31, 1999 and for the eight-month periods ended
August 31, 1999 and 1998 are unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies followed by the Company are set out
under "Significant Accounting Policies" preceding these consolidated
financial statements.
2. BUSINESS ACQUISITIONS
The following acquisitions were accounted for using the purchase method:
San Luis Rey Downs
In May 1999, the Company acquired the real estate assets of SLRD for cash
consideration of $6.4 million. SLRD, a horse boarding and training center
located in San Diego California, owns approximately 202 acres of real
estate.
Santa Anita
In December 1998, the Company completed the acquisition of the Santa Anita
racetrack operations and approximately 305 acres of related real estate for
$17.6 million and $101.0 million, respectively, for total consideration of
$118.6 million.
The purchase price has been allocated to the assets and liabilities
acquired as follows:
<TABLE>
<S> <C>
Net working capital deficit..................................... $ (7,428)
Building improvements........................................... 19,804
Fixed assets.................................................... 6,513
Other long term liabilities..................................... (1,317)
--------
17,572
Land and buildings.............................................. 101,045
--------
$118,617
========
</TABLE>
Pro-forma Impact
If the acquisition of the Santa Anita racetrack and related real estate
completed during the five month period ended December 31, 1998 had occurred
on August 1, 1997, the Company's unaudited pro forma revenue would have
been $22.0 million for the five-month period ended December 31, 1998 (for
the year ended July 31, 1998--$87.6 million) and pro forma net loss would
have been $8.5 million for the five-month period ended December 31, 1998
(for the year ended July 31, 1998--$1.1 million net loss).
F-23
<PAGE>
MI ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(all amounts in U.S. dollars unless otherwise noted and all tabular amounts in
thousands, except per share amounts)
(all amounts as at August 31, 1999 and for the eight-month periods ended August
31, 1999 and 1998 are unaudited)
3. REAL ESTATE PROPERTIES
Real estate properties consist of:
<TABLE>
<CAPTION>
July 31,
August 31, December 31, ------------------
1999 1998 1998 1997
----------- ------------ -------- --------
[unaudited]
<S> <C> <C> <C> <C>
Residential development
inventory.................... $ 18,136 $ 16,573 $ 13,908 $ 12,072
-------- -------- -------- --------
Revenue producing properties
Cost
Land and improvements....... 39,830 36,850 10,981 9,901
Buildings................... 58,023 56,840 14,922 12,586
Construction in progress.... 5,518 2,814 -- 20
-------- -------- -------- --------
103,371 96,504 25,903 22,507
Accumulated depreciation
Buildings................... (4,254) (2,317) (1,608) (678)
-------- -------- -------- --------
Revenue producing properties,
net.......................... 99,117 94,187 24,295 21,829
-------- -------- -------- --------
Properties under and held for
development
Cost
Land and improvements....... 127,432 126,652 60,706 48,441
Buildings................... 809 517 524 --
Construction in progress.... 19,702 4,389 302 --
-------- -------- -------- --------
Properties under and held for
development.................. 147,943 131,558 61,532 48,441
-------- -------- -------- --------
Properties available for sale
Cost
Land and improvements....... 52,898 53,935 52,374 19,754
Buildings................... 28,113 30,256 28,070 6,181
Furniture and fixtures...... 1,725 1,725 1,725 1,725
-------- -------- -------- --------
82,736 85,916 82,169 27,660
Accumulated depreciation
Buildings................... (1,521) (871) (325) (79)
Furniture and fixtures...... (716) (673) (576) (423)
-------- -------- -------- --------
Properties available for sale,
net.......................... 80,499 84,372 81,268 27,158
-------- -------- -------- --------
$345,695 $326,690 $181,003 $109,500
======== ======== ======== ========
</TABLE>
The classifications of properties above represent the Company's current
intentions with respect to future use (e.g. development or sale).
Depreciation has now ceased on properties classified as available for sale.
F-24
<PAGE>
MI ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(all amounts in U.S. dollars unless otherwise noted and all tabular amounts in
thousands, except per share amounts)
(all amounts as at August 31, 1999 and for the eight-month periods ended August
31, 1999 and 1998 are unaudited)
4. FIXED ASSETS
Fixed assets consist of:
<TABLE>
<CAPTION>
July 31,
August 31, December 31, --------------
1999 1998 1998 1997
----------- ------------ ------ ------
[unaudited]
<S> <C> <C> <C> <C>
Cost
Machinery and equipment........... $7,396 $7,632 $3,036 $2,724
Furniture and fixtures............ 2,368 2,225 -- --
------ ------ ------ ------
9,764 9,857 3,036 2,724
Accumulated depreciation
Machinery and equipment........... (2,323) (1,610) (1,150) (565)
Furniture and fixtures............ (264) (26) -- --
------ ------ ------ ------
$7,177 $8,221 $1,886 $2,159
====== ====== ====== ======
</TABLE>
5. INCOME TAXES
[a] Income taxes for SAC, LATC, MVB (from January 1, 1999), MGE and other
separate tax paying legal entities at August 31, 1999, have been
recorded based on their separate tax positions using the liability
method of tax allocation. Income taxes with respect to the other
components of the consolidated statements of income (loss) and
comprehensive income (loss) have been recorded at statutory rates based
on income before taxes as included in the consolidated statements of
income (loss) and comprehensive income (loss) as though such components
were separate tax paying entities. Given that the revenues and expenses
of this latter component of the consolidated statements of income
(loss) and comprehensive income (loss) have been prepared on a carve
out basis from Magna, the resulting income taxes payable and deferred
income tax assets and liabilities have been included in Magna's net
investment.
[b] The provision for income taxes differs from the expense that would be
obtained by applying United States federal statutory rates as a result
of the following:
<TABLE>
<CAPTION>
Eight-month
periods ended Five-month
August 31, period ended Years ended July 31,
-------------- December 31, ------------------------
1999 1998 1998 1998 1997 1996
------ ------- ------------ -------- ------ ------
[unaudited]
<S> <C> <C> <C> <C> <C> <C>
Expected provision
(recovery):
Federal statutory
income tax rate
(35%)................ $3,891 $(2,366) $(1,543) $ (3,014) $ (484) $ (848)
State income tax...... 757 -- -- -- -- --
Losses not benefited.. 694 2,366 1,366 3,014 484 848
------ ------- ------- -------- ------ ------
Income tax provision
(recovery)........... $5,342 $ -- $ (177) $ -- $ -- $ --
====== ======= ======= ======== ====== ======
</TABLE>
The income tax provision relates entirely to the income of SAC and
LATC. Other components of the Company are in a loss position. The tax
benefits of certain of these losses have been utilized by Magna and are
not available to the Company. However, the future tax benefits of the
income tax loss carryforwards of MVB (from January 1, 1999), MGE and
other separate tax paying entities at August 31, 1999 are available to
the Company. These losses amount to $5.5 million and have no expiry
date.
F-25
<PAGE>
MI ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(all amounts in U.S. dollars unless otherwise noted and all tabular amounts in
thousands, except per share amounts)
(all amounts as at August 31, 1999 and for the eight-month periods ended
August 31, 1999 and 1998 are unaudited)
[c] The details of income (loss) before income taxes by jurisdiction are as
follows:
<TABLE>
<CAPTION>
Eight-month
periods ended Five-month
August 31, period ended Years ended July 31,
---------------- December 31, -------------------------
1999 1998 1998 1998 1997 1996
------- ------- ------------ ------- ------- -------
[unaudited]
<S> <C> <C> <C> <C> <C> <C>
United States..... $13,181 $ (134) $ (540) $ (243) $ (92) $ (211)
Foreign........... (2,063) (6,625) (3,868) (8,367) (1,290) (2,213)
------- ------- ------- ------- ------- -------
$11,118 $(6,759) $(4,408) $(8,610) $(1,382) $(2,424)
======= ======= ======= ======= ======= =======
</TABLE>
[d] The details of the income tax provision (recovery) are as follows:
<TABLE>
<CAPTION>
Eight-month
periods
ended Five-month Years ended
August 31, period ended July 31,
----------- December 31, --------------
1999 1998 1998 1998 1997 1996
------ ---- ------------ ---- ---- ----
[unaudited]
<S> <C> <C> <C> <C> <C> <C>
Current provision
United States...................... $4,643 $-- $ -- $-- $-- $--
Foreign............................ -- -- -- -- -- --
------ ---- ----- ---- ---- ----
4,643 -- --- -- -- --
------ ---- ----- ---- ---- ----
Deferred provision
United States...................... 699 -- (177) -- -- --
Foreign............................ -- -- -- -- -- --
------ ---- ----- ---- ---- ----
699 -- (177) -- -- --
------ ---- ----- ---- ---- ----
$5,342 $-- $(177) $-- $-- $--
====== ==== ===== ==== ==== ====
</TABLE>
[e] Deferred income taxes have been provided on temporary differences,
which consist of the following:
<TABLE>
<CAPTION>
Eight-month
periods ended Five-month Years ended
August 31, period ended July 31,
---------------- December 31, ----------------
1999 1998 1998 1998 1997 1996
----------- ---- ------------ ---- ---- ----
[unaudited]
<S> <C> <C> <C> <C> <C> <C>
Tax depreciation in excess
of book depreciation..... $522 $-- $ -- $-- $-- $--
Tax benefit of loss
carryforwards............ (896) (545) (451) (689) (45) --
Utilization of loss
carryforwards............ 177 -- -- -- -- --
Increase in valuation al-
lowance.................. 896 545 274 689 45 --
---- ---- ----- ---- ---- ----
$699 $-- $(177) $-- $-- $--
==== ==== ===== ==== ==== ====
</TABLE>
F-26
<PAGE>
MI ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(all amounts in U.S. dollars unless otherwise noted and all tabular amounts in
thousands, except per share amounts)
(all amounts as at August 31, 1999 and for the eight-month periods ended August
31, 1999 and 1998 are unaudited)
[f] Deferred tax assets and liabilities for SAC, LATC, MVB (from January 1,
1999), MGE, and other separate tax paying entities at August 31, 1999
consist of the following temporary differences:
<TABLE>
<CAPTION>
July 31,
-----------
August 31, December 31,
1999 1998 1998 1997
----------- ------------ ----- ----
[unaudited]
<S> <C> <C> <C> <C>
Assets
Tax benefit of loss carryforwards...... $ 1,868 $ 1,288 $ 787 $ 39
Valuation allowance.................... (1,868) (1,111) (787) (39)
------- ------- ----- ----
$ -- $ 177 $ -- $--
======= ======= ===== ====
Liabilities
Real estate properties book value in
excess of tax value................... $ 522 $ -- $ -- $--
------- ------- ----- ----
$ 522 $ -- $ -- $--
======= ======= ===== ====
</TABLE>
Included in Magna's net investment at August 31, 1999 are additional net
deferred tax liabilities totaling $3.8 million representing temporary
differences on other assets and liabilities carved out from Magna
(excluding assets and liabilities held by SAC, LATC, MVB, MGE and other
separate tax paying entities at August 31, 1999). Such temporary
differences consist principally of real estate properties book value in
excess of tax value.
6. DEBT AND COMMITMENTS
[a] The Company's long-term debt, consists of the following:
<TABLE>
<CAPTION>
July 31,
---------------
August 31, December 31,
1999 1998 1998 1997
----------- ------------ ------- -------
[unaudited]
<S> <C> <C> <C> <C>
Bank term line of credit with
permitted borrowings of $18.8
million (Austrian Schillings 240
million), bearing interest at
VIBOR [Vienna Interbank Overnight
Rate] plus 0.625% per annum,
payable quarterly. The advance is
repayable in six annual
installments of principal of $3.1
million (Austrian Schillings 40
million) beginning on July 31,
1997. The Company has provided
two first mortgages on real
estate properties as security for
this facility.................... $ 9,250 $13,567 $12,784 $14,661
Mortgages outstanding with various
Austrian banks and local govern-
ments (Austrian Schillings 76
million), bearing interest at
rates ranging from 0.5% to 6.75%
per annum, payable in semi-annual
installments. The mortgages are
repayable over various periods to
2037............................. 5,839 6,578 6,261 --
Term loan, bearing interest at a
fixed rate of 4% per annum pay-
able annually. The advance is re-
payable in 10 annual installments
of principal of $35 thousand
(Austrian Schillings 0.4 million)
commencing December 31, 1997..... 274 301 285 --
------- ------- ------- -------
15,363 20,446 19,330 14,661
Less due within one year.......... 3,323 3,655 3,446 3,052
------- ------- ------- -------
$12,040 $16,791 $15,884 $11,609
======= ======= ======= =======
</TABLE>
F-27
<PAGE>
MI ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(all amounts in U.S. dollars unless otherwise noted and all tabular amounts in
thousands, except per share amounts)
(all amounts as at August 31, 1999 and for the eight-month periods ended August
31, 1999 and 1998 are unaudited)
[b] Future principal repayments on long-term debt at December 31, 1998 are
as follows:
<TABLE>
<S> <C>
1999............................................................... $ 3,655
2000............................................................... 3,631
2001............................................................... 3,624
2002............................................................... 3,624
2003............................................................... 232
Thereafter......................................................... 5,680
-------
$20,446
=======
</TABLE>
[c] Net interest expense (income) includes:
<TABLE>
<CAPTION>
Eight-month
periods ended Five-month
August 31, period ended Years ended July 31,
------------- December 31, ----------------------
1999 1998 1998 1998 1997 1996
------------- ------------ ------- ------- ------
[unaudited]
<S> <C> <C> <C> <C> <C> <C>
Interest cost, gross
--External debt....... $ 470 $ 700 $ 371 $ 1,021 $ 829 $ 136
--Magna debt.......... 475 747 1,055 986 520 256
----- ------- ------ ------- ------- -----
945 1,447 1,426 2,007 1,349 392
Less: Interest
capitalized............ 295 412 190 608 394 276
----- ------- ------ ------- ------- -----
Interest expense........ 650 1,035 1,236 1,399 955 116
Interest income......... 128 25 15 19 -- 175
----- ------- ------ ------- ------- -----
Interest expense
(income), net.......... $ 522 $ 1,010 $1,221 $ 1,380 $ 955 $ (59)
===== ======= ====== ======= ======= =====
</TABLE>
Interest capitalized relates to real estate properties under or held for
development.
Interest paid in cash for the eight-month period ended August 31, 1999
and the five-month period ended December 31, 1998 was $1.1 million and
$1.2 million, respectively (for the years ended July 31, 1998--$1.9
million; 1997--$1.4 million; 1996--$0.4 million).
[d] At August 31, 1999, the Company had commitments under operating leases
requiring annual rental payments for the fiscal periods ending December
31 as follows:
<TABLE>
<S> <C>
1999 (remaining four months)......................................... $119
2000................................................................. 313
2001................................................................. 200
2002................................................................. 20
----
$652
====
</TABLE>
For the eight-month period ended August 31, 1999 and five-month period
ended December 31, 1998, payments under operating leases amounted to
approximately $232 thousand and $39 thousand, respectively (for the
years ended July 31, 1998--$44 thousand; 1997--$49 thousand; 1996--
$7 thousand).
F-28
<PAGE>
MI ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(all amounts in U.S. dollars unless otherwise noted and all tabular amounts in
thousands, except per share amounts)
(all amounts as at August 31, 1999 and for the eight-month periods ended August
31, 1999 and 1998 are unaudited)
7. CURRENCY TRANSLATION ADJUSTMENT
Unrealized translation adjustments arise on the translation to U.S. dollars
of assets and liabilities of the Company's self-sustaining foreign
operations. During the eight-month period ended August 31, 1999, the
Company incurred an unrealized currency translation loss of $5.6 million,
primarily from the weakening of the Austrian Schilling against the U.S.
dollar during the period (an unrealized gain of $4.8 million for the five-
month period ended December 31, 1998 and unrealized losses for the years
ended July 31, 1998--$2.0 million; 1997--$7.2 million; 1996--$1.3 million).
8. FINANCIAL INSTRUMENTS
[a] Fair Value
The methods and assumptions used to estimate the fair value of financial
instruments are described below. Management has estimated the fair value
of its financial instruments using available market information and
appropriate valuation methodologies. Considerable judgement is required
in interpreting market data to develop estimates of fair value.
Accordingly, estimated fair values are not necessarily indicative of the
amounts that could be realized in current market exchanges.
Cash and cash equivalents, accounts receivable, bank indebtedness,
accounts payable, income taxes payable, refundable deposits and accrued
liabilities
Due to the short period to maturity of these instruments, the carrying
values as presented in the consolidated balance sheets are reasonable
estimates of fair value.
Long-term debt
The fair value of the Company's long-term debt, based on current rates
for debt with similar terms and maturities, are not materially different
from their carrying value.
[b] Credit Risk
The Company's financial assets that are exposed to credit risk consist
primarily of cash and cash equivalents and accounts receivable.
Cash and cash equivalents, which consist of short-term investments,
including commercial paper, is only invested in entities with an
investment grade credit rating. Credit risk is further reduced by
limiting the amount which is invested in any one government or
corporation.
The Company, in the normal course of business, is exposed to credit risk
from its customers. However, customer receivables are generally not a
significant portion of the Company's total assets and are comprised of a
large number of individual customers.
[c] Interest Rate Risk
The Company is not exposed to significant interest rate risk due to the
short-term maturity of its monetary current assets and current
liabilities and its current levels of long-term debt balances.
9. SEGMENTED INFORMATION
Operating Segments
The Company has two operating segments: racetrack and real estate
operations.
The following summary presents key information by operating segment.
F-29
<PAGE>
MI ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(all amounts in U.S. dollars unless otherwise noted and all tabular amounts in
thousands, except per share amounts)
(all amounts as at August 31, 1999 and for the eight-month periods ended August
31, 1999 and 1998 are unaudited)
<TABLE>
<CAPTION>
Eight-month period ended
August 31, 1999
-------------------------------
Racetrack Real Estate
Operations Operations Total
---------- ----------- --------
[unaudited]
<S> <C> <C> <C>
Revenue...................................... $ 57,557 $ 10,974 $ 68,531
Income (loss) before income taxes............ 13,059 (1,941) 11,118
Real estate properties and fixed assets,
net......................................... 148,373 204,499 352,872
Real estate properties and fixed asset
additions................................... $ 16,498 $ 5,555 $ 22,053
<CAPTION>
Eight-month period ended
August 31, 1998
-------------------------------
Racetrack Real Estate
Operations Operations Total
---------- ----------- --------
[unaudited]
<S> <C> <C> <C>
Revenue...................................... $ -- $ 16,375 $ 16,375
Loss before income taxes..................... -- (6,759) (6,759)
Real estate properties and fixed assets,
net......................................... -- 184,883 184,883
Real estate properties and fixed asset
additions................................... $ -- $ 63,314 $ 63,314
<CAPTION>
Five-month period ended
December 31, 1998
-------------------------------
Racetrack Real Estate
Operations Operations Total
---------- ----------- --------
<S> <C> <C> <C>
Revenue...................................... $ 3,952 $ 6,597 $ 10,549
Loss before income taxes..................... (435) (3,973) (4,408)
Real estate properties and fixed assets,
net......................................... 127,767 207,144 334,911
Real estate properties and fixed asset
additions................................... $ 633 $ 17,435 $ 18,068
<CAPTION>
Year ended July 31, 1998
-------------------------------
Racetrack Real Estate
Operations Operations Total
---------- ----------- --------
<S> <C> <C> <C>
Revenue...................................... $ -- $ 20,486 $ 20,486
Loss before income taxes..................... -- (8,610) (8,610)
Real estate properties and fixed assets,
net......................................... -- 182,889 182,889
Real estate properties and fixed asset
additions................................... $ -- $ 72,643 $ 72,643
<CAPTION>
Year ended July 31, 1997
-------------------------------
Racetrack Real Estate
Operations Operations Total
---------- ----------- --------
<S> <C> <C> <C>
Revenue...................................... $ -- $ 15,276 $ 15,276
Loss before income taxes..................... -- (1,382) (1,382)
Real estate properties and fixed assets,
net......................................... -- 111,659 111,659
Real estate properties and fixed asset
additions................................... $ -- $ 43,579 $ 43,579
<CAPTION>
Year ended July 31, 1996
-------------------------------
Racetrack Real Estate
Operations Operations Total
---------- ----------- --------
<S> <C> <C> <C>
Revenue...................................... $ -- $ 2,460 $ 2,460
Loss before income taxes..................... -- (2,424) (2,424)
Real estate properties and fixed assets,
net......................................... -- 75,215 75,215
Real estate properties and fixed asset
additions................................... $ -- $ 25,119 $ 25,119
</TABLE>
F-30
<PAGE>
MI ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(all amounts in U.S. dollars unless otherwise noted and all tabular amounts in
thousands, except per share amounts)
(all amounts as at August 31, 1999 and for the eight-month periods ended August
31, 1999 and 1998 are unaudited)
Geographic Segments
Revenue by geographic segment of the Company is as follows:
<TABLE>
<CAPTION>
Eight-month
periods ended Five-month
August 31, period ended Years ended July 31,
--------------- December 31, ----------------------
1999 1998 1998 1998 1997 1996
------- ------- ------------ ------- ------- ------
[unaudited]
<S> <C> <C> <C> <C> <C> <C>
United States............ $59,222 $ 1,251 $ 4,707 $ 1,698 $ 1,617 $1,326
Europe................... 9,309 15,124 5,842 18,788 13,659 1,134
------- ------- ------- ------- ------- ------
$68,531 $16,375 $10,549 $20,486 $15,276 $2,460
======= ======= ======= ======= ======= ======
</TABLE>
Real estate properties and fixed assets by geographic segment of the Company
are as follows:
<TABLE>
<CAPTION>
July 31,
August 31, December 31, -----------------
1999 1998 1998 1997
----------- ------------ -------- --------
[unaudited]
<S> <C> <C> <C> <C>
United States..................... $167,677 $146,063 $ 17,687 $ 17,639
Canada............................ 69,988 64,804 50,742 33,073
Europe............................ 115,207 124,044 114,460 60,947
-------- -------- -------- --------
$352,872 $334,911 $182,889 $111,659
======== ======== ======== ========
</TABLE>
10. TRANSACTIONS WITH RELATED PARTIES
[a] During the five-month period ended December 31, 1998, Magna entered
into an agreement to purchase from a company associated with members of
the family of Mr. F. Stronach and Ms. B. Stronach, the Chairman of the
Board and an Executive Vice-President respectively of Magna,
approximately 200 acres of land and improvements in Aurora, Ontario for
a purchase price of approximately $11.0 million. This land is adjacent
to land currently owned by Magna and other land subject to a
conditional sale agreement by Magna to the Company. As at August 31,
1999, Magna had paid $9.0 million to the vendor in connection with this
transaction. The rights to acquire this land and improvements, as well
as golf course construction in progress funded by Magna, have been
transferred to the Company as part of the Reorganization. The total
amount included in properties under and held for development on the
consolidated balance sheet at August 31, 1999 for this project is $17.5
million.
[b] Properties under and held for development includes $20.6 million which
represents the book value of the Aurora lands transferred to the
Company by Magna under a conditional sale agreement. The conditional
sale agreement is subject to the successful severance of the effected
properties. If severance is not obtained within a specified period such
that Magna retains ownership of the Aurora lands, Magna must return
$20.6 million to the Company with interest. Prior to completion of the
conditional sale, the property is being leased by the Company from
Magna for a nominal amount.
[c] Properties available for sale includes $4.6 million, which represents
the book value of vacant land, transferred to the Company by Magna
under two conditional sale agreements. The conditional sale agreements
are subject to the successful severance of the effected properties. If
severance is not obtained within a specified period such that Magna
retains ownership of the properties, Magna must return $4.6 million to
the Company with interest.
F-31
<PAGE>
MI ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(all amounts in U.S. dollars unless otherwise noted and all tabular amounts in
thousands, except per share amounts)
(all amounts as at August 31, 1999 and for the eight-month periods ended August
31, 1999 and 1998 are unaudited)
[d] The Company has granted a limited term option to Magna to reacquire a
real estate property for a fixed price equal to its book value of 50
million Austrian Schillings ($3.9 million). This property is included
in properties available for sale.
[e] At August 31, 1999, the Company had a note outstanding due to Magna in
the amount of $35.2 million. This amount was repaid on October 29,
1999.
[f] Effective March 1, 1999, the Company began charging Magna an access fee
for its use of the golf course and related facilities in
Oberwaltersdorf, Austria. The yearly fee amounts to $2.7 million.
During the eight months ended August 31, 1999, $1.3 million has been
recognized in revenue related to this fee.
The Company has granted Magna a right of first refusal to purchase the
Company's two golf courses.
[g] One of our subsidiaries has been named as a defendant in a class action
brought in a United States District Court by Gutwillig, et al. The
plaintiffs in this action claim unspecified compensatory and punitive
damages, for restitution and disgorgement of profits, all in relation
to forced labor performed by the plaintiffs for such subsidiary and
certain other Austrian and German corporate defendants at their
facilities in Europe during World War II. As a result of the
Reorganization, the Company acquired shares of such subsidiary. Under
Austrian law, such subsidiary, would be jointly and severally liable
for the damages awarded in respect of this class action claim. An
Austrian subsidiary of Magna has agreed to indemnify such subsidiary
for any damages or expenses associated with this claim.
[h] A subsidiary of Magna has agreed to indemnify us in respect of
environmental remediation costs and expenses relating to existing
conditions in certain of our Austrian real estate properties.
11. CONTINGENCIES
[a] The Company generates a substantial amount of its revenue from wagering
activities in Southern California and, therefore, it is subject to the
risks inherent in the ownership and operation of a racetrack. These
include, among others, the risks normally associated with changes in
the general economic climate, trends in the gaming industry, including
competition from other gaming institutions and state lottery
commissions, changes in tax laws and gaming laws.
[b] In the ordinary course of business activities, the Company may be
contingently liable for litigation and claims with customers, suppliers
and former employees. Management believes that adequate provisions have
been recorded in the accounts where required. Although it is not
possible to estimate the extent of potential costs and losses, if any,
management believes, but can provide no assurance, that the ultimate
resolution of such contingencies would not have a material adverse
effect on the financial position of the Company.
12. EMPLOYEE DEFINED BENEFIT PLANS
With the acquisition of the Santa Anita racetrack in December 1998, the
Company assumed the assets and liabilities of the Retirement Income Plan
discussed below.
This plan consists of a non-contributory defined benefit retirement plan
for year-round employees who are at least 21 years of age, have one or more
years of service, and are not covered by collective bargaining agreements.
Plan assets consist of a group annuity contract with a life insurance
company. Plan benefits
F-32
<PAGE>
MI ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(all amounts in U.S. dollars unless otherwise noted and all tabular amounts in
thousands, except per share amounts)
(all amounts as at August 31, 1999 and for the eight-month periods ended August
31, 1999 and 1998 are unaudited)
are based primarily on years of service and qualifying compensation during
the final years of employment. Funding requirements comply with federal
requirements that are imposed by law. In the event of a "change in
control," participants in the defined benefit retirement plan will become
fully vested in plan benefits. This occurred on December 10, 1998.
The Santa Anita racetrack was acquired in December 1998, and the Company
had no defined benefit plans prior thereto. Accordingly, a reconciliation
of the benefit obligation, plan assets, funded assets of the plan and the
components of the net periodic benefit cost has not been provided for the
five-month period ended December 31, 1998 or for any of the years in the
three-year period ended July 31, 1998. The benefit obligation and fair
value of plan assets as of December 31, 1998 was $7.0 million and $5.7
million, respectively.
The accrued pension cost is included in other long-term liabilities in the
consolidated balance sheets.
Assumptions used in determining the funded status of the retirement income
plan are as follows:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Weighted average discount rate.................................. 6.0%
Weighted average rate of increase in compensation levels........ 3.5%
Expected long-term rate of return............................... 8.0%
</TABLE>
The measurement date and related assumptions for the funded status of the
retirement income plan were as of December 31, 1998.
13. SUPPLEMENTARY FINANCIAL INFORMATION
[a] Quarterly Information (unaudited)
Summarized quarterly financial information of the Company for the eight
months ended August 31, 1999 and the years ended December 31, 1998 and 1997
is as follows:
<TABLE>
<CAPTION>
Three-month periods Two-month
For the eight months --------------------- period
ended August 31, 1999 March 31 June 30 August 31 Total
--------------------- ---------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
Revenue................. $ 39,907 $ 20,795 $ 7,829 $ 68,531
Gross profit (loss)..... 18,096 583 (2,998) 15,681
Net income (loss)....... $ 9,325 $ (1,235) $(2,314) $ 5,776
<CAPTION>
For the year ended
December 31, 1998 March 31 June 30 September 30 December 31 Total
------------------ ---------- --------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
Revenue................. $ 5,748 $ 4,995 $ 6,453 $ 7,995 $ 25,191
Gross profit (loss)..... (1,547) (1,703) (1,636) (903) (5,789)
Net loss................ $ (2,300) $ (2,464) $(2,876) $(2,806) $(10,446)
<CAPTION>
For the year ended
December 31, 1997 March 31 June 30 September 30 December 31 Total
------------------ ---------- --------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
Revenue................. $ 2,297 $ 2,249 $ 7,026 $ 3,983 $ 15,555
Gross profit (loss)..... 380 (222) 1,866 (60) 1,964
Net income (loss)....... $ (579) $ (1,057) $ 533 $(1,460) $ (2,563)
</TABLE>
F-33
<PAGE>
MI ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(all amounts in U.S. dollars unless otherwise noted and all tabular amounts in
thousands, except per share amounts)
(all amounts as at August 31, 1999 and for the eight-month periods ended August
31, 1999 and 1998 are unaudited)
[b] Comparative Information (unaudited)
Summarized comparative financial information for the five-month period
ended December 31, 1997 is as follows:
<TABLE>
<S> <C>
Revenue............................................................ $ 5,844
Operating costs.................................................... 6,971
Depreciation and amortization...................................... 742
Interest expense................................................... 526
-------
Loss before income taxes........................................... (2,395)
Income taxes....................................................... --
-------
Net loss........................................................... $(2,395)
=======
</TABLE>
14. CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The Company's accounting policies as reflected in these consolidated
financial statements do not materially differ from accounting principles
generally accepted in Canada ("Canadian GAAP") except for:
[a] For purposes of reconciling to Canadian GAAP, the Company has early
adopted the provisions of the Canadian Institute of Chartered
Accountant Handbook Section 3461 "Employee Future Benefits" on a
retroactive basis. Accordingly, net pension expense and accrued pension
liabilities are the same as those determined by the application of U.S.
GAAP.
[b] Under Canadian GAAP, the Company is required to comment on its Year
2000 readiness.
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date-sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in errors
when information using year 2000 dates is processed. In addition,
similar problems may arise in some systems, which use certain dates in
1999 to represent something other than a date. The effects of the Year
2000 Issue may be experienced before, on, or after January 1, 2000,
and, if not addressed, the impact on operations and financial reporting
may range from minor errors to significant systems failure, which could
affect the Company's ability to conduct normal business operations. It
is not possible to be certain that all aspects of the Year 2000 Issue
affecting the Company, including those related to the efforts of
customers, suppliers, or other third parties, will be fully resolved.
[c] Under Canadian GAAP, there is no requirement to disclose comprehensive
income (loss).
15. SUBSEQUENT EVENTS
[a] At August 31, 1999, the components of Magna's net investment were as
follows:
<TABLE>
<S> <C>
Deferred income tax assets..................................... $ 3,041
Deferred income tax liabilities................................ (6,859)
Share capital.................................................. (293,123)
---------
$(296,941)
=========
</TABLE>
On September 1, 1999, Magna invested an additional $250 million in cash
in the Company.
F-34
<PAGE>
MI ENTERTAINMENT CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(all amounts in U.S. dollars unless otherwise noted and all tabular amounts in
thousands, except per share amounts)
(all amounts as at August 31, 1999 and for the eight-month periods ended August
31, 1999 and 1998 are unaudited)
On November 5, 1999, Magna completed the Reorganization described in
the Principles of Consolidation section set out under "Significant
Accounting Policies" preceding these consolidated financial statements.
In addition, the Company's capital structure was established creating
Class A Subordinate Voting Stock with one vote per share and Class B
Stock with 20 votes per share. As of November 5, 1999, 78,535,328 Class
B Stock and nil Class A Subordinate Voting Stock were issued and
outstanding.
Assuming the above issuances of shares occurred at the beginning of the
periods presented, basic and diluted earnings (loss) per share would
have been as follows:
<TABLE>
<CAPTION>
Eight-month
periods ended Five-month
August 31, period ended Years ended July 31,
--------------- December 31, -------------------------
1999 1998 1998 1998 1997 1996
------- ------- ------------ ------- ------- -------
[unaudited]
<S> <C> <C> <C> <C> <C> <C>
Earnings (loss) per
share of Class A
Subordinate Voting and
Class B Stock:
Basic and diluted..... $ 0.07 $ (0.09) $ (0.05) $ (0.11) $ (0.02) $ (0.03)
Average number of shares
of Class A Subordinate
Voting and Class B
Stock outstanding
during the period [in
thousands]:
Basic and diluted..... 78,535 78,535 78,535 78,535 78,535 78,535
</TABLE>
[b] On September 1, 1999, the Company completed the acquisition of
Gulfstream Park Racing Association, Inc., including its related horse
racing operations and approximately 255 acres of related real estate,
for $80.2 million, net of cash acquired.
[c] The Company has signed a definitive agreement to acquire the
Thistledown and Remington Park racetracks in North Randall, Ohio and
Oklahoma City, Oklahoma, respectively, for a total purchase price of
$24.0 million. Of the total purchase price, $19.5 million will be paid
in cash and the balance of $4.5 million will be paid through the
issuance of 650,695 shares of Class A Subordinate Voting Stock.
[d] The Company has signed a definitive agreement to acquire Golden Gate
Fields racetrack in Albany and Berkeley, California for a total
purchase price of $87.0 million. Of the total purchase price,
$60.0 million will be paid in cash, $7.0 million will be paid through
the issuance of 1,012,195 shares of Class A Subordinate Voting Stock
and $20.0 million will be paid by way of an interest-free promissory
note payable, $10.0 million of which matures on the first anniversary
of the date of closing and $5.0 million of which matures on each of the
second and third anniversaries.
[e] On November 8, 1999, the Company filed a registration statement with
the United States Securities and Exchange Commission and a preliminary
prospectus in Ontario and certain other provinces of Canada in
connection with Magna's planned distribution, by way of dividend, of
approximately 15.7 million shares of Class A Subordinate Voting Stock
of the Company to Magna's shareholders.
The Company will convert approximately 15.7 million shares of Class B
Stock to shares of Class A Subordinate Voting Stock to effect the
dividend.
F-35
<PAGE>
SCHEDULE III
MI ENTERTAINMENT CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(Amounts in thousands, U.S. dollars)
<TABLE>
<CAPTION>
Costs Capitalized
Initial Costs to Subsequent to Foreign Exchange Gross Amount at which
Company Acquisition Impact Carried at Close of Period
-------------------- -------------------- -------------------- ----------------------------
Building and Building and Building and Building and
Description Encumbrance Land Improvements Land Improvements Land Improvements Land Improvements Total
----------- ----------- ------- ------------ ------ ------------ ------ ------------ ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
RACETRACK
OPERATIONS
Santa Anita
Racing facilities
California,
U.S.A............ -- 25,072 43,277 -- 504 -- -- 25,072 43,781 68,853
Land held for
development
California,
U.S.A............ -- 52,500 -- -- 120 -- -- 52,500 120 52,620
REAL ESTATE
OPERATIONS
Golf Course
Facilities
Niederoesterreich,
Austria......... -- 3,721 -- 7,120 19,992 937 (4,120) 11,778 15,872 27,650
Ontario,
Canada.......... -- 11,008 -- 11 4,273 33 (4) 11,052 4,269 15,321
Land
Ontario,
Canada.......... -- 13,479 -- 8,478 -- (2,227) -- 19,730 -- 19,730
Ontario,
Canada.......... -- 11,314 -- 96 -- (768) -- 10,642 -- 10,642
Ontario,
Canada.......... -- 2,963 -- 225 524 (324) (7) 2,864 517 3,381
Ontario,
Canada.......... -- 4,452 -- 98 -- (303) -- 4,247 -- 4,247
Ontario,
Canada.......... -- 986 -- 48 -- (68) -- 966 -- 966
Ontario,
Canada.......... -- 1,645 -- 47 -- (111) -- 1,581 -- 1,581
Ontario,
Canada.......... -- 1,868 -- 56 -- (203) -- 1,721 -- 1,721
Ontario,
Canada.......... -- 377 -- 1 -- (42) -- 336 -- 336
Ontario,
Canada.......... -- 861 -- 10 -- (94) -- 777 -- 777
Ontario,
Canada.......... -- 1,189 -- 779 -- (214) -- 1,754 -- 1,754
Ontario,
Canada.......... -- 2,559 -- 201 -- (280) -- 2,480 -- 2,480
Ontario,
Canada.......... -- 1,669 -- 240 -- (207) -- 1,702 -- 1,702
Kentucky,
U.S.A........... -- 2,847 -- 13 -- -- -- 2,860 -- 2,860
Michigan,
U.S.A........... -- 1,161 -- 65 -- -- -- 1,226 -- 1,226
Michigan,
U.S.A........... -- 2,782 -- 8 -- -- -- 2,790 -- 2,790
Maryland,
U.S.A........... -- 997 -- 18 -- -- -- 1,015 -- 1,015
Florida,
U.S.A........... -- 1,918 -- 12 -- -- -- 1,930 -- 1,930
New York,
U.S.A........... -- 725 -- -- -- -- -- 725 -- 725
Niederoesterreich,
Austria......... -- 7,099 -- 49 -- (343) -- 6,805 -- 6,805
Niederoesterreich,
Austria......... -- 21,449 -- 2,010 -- (1,122) -- 22,337 -- 22,337
Austria......... -- 6,239 -- 4 -- 434 -- 6,677 -- 6,677
Steienmark,
Austria......... -- 2,229 -- -- -- 155 -- 2,384 -- 2,384
Commercial/Industrial
properties
Colorado,
U.S.A........... -- -- 1,045 -- -- -- -- -- 1,045 1,045
Oberoesterreich,
Austria......... -- 4,011 8,193 -- -- 279 571 4,290 8,764 13,054
Oberoesterreich,
Austria......... -- 3 3,193 -- 821 -- 223 3 4,237 4,240
Wien, Austria... -- 4,888 2,277 -- -- 341 159 5,229 2,436 7,665
Residential
properties
Ontario,
Canada.......... -- 70 112 -- 6 (5) (8) 65 110 175
Colorado,
U.S.A........... -- -- 1,557 -- 60 -- -- -- 1,617 1,617
Colorado,
U.S.A........... -- -- 3,600 -- -- -- -- -- 3,600 3,600
Florida,
U.S.A........... -- 669 1,242 -- 402 -- -- 669 1,644 2,313
Austria......... 5,839 8,595 7,941 (2) 34 599 552 9,192 8,527 17,719
Other............ 40 -- -- -- (2) 2 38 2 40
----- ------- ------ ------ ------ ------ ------ ------- ------ -------
5,839 201,385 72,437 19,587 26,736 (3,535) (2,632) 217,437 96,541 313,978
===== ======= ====== ====== ====== ====== ====== ======= ====== =======
<CAPTION>
Life on
which
Depreciation
in Latest
income
Accumulated Date of Date statement is
Description Depreciation Construction Acquiried Computed(1)
----------- ------------ ------------ --------- ------------
<S> <C> <C> <C> <C>
RACETRACK
OPERATIONS
Santa Anita
Racing facilities
California,
U.S.A............ 123 n/a 1998 40 years
Land held for
development
California,
U.S.A............ -- n/a 1998 n/a
REAL ESTATE
OPERATIONS
Golf Course
Facilities
Niederoesterreich,
Austria......... 2,194 1996 1994 25 years
Ontario,
Canada.......... -- Ongoing 1998 n/a
Land
Ontario,
Canada.......... --
Ontario,
Canada.......... -- n/a 1998 n/a
Ontario,
Canada.......... -- n/a 1996 n/a
Ontario,
Canada.......... -- n/a 1997 n/a
Ontario,
Canada.......... -- n/a 1997 n/a
Ontario,
Canada.......... -- n/a 1997 n/a
Ontario,
Canada.......... -- n/a 1997 n/a
Ontario,
Canada.......... -- n/a 1985 n/a
Ontario,
Canada.......... -- n/a 1985 n/a
Ontario,
Canada.......... -- n/a 1985 n/a
Ontario,
Canada.......... -- n/a 1997 n/a
Ontario,
Canada.......... -- n/a 1987 n/a
Kentucky,
U.S.A........... -- n/a 1997 n/a
Michigan,
U.S.A........... -- n/a 1996 n/a
Michigan,
U.S.A........... -- n/a 1996 n/a
Maryland,
U.S.A........... -- n/a 1994 n/a
Florida,
U.S.A........... -- n/a 1994 n/a
New York,
U.S.A........... -- n/a 1998 n/a
Niederoesterreich,
Austria......... -- n/a 1994 n/a
Niederoesterreich,
Austria......... -- n/a 1996 n/a
Austria......... -- n/a 1998 n/a
Steienmark,
Austria......... -- n/a 1998 n/a
Commercial/Industrial
properties
Colorado,
U.S.A........... 505 n/a 1992 n/a
Oberoesterreich,
Austria......... 482 n/a 1998 n/a
Oberoesterreich,
Austria......... -- n/a 1998 n/a
Wien, Austria... 35 n/a 1998 n/a
Residential
properties
Ontario,
Canada.......... 6 n/a 1998 n/a
Colorado,
U.S.A........... 83 n/a 1992 n/a
Colorado,
U.S.A........... -- n/a 1995 n/a
Florida,
U.S.A........... 267 n/a 1994 n/a
Austria......... 165 n/a 1998 n/a
Other............ 1
------------
3,861
============
</TABLE>
- ----
(1) Depreciation has ceased on properties available for sale. See note 3 to the
Company's Consolidated Financial Statements.
F-36
<PAGE>
SCHEDULE III
MI ENTERTAINMENT CORP.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
[Amounts in thousands, U.S. dollars]
<TABLE>
<CAPTION>
Five-month
period ended Years ended July 31,
December 31, ------------------------
1998 1998 1997 1996
------------ ------- ------- ------
<S> <C> <C> <C> <C>
COST
Balance at beginning of period........... 169,604 98,608 67,719 44,842
Additions during the period:
Acquisitions........................... 132,578 66,194 33,843 5,998
Improvements........................... 6,250 6,099 6,346 17,996
Foreign exchange impact................. 5,546 (1,297) (9,300) (1,117)
------- ------- ------- ------
Balance at close of period............... 313,978 169,604 98,608 67,719
------- ------- ------- ------
ACCUMULATED DEPRECIATION
Balance at beginning of period........... 2,509 1,180 319 151
Additions during the period:
Depreciation and amortization.......... 1,233 1,289 966 169
Foreign exchange impact................. 119 40 (105) (1)
------- ------- ------- ------
Balance at close of period............... 3,861 2,509 1,180 319
------- ------- ------- ------
Net book value........................... 310,117 167,095 97,428 67,400
Residential development inventory........ 16,573 13,908 12,072 6,858
------- ------- ------- ------
Real estate properties, net.............. 326,690 181,003 109,500 74,258
======= ======= ======= ======
</TABLE>
F-37
<PAGE>
FINANCIAL STATEMENTS
Los Angeles Turf Club, Inc
For the periods from January 1, 1998 to December 10, 1998,
November 6, 1997 to December 31, 1997, January 1, 1997
to November 5, 1997 and for the year ended December 31, 1996
F-38
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholder and Board of Directors
Los Angeles Turf Club, Inc.
We have audited the accompanying balance sheets of the Los Angeles Turf
Club, Inc. (the Company) as of December 10, 1998 and December 31, 1997, and the
related statements of operations, shareholder's equity (deficit) and cash flows
for the periods from January 1, 1998 through December 10, 1998, November 6,
1997 through December 31, 1997, January 1, 1997 through November 5, 1997, and
for the year ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at December 10,
1998 and December 31, 1997 and the results of its operations and its cash flows
for the periods from January 1, 1998 through December 10, 1998, November 6,
1997 through December 31, 1997, January 1, 1997 through November 5, 1997, and
for the year ended December 31, 1996, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Los Angeles, California
June 11, 1999
F-39
<PAGE>
LOS ANGELES TURF CLUB, INC.
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 10, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 221 $ 15,632
Accounts receivable, net of allowance of $238 at
December 10, 1998, and $367 at December 31, 1997.. 2,204 2,417
Prepaid expenses and other assets.................. 1,221 1,393
-------- --------
Total current assets............................. 3,646 19,442
-------- --------
Equipment............................................ 11,928 10,805
Accumulated depreciation............................. (1,424) (224)
-------- --------
10,504 10,581
-------- --------
Other assets......................................... 1,699 1,699
-------- --------
Total assets..................................... $ 15,849 $ 31,722
======== ========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable................................... $ 1,730 $ 10,736
Accrued deferred compensation cost................. 3,850 3,977
Accrued benefit plan cost.......................... 1,304 1,304
Other liabilities.................................. 6,201 10,033
Borrowing under line of credit..................... 2,500 --
Due to affiliates.................................. 20,719 23,718
-------- --------
Total current liabilities........................ 36,304 49,768
Deferred revenue..................................... 1,812 1,349
Deferred income taxes................................ 2,265 2,265
-------- --------
Total liabilities................................ 40,381 53,382
-------- --------
Shareholder's deficit:
Common stock, $1,000 par value; 25 shares
authorized, issued and outstanding................ 25 25
Additional paid-in capital......................... 8,314 6,960
Receivable from parent............................. (15,868) (13,355)
Retained earnings (deficit)........................ (17,003) (15,290)
-------- --------
Total shareholder's deficit...................... (24,532) (21,660)
-------- --------
Total liabilities and shareholder's deficit...... $ 15,849 $ 31,722
======== ========
</TABLE>
See accompanying notes.
F-40
<PAGE>
LOS ANGELES TURF CLUB, INC.
STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Period Period Period
From From From
January 1, November 6, January 1,
1998 through 1997 through 1997 through Year Ended
December 10, December 31, November 5, December 31,
1998 1997 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Wagering commissions.... $41,043 $ 2,950 $39,701 $44,781
Admission related....... 21,940 2,278 20,334 23,825
Interest and other...... 179 39 615 581
------- ------- ------- -------
63,162 5,267 60,650 69,187
------- ------- ------- -------
Costs and expenses:
Horse racing operating
costs.................. 48,437 6,407 49,279 48,735
Depreciation and
amortization........... 1,200 171 2,570 3,212
General and
administrative......... 3,965 742 4,821 6,353
Interest and other...... 1,089 30 110 788
Rental expense.......... 10,184 740 9,895 10,861
------- ------- ------- -------
64,875 8,090 66,675 69,949
------- ------- ------- -------
Loss before income taxes.. (1,713) (2,823) (6,025) (762)
Income taxes.............. -- -- -- --
------- ------- ------- -------
Net loss.................. $(1,713) $(2,823) $(6,025) $ (762)
======= ======= ======= =======
Basic and diluted loss per
share.................... $ (68.5) $(112.9) $(241.0) $ (30.5)
======= ======= ======= =======
</TABLE>
See accompanying notes.
F-41
<PAGE>
LOS ANGELES TURF CLUB, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
For the Periods January 1, 1998 through December 10, 1998, November 6, 1997
through December 31, 1997, January 1, 1997 through November 5, 1997, and
the Year Ended December 31, 1996
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional Receivable Retained
------------- Paid-in From Earnings
Shares Amount Capital Parent (Deficit) Total
------ ------ ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... 25 $ 25 $1,895 $(16,417) $ 22,053 $ 7,556
Addition to receivable
from parent.......... -- -- -- (325) -- (325)
Contributed capital... -- -- 3,208 -- -- 3,208
Net loss.............. -- -- -- -- (762) (762)
---- ---- ------ -------- -------- --------
Balance, December 31,
1996................... 25 25 5,103 (16,742) 21,291 9,677
Payment of receivable
from parent.......... -- -- -- 4,015 -- 4,015
Contributed capital... -- -- 1,494 -- -- 1,494
Net loss.............. -- -- -- -- (6,025) (6,025)
---- ---- ------ -------- -------- --------
Balance, November 5,
1997................... 25 25 6,597 (12,727) 15,266 9,161
Purchase accounting
adjustment........... -- -- -- -- (27,733) (27,733)
Addition to receivable
from parent.......... -- -- -- (628) -- (628)
Contributed capital... -- -- 363 -- -- 363
Net loss.............. -- -- -- -- (2,823) (2,823)
---- ---- ------ -------- -------- --------
Balance, December 31,
1997................... 25 25 6,960 (13,355) (15,290) (21,660)
Addition to receivable
from parent.......... -- -- -- (2,513) -- (2,513)
Contributed capital... -- -- 1,354 -- -- 1,354
Net loss.............. -- -- -- -- (1,713) (1,713)
---- ---- ------ -------- -------- --------
Balance, December 10,
1998................... 25 $ 25 $8,314 $(15,868) $(17,003) $(24,532)
==== ==== ====== ======== ======== ========
</TABLE>
See accompanying notes.
F-42
<PAGE>
LOS ANGELES TURF CLUB, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Period from Period from Period from
January 1, November 6, January 1,
1998 through 1997 through 1997 through Year Ended
December 10, December 31, November 5, December 31,
1998 1997 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................. $ (1,713) $(2,823) $ (6,025) $ (762)
Adjustments to reconcile
net loss to net cash
(used in) provided by
operating activities:
Depreciation and
amortization............ 1,200 171 2,570 3,212
Deferred income taxes.... -- -- -- (327)
Decrease (increase) in
accounts receivable,
net..................... 213 55 (88) 665
Decrease (increase) in
prepaid expenses and
other assets............ 172 231 (224) (658)
(Decrease) increase in
accounts payable........ (9,006) 7,148 (7,243) 1,758
(Decrease) increase in
other liabilities,
deferred compensation
and permanent employee
compensation............ (3,959) (2,831) 764 (842)
Increase (decrease) in
deferred revenues....... 463 540 (1,030) (540)
-------- ------- -------- -------
Net cash (used in)
provided by operating
activities............... (12,630) 2,491 (11,276) 2,506
-------- ------- -------- -------
Cash flows from investing
activities:
Additions to equipment.... (1,123) (1,805) (7,051) (4,550)
-------- ------- -------- -------
Net cash used in investing
activities............... (1,123) (1,805) (7,051) (4,550)
-------- ------- -------- -------
Cash flows from financing
activities:
Repayment of bank loans
payable.................. -- (82) (785) (868)
Borrowing under line of
credit................... 2,500 -- -- --
(Decrease) increase in due
to/from affiliates....... (2,999) 10,985 7,823 (2,050)
Contributed capital....... 1,354 366 1,494 3,208
(Increase) decrease in
receivable from parent... (2,513) (628) 4,015 (325)
-------- ------- -------- -------
Net cash (used in)
provided by financing
activities............... (1,658) 10,641 12,547 (35)
-------- ------- -------- -------
Net (decrease) increase in
cash and cash
equivalents............... (15,411) 11,327 (5,780) (2,079)
Cash and cash equivalents
at beginning of period.... 15,632 4,305 10,085 12,164
-------- ------- -------- -------
Cash and cash equivalents
at end of period.......... $ 221 $15,632 $ 4,305 $10,085
======== ======= ======== =======
Supplemental Cash Flow
Information (see Notes 3
and 9):
Interest paid for the
period................... $ 58 $ -- $ 111 $ 288
======== ======= ======== =======
</TABLE>
See accompanying notes.
F-43
<PAGE>
LOS ANGELES TURF CLUB, INC.
NOTES TO FINANCIAL STATEMENTS
December 10, 1998, December 31, 1997 and 1996
1. Basis of Presentation
Los Angeles Turf Club, Inc. ("LATC" or the "Company") was incorporated in
1979 and is a successor of a corporation originally organized in 1934 to
conduct thoroughbred horse racing at Santa Anita Racetrack ("Santa Anita") in
Southern California. Prior to November 5, 1997, LATC was a wholly owned
subsidiary of Santa Anita Operating Company and Subsidiaries ("SAOC" or
"Parent"). On November 5, 1997, Meditrust Acquisition Company ("Meditrust")
merged with SAOC and changed its name to Meditrust Operating Company. The
merger has been accounted for as a purchase and the assets and liabilities of
LATC were recorded at their fair market value as of November 5, 1997. A
complete change in accounting basis is appropriate because of the change in
control of voting interests. The financial statements for the periods
subsequent to November 5, 1997 present the financial position of the Company
and its results of operations after the allocation of the purchase price
relating to the Meditrust acquisition. The accompanying financial statements
for the periods prior to and including November 5, 1997 do not include the
effects of Meditrust's purchase accounting for the acquisition (Note 3). On
December 10, 1998, LATC was acquired by a wholly-owned subsidiary of Magna
International Inc.
The accompanying financial statements include the balance sheet and income
statement accounts of LATC. Certain costs incurred by LATC's Parent on the
Company's behalf have been allocated to LATC on the specific identification
basis. The statement of operations may not necessarily be indicative of the
revenues and expenses that would have resulted had LATC operated as a stand
alone entity.
2. Summary of Significant Accounting Policies
The financial statements have been prepared in accordance with generally
accepted accounting principles in the United States of America, which conform,
in all material respects, with accounting principles generally accepted in
Canada except as described in Note 11 to these financial statements.
Property, Plant and Equipment
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("FAS No. 121"). FAS No.
121 requires that impairment losses be recorded on long-lived assets used in
operations when events or changes in circumstances indicate that the
undiscounted cash flows to be generated by these assets are less than their
carrying amount. No such impairment losses were recorded during the periods
January 1, 1998 through December 10, 1998, November 6, 1997 through December
31, 1997, January 1, 1997 through November 5, 1997 or for the year ended
December 31, 1996.
Depreciation of property, plant and equipment is provided primarily on the
straight-line method generally over the following estimated useful lives:
<TABLE>
<S> <C>
Machinery and other equipment................................ 5 to 15 years
Leasehold improvements....................................... 5 to 15 years
</TABLE>
Expenditures which materially increase property lives are capitalized. The
cost of maintenance and repairs is charged to expense as incurred. When
depreciable property is retired or disposed of, the related cost and
accumulated depreciation is removed from the accounts and any gain or loss
reflected in current operations.
F-44
<PAGE>
LOS ANGELES TURF CLUB, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred Revenues
Deferred revenues consist of prepaid admission tickets and parking, which
are recognized as income ratably over the period of the related race meet.
Also, deferred revenue includes prepaid rent from another thoroughbred horse
racing corporation, Oak Tree Racing Association ("OTRA"), which utilizes the
Company's racetrack for a portion of the year. Prepaid rent is recognized over
the remaining term of the lease.
Cash and Cash Equivalent
Highly liquid short-term investments, with remaining maturities of three
months or less at the date of acquisition, are considered cash equivalents.
Allowance for Bad Debts
Management periodically evaluates the collectibility of accounts receivable
and adjusts the allowance for doubtful accounts to reflect the amounts
estimated to be uncollectible .
Advertising
Costs incurred for production and communicating advertising are generally
expensed when incurred. Costs incurred for promotions for specific live race
days are expensed on the applicable race day. Advertising cost of $3,175,000,
$262,000, $2,331,000, and $1,773,000 were incurred for the periods of January
1, 1998 through December 10, 1998, November 6, 1997 through December 31, 1997,
January 1, 1997 through November 5, 1997 and the year ended December 31, 1996,
respectively and are included in horse racing operating costs in the
accompanying financial statements.
Revenues and Costs
The Company records operating revenues associated with thoroughbred horse
racing at Santa Anita Racetrack on a daily basis, except for season admissions
which are recorded ratably over the racing season.
Horse Racing Revenues and Direct Operating Costs
Horse racing revenues and direct operating costs are shown net of state and
local taxes, stakes, purses and awards.
Earnings Per Share
Basic earnings per share is computed by dividing the Company's net income or
loss by the weighted average number of common shares outstanding during the
period which was 25 shares for each of the periods presented. The Company does
not have any dilutive securities.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosure about Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components. SFAS 130 became effective
in the first quarter of 1998 and had no impact on the Company's financial
statements. SFAS No. 131 establishes new standards on reporting information
about operating segments in both annual and interim financial statements. It
also establishes standards for related disclosures about products and services,
geographic areas, and major
F-45
<PAGE>
LOS ANGELES TURF CLUB, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
customers. The adoption of the new requirements of SFAS No. 131 did not impact
the Company's disclosure of segment information because the Company operates in
one line of business.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.133, "Accounting for Derivative Instruments"
("SFAS No. 133"). SFAS No. 133 is effective for all fiscal quarters of fiscal
years beginning after June 15, 2000. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities. SFAS
No. 133 requires that an entity recognize all derivatives either as assets or
liabilities and measure those instruments at fair market value. Presently, the
Company does not use derivative instruments either in hedging activities or as
investments. Accordingly, the Company believes that adoption of SFAS No. 133
will have no impact on its financial position or results of operations.
Concentration of Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash investments and receivables.
The Company places its cash investments in investment grade short-term
instruments and limits the amount of credit exposure to any one commercial
issuer. Concentrations of credit risk with respect to accounts receivable are
limited due to the number of satellite locations and Santa Anita group event
patrons.
The Company generates the majority of its revenue from wagering activities
in Southern California and therefore it is subject to the risks inherent in the
ownership and operation of a racetrack. These include, among others, the risks
normally associated with changes in the general economic climate, trends in the
gaming industry, including competition from other gaming institutions and state
lottery commissions and changes in tax laws and gaming laws.
Fair Value of Financial Instruments
Management has estimated the fair value of its financial instruments using
available market information and appropriate valuation methodologies.
Considerable judgment is required in interpreting market data to develop
estimates of fair value. Accordingly, the estimated values for the Company as
of December 10, 1998 and December 31, 1997 are not necessarily indicative of
the amounts that could be realized in current market exchanges.
For those financial instruments for which it is practicable to estimate
value, management has determined that the carrying amounts of the Company's
financial instruments approximate their fair value as of December 10, 1998 and
December 31, 1997.
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates in the
near term.
3. Acquisition of the Company by Meditrust Acquisition Company
On November 5, 1997, Meditrust acquired LATC. Accordingly, the Company has
adjusted the carrying value of its assets and liabilities to reflect the cost
of Meditrust's investment in LATC in accordance with Accounting Principle Board
Opinion No. 16. As a result, $19,100,000 was allocated to assets and
$37,672,000 was allocated to liabilities, with the remaining balance being
recorded as a reduction to shareholder's equity.
F-46
<PAGE>
LOS ANGELES TURF CLUB, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company's statement of operations reflects depreciation and amortization
based on a historic basis through November 5, 1997 and incorporates the
adjusted basis of the Company's assets and liabilities subsequent to November
5, 1997.
4. Executive Severance
During the period of January 1, 1997 through November 5, 1997 and the year
ended December 31, 1996, pursuant to resignation agreements with certain
executive officers, the Company incurred $351,000 and $851,000, respectively,
in executive severance costs which have been charged to general and
administrative expenses in the statements of operations.
5. Loans Payable
The Company entered into a sale-leaseback transaction related to the
financing of certain television, video monitoring and production equipment
under a five-year lease which expired in December 1997. This financing
arrangement was accounted for as a capital lease.
6. Borrowing Under Line of Credit
At December 10, 1998, the Company had $2,500,000 outstanding under an
unsecured line of credit. Interest on the line of credit was based on prime
plus 0.5% (8.25% at December 10, 1998). The outstanding balance under the line
of credit was paid off subsequent to December 10, 1998.
7. Income Taxes
Income taxes are calculated on a separate return basis. Historically, the
Company has filed consolidated returns with its Parent. Deferred income taxes
arise from temporary differences in the recognition of certain items of revenue
and expense for financial statement and tax reporting purposes. The sources of
temporary differences and their related tax effects for the periods of January
1, 1998 through December 10, 1998, November 6, 1997 through December 31, 1997,
January 1, 1997 through November 5, 1997 and the year ended December 31, 1996
are as follows:
<TABLE>
<CAPTION>
January 1, November 6, January 1,
1998 through 1997 through 1997 through Year ended
December 10, December 31, November 5, December 31,
1998 1997 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Accelerated depreciation
and amortization methods
utilized for tax reporting
purposes.................. $ 308,000 $ (233,000) $ (498,000) $ 675,000
Net operating loss
carryovers................ (879,000) (1,029,000) (2,197,000) (784,000)
Deductions previously
deducted for book
purposes, deductible for
tax purposes currently.... 53,000 71,000 150,000 435,000
Income previously included
for book purposes, not
includable for tax
purposes currently........ -- -- -- (326,000)
Increase in valuation
allowance for deferred tax
assets.................... 518,000 1,191,000 2,545,000 --
--------- ----------- ----------- ---------
$ -- $ -- $ -- $ --
========= =========== =========== =========
</TABLE>
A reconciliation of the Company's total income tax provision for the periods
of January 1, 1998 through December 10, 1998, November 6, 1997 through December
31, 1997, January 1, 1997 through November 5, 1997 and the year ended December
31, 1996 to the statutory federal corporate income tax rate of 34% and the
F-47
<PAGE>
LOS ANGELES TURF CLUB, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
state rate of 9.3% for the year ended December 31, 1996 and 8.84% for the
periods of January 1, 1997 through November 5, 1997, November 6, 1997 through
December 31, 1997 and January 1, 1998 through December 10, 1998, is as follows:
<TABLE>
<CAPTION>
January 1, November 6, January 1,
1998 through 1997 through 1997 through Year ended
December 10, December 31, November 5, December 31,
1998 1997 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Computed "expected" tax
recovery for federal
income taxes, net of state
income taxes.............. $(734,000) $(1,209,000) $(2,581,000) $(330,000)
Nondeductible political
contributions............. 73,000 2,000 5,000 82,000
Unrecognized tax net
operating loss
carryforwards, net........ 661,000 1,207,000 2,576,000 194,000
Other, net................. -- -- -- 54,000
--------- ----------- ----------- ---------
$ -- $ -- $ -- $ --
========= =========== =========== =========
</TABLE>
The deferred tax assets and liabilities as of December 10, 1998 and December
31, 1997 consist of the following:
<TABLE>
<CAPTION>
December 10, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Compensation deductible for tax purposes when
paid.............................................. $ 125,000 $ 180,000
Pension contribution deductible for tax purposes
when paid......................................... 581,000 581,000
Contribution carryover............................. 8,000 7,000
Other.............................................. 452,000 452,000
Federal tax benefit of state deferred liabilities.. 562,000 562,000
Federal net operating loss carryovers.............. 3,664,000 2,876,000
State net operating loss carryovers................ 441,000 350,000
Valuation allowance................................ (5,413,000) (4,895,000)
----------- -----------
Total deferred assets............................ 420,000 113,000
----------- -----------
Deferred tax liabilities:
Difference between tax and book depreciation....... (1,028,000) (721,000)
Income previously included for book purposes, not
includable for tax purposes....................... (11,000) (11,000)
State income tax deductible when paid for federal
tax purposes...................................... (1,646,000) (1,646,000)
----------- -----------
Total deferred tax liabilities................... (2,685,000) (2,378,000)
----------- -----------
Net liability for deferred income taxes.............. $(2,265,000) $(2,265,000)
=========== ===========
</TABLE>
There were no taxes paid for the periods of January 1, 1998 through December
10, 1998, November 6, 1997 through December 31, 1997, January 1, 1997 through
November 5, 1997 and the year ended December 31, 1996.
8. Commitments and Contingencies
Certain claims, suits and complaints arising in the ordinary course of
business have been filed or are pending against the Company. In the opinion of
management, all such matters are adequately covered by
F-48
<PAGE>
LOS ANGELES TURF CLUB, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
insurance or, if not covered, are without merit or are of such a nature or
involve minor damages that would not have a significant effect on the financial
position or results of operations if disposed of unfavorably.
The Company leases the racetrack from an affiliate. The lease agreement
covers the period through December 31, 2010 (see note 10). The Company has
sublet the racetrack for certain periods during the year to OTRA through 2010
(see Note 10).
9. Employee Benefit Plans
Stock Option Program
Prior to December 10, 1998, SAOC and its successor Meditrust Operating
Company were part of a "paired shared real estate investment trust" structure.
As such SAOC and Meditrust Operating Company's shares were traded as a single
unit with Santa Anita Realty Enterprises, Inc. (SARE) and Meditrust
Corporation, respectively, under a stock-pairing agreement.
Stock options granted by LATC's parent were matched with the corresponding
paired share of SARE or its successor Meditrust Corporation once the employees
exercised their option. On November 5, 1997, the stock options outstanding were
deemed exercised and accordingly, a liability for these stock options were
recorded as part of the Meditrust purchase price adjustment.
Restricted Stock Awards
Under the 1995 Share Award Plan, SAOC granted 126,647 shares of common stock
as a Restricted Stock Award at a value of $15.50 per paired share. Of the
shares issued in 1995; 59,291 shares vested in 1996, and 8,065 shares vested in
1995. Based on the Restricted Stock Award agreement SAOC purchased 43,161
shares back in 1997. The remaining 16,130 shares vested in 1997 upon change in
control. Compensation of $61,000 and $524,000 for the years ended December 31,
1997 and 1996, respectively, are included in the general and administrative
expenses in the accompanying statements of operations.
Retirement Income Plan
The Company's parent has a non-contributory defined benefit retirement plan
for year-round employees who are at least 21 years of age, have one or more
years of service, and are not covered by collective bargaining agreements. Plan
assets consist of a group annuity contract with a life insurance company. Plan
benefits are based primarily on years of service and qualifying compensation
during the final years of employment. Funding requirements comply with federal
requirements that are imposed by law. In the event of a "change in control,"
participants in the defined benefit retirement plan become fully vested in plan
benefits, which occurred at November 5, 1997.
F-49
<PAGE>
LOS ANGELES TURF CLUB, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The net periodic pension cost allocated to the Company by its Parent for
the periods of January 1, 1998 through December 10, 1998, November 6, 1997
through December 31, 1997, January 1, 1997 through November 5, 1997 and the
year ended December 31, 1996 for the retirement income plan included the
following components:
<TABLE>
<CAPTION>
January 1, November 6, January 1,
1998 through 1997 through 1997 through Year ended
Components of Net Periodic December 10, December 31, November 5, December 31,
Pension Cost 1998 1997 1997 1996
- -------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Service cost................ $ 327,000 $ 38,000 $ 211,000 $ 277,000
Interest cost on projected
benefit obligation......... 429,000 65,000 361,000 441,000
Actual return on plan
assets..................... (490,000) (68,000) (377,000) (387,000)
Net amortization and
deferral................... 171,000 19,000 106,000 101,000
--------- -------- --------- ---------
Net periodic pension
cost..................... $ 437,000 $ 54,000 $ 301,000 $ 432,000
========= ======== ========= =========
</TABLE>
The following provides a reconciliation of benefits obligations, plan
assets and funded status of the plan.
<TABLE>
<CAPTION>
December 10, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of period..... $ 6,603,000 $ 5,999,000
Service cost.................................. 327,000 249,000
Interest cost................................. 429,000 427,000
Benefits paid................................. (384,000) (362,000)
Actuarial losses.............................. 22,000 290,000
----------- -----------
Benefit obligation at end of period......... 6,997,000 6,603,000
----------- -----------
Change in plan assets:
Fair value of plan assets at beginning of
period....................................... 5,299,000 4,868,000
Actual return on plan assets.................. 490,000 445,000
Company contributions......................... 288,000 348,000
Benefits paid................................. (384,000) (362,000)
----------- -----------
Fair value of plan assets at end of period.. $ 5,693,000 $ 5,299,000
----------- -----------
Funded status of the plan (underfunded)..... $(1,304,000) $(1,304,000)
=========== ===========
</TABLE>
Assumptions used in determining the funded status of the retirement income
plan are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate............................... 6.0% 6.8% 7.5%
Weighted average rate of increase in compensation levels..... 3.5% 3.5% 3.5%
Expected long-term rate of return............................ 8.0% 8.0% 8.0%
</TABLE>
The measurement date and related assumptions for the funded status of the
Company's retirement income plan were as of the end of the year.
The Company also participates in several multi-employer pension plans for
the benefit of its employees who are union members. Company contributions to
these plans were $4,391,000 for the period of January 1, 1998 to December 10,
1998, $672,000 for the period of November 6, 1997 through December 31, 1997,
$3,709,000 for the period of January 1, 1997 through November 5, 1997, and
$4,377,000 for the year ended
F-50
<PAGE>
LOS ANGELES TURF CLUB, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1996. The data available from administrators of the multi-employer
pension plans is not sufficient to determine the accumulated benefit
obligations, nor the net assets attributable to the multi-employer plans in
which Company employees participate.
Deferred Compensation Plan
The Company's parent has defined benefit deferred compensation agreements
which provide selected prior management employees with a fixed benefit at
retirement age. During 1995, the outstanding agreements for active employees
were curtailed and replaced by awards of restricted stock under the 1995 Share
Award Plan. Plan benefits are based primarily on years of service and
qualifying compensation.
Net periodic pension cost for the periods of January 1, 1998 to December 10,
1998, November 6, 1997 through December 31, 1997, January 1, 1997 through
November 5, 1997 and for the year ended December 31, 1996 for the deferred
compensation plan included the following components:
<TABLE>
<CAPTION>
January 1, November 6, January 1,
1998 through 1997 through 1997 through Year ended
Components of Net Periodic December 10, December 31, November 5, December 31,
Pension Cost 1998 1997 1997 1996
- -------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Service costs............... $ -- $ -- $ -- $ --
Interest cost on projected
benefit obligation......... 237,000 43,000 240,000 231,000
Amortization of unrecognized
net obligation and
experience losses.......... 66,000 -- -- --
-------- ------- -------- --------
Net periodic pension
cost..................... $303,000 $43,000 $240,000 $231,000
======== ======= ======== ========
</TABLE>
The following provides a reconciliation of benefit obligations and funded
status of the plan. The plan has no assets.
<TABLE>
<CAPTION>
December 10, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of period...... $ 3,977,000 $ 3,737,000
Service cost................................... -- --
Interest cost.................................. 237,000 283,000
Benefits paid.................................. (532,000) (539,000)
Actuarial losses............................... 168,000 496,000
----------- -----------
Benefit obligation at end of period.......... $ 3,850,000 $ 3,977,000
=========== ===========
Funded status of the plan (underfunded)...... $(3,850,000) $(3,977,000)
=========== ===========
</TABLE>
Assumptions used in determining the funded status of the deferred
compensation plan are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Weighted average discount rate................................ 6.0% 6.8% 7.5%
</TABLE>
The measurement date and related assumptions for the funded status of the
Company's deferred compensation plan were as of the end of the year.
F-51
<PAGE>
LOS ANGELES TURF CLUB, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
10. Related Party Transactions
The Company leases the racetrack from an affiliate for the full year for a
fee of 1.5% of the on-track wagering on live races at Santa Anita Racetrack,
which includes the OTRA meet. In addition, the Company pays to the affiliate
26.5% of its wagering commissions from satellite wagering (not to exceed 1.5%
of such wagering). When the Company operates as a satellite for Hollywood Park
Racetrack, Del Mar Racetrack and Pomona Fairplex, the Company pays 26.5% of its
wagering commissions as additional rent to the affiliate. For the periods
January 1, 1998 through December 10, 1998, November 6, 1997 through December
31, 1997, January 1, 1997 through November 5, 1997 and the year ended December
31, 1996, LATC paid the affiliate (including charity days) $10,184,000,
$740,000, $9,895,000, and $10,861,000 in rent.
The lease arrangement between the Company and the affiliate requires the
Company to assume costs attributable to utilities, taxes, maintenance and
insurance.
The Company has sublet the racetrack to OTRA (through 2010) to conduct
OTRA's annual thoroughbred horse racing meet, which commences in late September
or early October. OTRA races five weeks in even-numbered years and six weeks in
odd-numbered years. The Company received $5,233,462, $7,446, $3,797,266 and
$4,807,724, included in wagering commissions, respectively, in rent from OTRA
for the periods January 1, 1998 through December 10, 1998, November 6, 1997
through December 31, 1997, January 1, 1997 through November 5, 1997 and the
year ended December 31, 1996.
As of December 31, 1997, due to affiliates consists of $23,718,000 due to
Meditrust Corporation including $5,500,000 loan payable to Meditrust
Corporation. The loan bore interest at 7% and was repaid in 1998. The affiliate
started charging 7% interest to the Company beginning January 1, 1998 on a
portion of the payable balance. No interest was charged on borrowing from
affiliates prior to January 1, 1998.
As of December 10, 1998, due to affiliates consists of $20,719,000 due to
Meditrust Corporation. Interest of $880,000 was incurred on borrowings from
affiliates and is included in interest and other expenses in the accompanying
statement of operations.
Costs incurred by LATC's parent have been allocated to LATC on the specific
identification basis and were $1,354,000, $363,000, $1,494,000 and $3,208,000
for the periods January 1, 1998 through December 10, 1998, November 6, 1997
through December 31, 1997, January 1, 1997 through November 5, 1997 and the
year ended December 31, 1996, respectively. Such costs are included in the
accompanying statement of operations.
11. Canadian Generally Accepted Accounting Principles
The Company's accounting policies as reflected in these financial statements
do not differ materially from accounting principles generally accepted in
Canada ("Canadian GAAP") except for:
(a) The receivable from parent is shown as a deduction from shareholder's
deficit. Under Canadian GAAP, the receivable from parent would be
presented as a non-current asset. Under Canadian GAAP, total assets at
December 10, 1998 and December 31, 1997 would be $31,717,000 and
$45,077,000, respectively, and shareholder's deficit would be
$8,664,000 and $8,305,000, respectively.
(b) For purposes of reconciling to Canadian GAAP, the Company has early
adopted the provisions of the Canadian Institute of Chartered
Accountants Handbook Section 3461, "Employee Future Benefits," on a
retroactive basis. Accordingly, net pension expense and accrued pension
liabilities are the same as those determined by the application of U.S.
GAAP.
F-52
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
GULFSTREAM PARK RACING ASSOCIATION, INC.
AND SUBSIDIARY
For the years ended December 31, 1998, 1997 and 1996
F-53
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Gulfstream Park Racing Association, Inc. and Subsidiary
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' deficit, and cash flows
present fairly, in all material respects, the financial position of Gulfstream
Park Racing Association, Inc. and Subsidiary (the "Company") at December 31,
1998 and 1997, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1998, in
conformity with accounting principals generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Miami, Florida
March 10, 1999
F-54
<PAGE>
GULFSTREAM PARK RACING ASSOCIATION, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, December 31, December 31,
1999 1998 1997
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 7,832,459 $ 2,375,511 $ 605,194
Restricted cash and cash
equivalents........................ 163,884 292,721 592,285
Accounts receivable, less allowance
for doubtful accounts of $101,012
at August 31, 1999 and $0 and
$191,012 at December 31, 1998 and
1997 respectively.................. 156,441 121,445 128,135
Note receivable..................... 93,250 93,250 --
Prepaid expenses.................... 911,364 451,144 767,285
------------ ------------ ------------
Total current assets................ 9,157,398 3,334,071 2,092,899
------------ ------------ ------------
Property, plant and equipment:
Land and improvements............... 9,401,638 9,401,638 9,012,699
Buildings and improvements.......... 24,214,826 23,323,001 22,485,253
Furniture, fixtures and equipment... 5,070,935 5,089,592 4,138,418
------------ ------------ ------------
38,687,399 37,814,231 35,636,370
Less accumulated depreciation....... 25,842,336 24,575,672 22,787,284
------------ ------------ ------------
Net property, plant and equipment... 12,845,063 13,238,559 12,849,086
------------ ------------ ------------
Other assets:
Investments, at cost................ 2,500 2,500 2,500
Deposits............................ 12,450 12,450 12,480
Deferred financing costs, net of
accumulated amortization of
$321,124 at August 31, 1999 and
$295,948 and $231,614 at December
31, 1998 and 1997 respectively..... 546 25,722 90,056
------------ ------------ ------------
Total other assets.................. 15,496 40,672 105,036
------------ ------------ ------------
Total assets........................ $ 22,017,957 $ 16,613,302 $ 15,047,021
============ ============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts Payable:
Trade............................... $ 751,477 $ 1,869,022 $ 1,079,003
Unearned income..................... 1,844,036 512,187 428,458
Mutuel tickets outstanding.......... 48,833 32,798 23,891
Accrued liabilities:
Interest............................ -- 127,092 --
Underpaid purses.................... 163,884 292,721 592,285
Other accrued expenses.............. 824,146 381,107 507,511
Income taxes payable................ 1,506,420 399,454 --
Notes payable....................... 6,800,000 500,000 --
------------ ------------ ------------
Total current liabilities............ 11,938,796 4,114,381 2,631,148
Deferred income tax.................. 694,270 586,809 731,159
Term note payable.................... -- 6,800,000 7,800,000
Long-term debt....................... 48,000,000 48,000,000 48,000,000
------------ ------------ ------------
Total Liabilities.................... 60,633,066 59,501,190 59,162,307
------------ ------------ ------------
Commitments and contingencies (Note
5)
Stockholders' deficit:
Common stock, $1 par value,
authorized and issued 13,040
shares; outstanding 11,232 shares.. 13,040 13,040 13,040
Additional paid-in capital.......... 22,991,259 22,991,259 22,991,259
Accumulated deficit................. (59,853,908) (64,126,687) (65,354,085)
------------ ------------ ------------
(36,849,609) (41,122,388) (42,349,786)
Less:
Treasury stock, 1,808 common shares
at cost............................ (1,765,500) (1,765,500) (1,765,500)
------------ ------------ ------------
Total stockholders' deficit.......... (38,615,109) (42,887,888) (44,115,286)
------------ ------------ ------------
Total liabilities and stockholders'
deficit............................. $ 22,017,957 $ 16,613,302 $ 15,047,021
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-55
<PAGE>
GULFSTREAM PARK RACING ASSOCIATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Eight Months Ended
August 31, Year Ended December 31,
------------------------ -------------------------------------
1999 1998 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES:
On-track wagering
commissions........... $21,166,704 $21,064,663 $21,064,663 $20,896,273 $19,710,687
Intertrack wagering
commissions........... 4,327,102 4,134,875 4,110,273 4,370,064 3,766,721
Interstate wagering and
simulcast fees........ 15,370,575 14,177,930 14,178,719 13,803,677 13,322,237
Breakage income........ 930,803 983,233 983,233 949,286 891,837
Escheated mutuel
tickets............... 551,106 546,823 546,823 576,608 422,991
Stake fees for purses.. 966,140 989,750 989,750 941,545 953,410
Admissions
General................ 997,752 1,036,942 1,036,957 1,080,379 1,121,186
Season boxes, passes
and memberships....... 539,618 503,534 505,887 548,232 557,415
Program sales.......... 192,746 209,038 209,038 201,015 174,759
Parking................ 158,527 137,503 137,503 144,274 151,744
Concessions............ -- -- -- 35,123 172,984
Rent................... 24,215 37,575 54,375 16,455 9,210
Other revenues......... 640,181 595,238 785,474 509,298 567,282
----------- ----------- ----------- ----------- -----------
45,865,469 44,417,104 44,602,695 44,072,229 41,822,463
----------- ----------- ----------- ----------- -----------
EXPENSES:
Departmental expenses.. 11,983,727 11,663,616 14,343,052 13,977,248 12,981,229
Stakes, purses,
trophies, and other
awards................ 21,835,696 20,923,313 20,954,428 20,550,496 19,067,874
Property taxes......... 462,753 460,752 660,922 657,947 649,268
Payroll taxes and
licenses.............. 645,127 580,559 726,003 740,943 650.911
Insurance.............. 386,681 395,216 567,662 427,374 736,396
Utilities.............. 191,652 140,987 219,312 232,202 187,477
Contributions.......... 10,545 37,875 87,975 79,107 86,689
Depreciation........... 1,266,664 1,289,600 1,795,401 1,877,575 2,031,431
Amortization........... 25,176 42,889 64,334 64,334 64,334
Other.................. -- -- 107,644 51,530 72,993
----------- ----------- ----------- ----------- -----------
36,808,021 35,534,807 39,526,733 38,658,756 36,528,602
----------- ----------- ----------- ----------- -----------
Operating Income....... 9,057,448 8,882,297 5,075,962 5,413,473 5,293,861
----------- ----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income........ 284,797 354,258 463,449 471,127 449,855
Interest expense....... (2,325,559) (2,571,445) (3,771,610) (3,880,246) (3,946,487)
Gain (loss) on sale of
property.............. -- -- 5,000 -- 1,818,422
Other.................. 66,133 255,850 315,195 19,760 378,752
----------- ----------- ----------- ----------- -----------
Other expense, net..... (1,974,629) (1,961,337) (2,987,966) (3,389,359) (1,299,458)
----------- ----------- ----------- ----------- -----------
Income before provision
for income taxes...... 7,082,819 6,920,960 2,087,996 2,024,114 3,994,403
Provision for income
taxes.................. 2,810,040 2,852,575 860,598 918,299 1,631,200
----------- ----------- ----------- ----------- -----------
Net Income............. $ 4,272,779 $ 4,068,385 $ 1,227,398 $ 1,105,815 $ 2,363,203
=========== =========== =========== =========== ===========
Basic and diluted
earnings per share..... $ 380.41 $ 362.21 $ 109.28 $ 98.45 $ 210.40
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-56
<PAGE>
GULFSTREAM PARK RACING ASSOCIATION, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Additional
Common Paid-In Accumulated Treasury Total
Stock Capital Deficit Stock Deficit
------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Balances at December 31,
1995................... $13,040 $22,991,259 $(68,823,103) $(1,765,500) $(47,584,304)
Net income, year ended
December 31, 1996...... -- -- 2,363,203 -- 2,363,203
------- ----------- ------------ ----------- ------------
Balance at December 31,
1996................... 13,040 22,991,259 (66,459,900) (1,765,500) (45,221,101)
Net income, year ended
December 31, 1997...... -- -- 1,105,815 -- 1,105,815
------- ----------- ------------ ----------- ------------
Balances at December 31,
1997................... 13,040 22,991,259 (65,354,085) (1,765,500) (44,115,286)
Net income, year ended
December 31, 1998...... -- -- 1,227,398 -- 1,227,398
------- ----------- ------------ ----------- ------------
Balances at December 31,
1998................... 13,040 22,991,259 (64,126,687) (1,765,500) (42,887,888)
Net income, eight months
ended August 31, 1999
(unaudited)............ -- -- 4,272,779 -- 4,272,779
------- ----------- ------------ ----------- ------------
Balances at August 31,
1999 (unaudited)....... $13,040 $22,991,259 $(59,853,908) $(1,765,500) $(38,615,109)
======= =========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-57
<PAGE>
GULFSTREAM PARK RACING ASSOCIATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
1. Description of Business:
Gulfstream Park Racing Association, Inc. and its wholly-owned subsidiary
(the "Company"), operate a pari-mutuel horse racing facility in Broward County,
Florida. As provided in the Florida statutes, the Company was authorized to
operate 63 day racing meets during the years ended December 31, 1998 and 1997
and 64 day racing meets during the year ended December 31, 1996. The Company
operates during the prime winter racing season under current Florida pari-
mutuel legislation. A change in legislation could affect the Company's
operating dates and significantly impact future operations.
Ownership
Until August 31, 1999, the Company was a wholly-owned subsidiary of
Gulfstream Holdings, Inc. ("Gulfstream").
2. Significant Accounting Policies:
The significant accounting policies used by the Company in the preparation
of the accompanying consolidated financial statements are as follows:
Basis of Presentation:
The consolidated financial statements have been prepared in accordance with
accounting principals generally accepted in the United States, which conform,
in all material respects, with accounting principles generally accepted in
Canada.
Principles of Consolidation
The consolidated financial statements include the accounts of Gulfstream
Park Racing Association and its subsidiary. All significant intercompany
balances and transactions have been eliminated on consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amount of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less at the time of purchase to be cash equivalents.
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents,
which at times may exceed FDIC insurance limits. As of December 31, 1998, the
Company had approximately $3 million of cash in excess of these limits. The
Company places its cash and cash equivalents with high credit quality financial
institutions and, by policy, limits the amount of credit exposure to any one
financial institution.
F-58
<PAGE>
GULFSTREAM PARK RACING ASSOCIATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
Property, Plant and Equipment
Property, plant and equipment are stated at cost and depreciated on the
straight-line method over the estimated useful lives of the assets:
<TABLE>
<S> <C>
Buildings...................................................... 25 years
Improvements................................................... 7 to 15 years
Furniture, fixtures and equipment.............................. 5 years
</TABLE>
When assets are retired or otherwise disposed of, the costs and accumulated
depreciation are removed from the respective accounts and any related gain or
loss is recognized in current operations. Maintenance and repair costs are
charged to expense as incurred, and renewals and improvements are capitalized.
Deferred Financing Costs
The Company capitalized costs associated with the acquisition of the
$15,000,000 credit facility, as described in Note 4, and is amortizing these
costs using the straight-line method over the term of the financing.
Income Taxes
The Company utilizes the liability method of accounting for deferred income
taxes. Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using tax rates in effect for the year which the differences
are expected to reverse.
Purses
The Company is required to distribute a specific amount of purses and
owners' awards based on a percentage of the pari-mutuel handle, plus additional
other amounts. At December 31, 1998 and 1997, purses and owners' awards were
underpaid by $292,721 and $592,285, respectively, as shown in the accompanying
consolidated balance sheets. At December 31, 1998 and 1997, $292,721 and
$592,285, respectively, was held in restricted cash accounts in connection with
this liability.
Asset Impairment
The Company evaluates impairment whenever events or changes in circumstances
indicate that the carrying amount in an asset may not be recoverable.
Management of the Company assesses the recoverability of long-lived assets by
determining whether the depreciation and amortization of such assets over their
remaining lives can be recovered through projected undiscounted cash flows. The
amount of impairment, if any, is measured based on fair value (projected
discounted cash flows) and is charged to operations in the period in which such
impairment is determined by management.
Earnings Per Share
Basic earnings per share is computed by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
during the period which was 11,232 shares for the periods presented. The
Company does not have any dilutive securities.
F-59
<PAGE>
GULFSTREAM PARK RACING ASSOCIATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
Fair Value of Financial Instruments
Management has estimated that the fair market value of its financial
instruments using available market information and appropriate valuation
methodologies. Considerable judgment is required in interpreting market data to
develop estimates of fair market. Accordingly, the estimated fair values are
not necessarily indicative of the amounts that could be realized in current
market exchanges.
Cash and cash equivalents, restricted cash and cash equivalents, accounts
receivable, note receivable, prepaid expenses, accounts payable and accrued
liabilities, mutuel tickets outstanding income taxes payable and notes
payable --
Due to the short period to maturity of the instruments, the carrying values
as presented in the consolidated balance sheets are reasonable estimates of
fair value.
Term note payable and long-term debt --
The fair value of the Company's term note payable and long-term debt based
on current rates for debt with similar terms and maturities, are not
materially different from their carrying value.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash investments and receivables.
The Company places its cash investments in investment grade short-term
instruments and limits the amount of credit exposure to any one commercial
issuer. Concentrations of credit risk with respect to accounts receivable are
limited due to the large number of receivable accounts.
Unaudited Interim Consolidated Financial Statements
In the opinion of management, the unaudited interim consolidated financial
statements reflect all adjustments, which consist only of normal and recurring
adjustments, necessary to present fairly the financial position at August 31,
1999 and the results of operations and cash flows for the eight months ended
August 31, 1999 and 1998.
New Accounting Standards
In June, 1998, the Financial Accounting Standards Board issued Statement No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities". This Statement is effective for the Company's first quarter ended
March 31, 2001. SFAS 133 requires that an entity recognize all derivative
instruments either as assets or liabilities and measure those instruments at
fair value. The Company has not determined the impact, if any, of this
pronouncement on its consolidated financial statements.
Reclassification
Certain amounts have been reclassified to conform to the December 31, 1998
presentation.
F-60
<PAGE>
GULFSTREAM PARK RACING ASSOCIATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
3. Income Taxes:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Eight months ended
August 31, Year ended December 31,
----------------------- ------------------------------
1999 1998 1998 1997 1996
----------- ----------- --------- -------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Current provision:
Federal............ $2,307,569 $2,844,179 $ 858,065 $652,744 $ 942,601
State.............. 395,009 486,866 146,883 111,736 168,355
---------- ---------- --------- -------- ----------
2,702,578 3,331,045 1,004,948 764,480 1,110,956
---------- ---------- --------- -------- ----------
Deferred provision:
Federal............ 91,755 (408,536) (123,252) 131,337 450,183
State.............. 15,702 (69,934) (21,098) 22,482 70,061
---------- ---------- --------- -------- ----------
107,462 (478,470) (144,350) 153,819 520,244
---------- ---------- --------- -------- ----------
$2,810,040 $2,852,575 $ 860,598 $918,299 $1,631,200
========== ========== ========= ======== ==========
</TABLE>
The significant components of the net deferred tax liability as of August
31, 1999, December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
August 31, December 31, December 31,
1999 1998 1997
----------- ------------ ------------
(unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Deferred income...................... $ 3,393 $ 205,335 $ 169,241
State deferred taxes................. 34,501 29,161 36,334
Other................................ 168,232 164,062 139,119
Valuation allowance.................. (99,219) (99,219) (99,219)
--------- --------- ---------
106,907 299,339 245,475
Deferred tax liabilities:
Property and equipment............... (801,177) (886,148) (976,634)
--------- --------- ---------
Net deferred tax liability............. $(694,270) $(586,809) $(731,159)
========= ========= =========
</TABLE>
The Company provides a valuation allowance against deferred tax assets if,
based on the weight of available evidence, it is more likely than not that some
or all of the deferred tax assets will not be realized. The Company has
established a valuation allowance against deferred tax assets of $99,219 at
December 31, 1998.
F-61
<PAGE>
GULFSTREAM PARK RACING ASSOCIATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
The reconciliation between the statutory income tax provision and the actual
tax provision for the eight month periods ended August 31, 1999 and 1998 and
the years ended December 31, 1998, 1997 and 1996 is shown as follows:
<TABLE>
<CAPTION>
Eight months ended
August 31, Years ended December 31,
----------------------- ----------------------------
1999 1998 1998 1997 1996
----------- ----------- -------- -------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Income tax at Federal
statutory rate.......... $2,478,987 $2,422,336 $746,248 $708,441 $1,398,041
State taxes, net of
federal benefit......... 266,965 271,006 81,760 87,242 154,971
Other.................... 64,088 159,233 32,590 122,616 78,188
---------- ---------- -------- -------- ----------
Income tax provision..... $2,810,040 $2,852,575 $860,598 $918,299 $1,631,200
========== ========== ======== ======== ==========
</TABLE>
4. Notes Payable:
During the year, the Company had a $15,000,000 credit facility from a
financial institution. The credit facility consists of a $2,000,000 revolving
line of credit and a $13,000,000 term loan. The line of credit expired on May
31, 1998, and bore interest at LIBOR plus .55%, plus a commitment fee of .2%.
As of December 31, 1998, the outstanding balances on the term loan was
$7,300,000. The term loan calls for annual principal payments of $500,000 with
a balloon payment due at maturity. The line of credit and the term loan are
collateralized by the assets of the Company, and a nonrecourse guarantee and
pledge agreement by Gulfstream. The credit facility contains covenants which
restrict borrowings and the payment of dividends, requires the maintenance of
certain financial ratios and limits capital expenditures. The term loan, with
interest rates indexed to market rates, approximates fair-market value at
December 31, 1998 and August 31, 1999.
On February 16, 1999, the Company amended its term loan arrangement through
February 16, 2000 with interest at LIBOR plus 1.25%. All other terms of the
arrangement are substantially identical to the previous terms.
5. Long-Term Debt:
At December 31, 1998, the Company had $48,000,000 in long-term debt
outstanding to Orient Corporation (USA). This debt is collateralized by
substantially all of the Company's assets, and is subordinate to the credit
facility. The Company pays interest at TIBOR plus .80% (5.3% at December 31,
1998). The Company entered into an interest rate agreement which limits the
applicable interest rate through December 31, 1999. This debt matures on
December 31, 2004, with annual payments of $500,000 commencing in 2000 with a
balloon payment due at maturity. The long-term debt, with interest rates
indexed to market rates, approximates fair market value at December 31, 1998.
(see Note 9)
6. Commitments and Contingencies:
Contracts
(i) Concession contract
During 1998, the Company entered into a five-year concession contract. Under
the terms of the agreement, the concessionaire is entitled to a guarantee of
$125,000 in the first year and $100,000 thereafter in return for their
services. In the event profits from concessions in a given year exceed
guaranteed amounts (the "excess"), the Company is entitled to receive a portion
of the excess. The Company's entitlement is the first $100,000 of the excess
plus a portion of any additional excess earned above $100,000. (see Note 9)
F-62
<PAGE>
GULFSTREAM PARK RACING ASSOCIATION, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
(ii) Service agreements
The Company is engaged in a totalisator service agreement that provides that
the Company pay a minimum service charge that is based on a multiple applied to
all wagers plus a $1,000 fee for each racing day. This agreement will expire at
December 31, 1999.
The Company is committed to a service agreement to provide on-track audio
and video support operations through December 31, 2001. The service charge paid
by the Company for each racing day is $3,730.
In December, 1998, the Company entered into a five-year operating lease
agreement for phone equipment. Under the terms of the agreement, the Company is
obligated to pay $13,402 per month with a fair market value purchase option at
the end of the third and fifth year.
Litigation and Other
The Company is a defendant in certain legal and other actions arising in the
normal course of business. Management believes that the outcome of these
actions will not have a material effect on the Company's financial position or
results of operations.
7. Related Party Transactions:
An officer of the Company is a partner in a law firm which performed various
legal services for the Company. Charges from this law firm for legal services
and other reimbursable costs amounted to approximately $44,900 and $21,400 for
the eight month periods ended August 31, 1999 and 1998 and approximately
$29,100, $94,300 and $34,300 for the years ended December 31, 1998, 1997 and
1996, respectively.
The Company has an agreement to pay a consulting fee and loan guarantee fee
to Gulfstream. Such payments amounted to $39,659 and $122,772 for the eight
month periods ended August 31, 1999 and 1998 and $244,772, $255,368 and
$256,980 in the years ended December 31, 1998, 1997 and 1996, respectively.
8. Employee Benefit Plan:
Effective January 1, 1995, the Company adopted a 401(k) profit sharing plan
(the "Plan") to provide retirement benefits for its employees. All employees
who meet certain eligibility requirements are able to participate in the Plan.
Discretionary matching contributions are determined each year by the Company.
The Company contributed to the Plan approximately $54,600 and $71,300 during
the eight month periods ended August 31, 1999 and 1998 and approximately
$85,100, $82,900 and $86,700, during the years ended December 31, 1998, 1997
and 1996, respectively.
9. Subsequent Events (unaudited):
a) On September 1, 1999, Entertainment Corp., a wholly-owned subsidiary
of Magna International Inc., acquired all of the outstanding common stock
of the Company. Under the terms of the purchase and sale agreement,
$48,000,000 in long-term debt was repaid immediately before the sale, with
funds provided by the seller through an addition to paid-up capital. The
interest rate agreements associated with this long-term debt were
cancelled.
b) The concession contract (Note 6 (i)) was waived in 1999 due to losses
incurred. These losses were shared by the Company and the concessionaire.
F-63
<PAGE>
FINANCIAL STATEMENTS
REMINGTON PARK, INC.
For the years ended December 31, 1998, 1997 and 1996
F-64
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Remington Park, Inc.
We have audited the accompanying balance sheets of Remington Park, Inc. (the
"Company") as of December 31, 1998 and 1997 and the related statements of
operations and accumulated deficit, stockholder's equity (deficit) and cash
flows for each of the years in the three-year period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Remington Park, Inc. as of
December 31, 1998 and 1997 and the results of its operations and its cash flows
for each of the years in the three-year period ended December 31, 1998 in
conformity with accounting principles generally accepted in the United States.
Youngstown, Ohio Hill, Barth & King LLC
February 19, 1999 Certified Public Accountants
(except Note K for
which the date is
October 21, 1999)
F-65
<PAGE>
REMINGTON PARK, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, December 31, December 31,
1999 1998 1997
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents--NOTE F.. $ 516,109 $ 697,037 $ 501,209
Restricted cash.................... 3,418,289 446,664 400,609
Trade accounts receivable.......... 443,758 306,743 890,243
Inventories........................ 166,110 162,833 202,791
Prepaid expenses and other assets.. 302,188 180,268 270,056
------------ ------------ ------------
Total Current Assets............. 4,846,454 1,793,545 2,264,908
------------ ------------ ------------
PROPERTY AND EQUIPMENT--NOTES B AND I
Land improvements.................. 4,036,617 3,989,282 4,527,282
Buildings and structures........... 29,682,923 30,135,806 32,047,806
Machinery and equipment............ 7,996,937 7,953,549 7,921,772
Furniture and fixtures............. 1,651,972 1,649,747 1,638,081
------------ ------------ ------------
43,368,449 43,728,384 46,134,941
Less accumulated depreciation...... 34,564,905 34,621,473 32,078,706
------------ ------------ ------------
Net Property and Equipment....... 8,803,544 9,106,911 14,056,235
------------ ------------ ------------
OTHER ASSETS
Land lease and other costs less
amortization--NOTES E AND I....... 1,330,497 1,392,987 1,943,765
------------ ------------ ------------
$ 14,980,495 $ 12,293,443 $ 18,264,908
============ ============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
(DEFICIT)
CURRENT LIABILITIES
Accounts payable................... $ 1,595,777 $ 1,374,870 $ 2,851,255
Unredeemed pari-mutuel tickets..... 177,326 445,909 465,585
Advances payable to The Edward J.
DeBartolo Corporation--NOTE G..... 156,221 453,771 5,934,012
Accrued liabilities................ 1,009,225 926,162 782,715
Percentage entitlements in excess
of purses paid--NOTE C............ 3,002,571 292,293 700,911
Deferred revenue................... 587,077 6,972 90,974
------------ ------------ ------------
Total Current Liabilities........ 6,528,197 3,499,977 10,825,452
------------ ------------ ------------
OTHER LIABILITIES
Long-term debt less principal due
within one year--NOTE B........... -- -- 30,000,000
Other.............................. 18,711 -- --
------------ ------------ ------------
Total Other Liabilities.......... 18,711 -- 30,000,000
------------ ------------ ------------
STOCKHOLDER'S EQUITY (DEFICIT)--NOTE
G
Common stock--$1.00 par value per
share:
Authorized 10,000 shares; issued
and outstanding 500 shares....... 500 500 500
Additional paid-in capital........ 48,148,592 47,991,918 7,409,500
Accumulated deficit............... (39,715,505) (39,198,952) (29,970,544)
------------ ------------ ------------
Total Stockholder's Equity
(Deficit)....................... 8,433,587 8,793,466 (22,560,544)
------------ ------------ ------------
$ 14,980,495 $ 12,293,443 $ 18,264,908
============ ============ ============
</TABLE>
See accompanying notes to financial statements
F-66
<PAGE>
REMINGTON PARK, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
Eight Months Ended August
31, Years Ended December 31,
-------------------------- ----------------------------------------
1999 1998 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES
Pari-Mutuel income...... $ 18,760,422 $ 20,522,249 $ 29,095,338 $ 33,085,838 $ 33,461,803
------------ ------------ ------------ ------------ ------------
Less:
Purses paid to
horsemen............. 6,408,059 6,875,898 9,819,313 11,438,288 11,450,284
Amounts paid to the
State of Oklahoma.... 2,211,997 2,390,148 3,362,670 3,801,826 3,620,381
Breakage and breeders
awards paid to the
Oklahoma Breeding and
Development Revolving
Fund................. 598,114 694,348 990,960 1,157,359 775,645
Commissions paid to
host tracks.......... 2,587,509 2,556,156 3,420,305 3,680,734 2,833,637
------------ ------------ ------------ ------------ ------------
11,805,679 12,516,550 17,593,248 20,078,207 18,679,947
------------ ------------ ------------ ------------ ------------
Net Pari-Mutuel Income.. 6,954,743 8,005,699 11,502,090 13,007,631 14,781,856
Other Income.......... 1,793,648 2,503,692 3,989,992 4,812,500 6,032,648
------------ ------------ ------------ ------------ ------------
Total Revenues...... 8,748,391 10,509,391 15,492,082 17,820,131 20,814,504
Operating costs and
expenses--
NOTES E and G......... 8,915,500 11,258,714 16,994,450 20,177,827 21,064,646
Depreciation and
amortization......... 432,336 1,803,581 2,706,547 2,723,763 2,800,681
Provision for
impairment of long-
lived assets--NOTE
I.................... -- 2,837,000 2,837,000 5,077,918 --
------------ ------------ ------------ ------------ ------------
LOSS FROM OPERATIONS.... (599,445) (5,389,904) (7,045,915) (10,159,377) (3,050,823)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES)
Interest income....... 87,485 74,385 122,477 116,336 106,130
Interest expense--NOTE
G.................... (4,593) (1,697,885) (2,304,970) (2,539,923) (2,481,557)
------------ ------------ ------------ ------------ ------------
82,892 (1,623,500) (2,182,493) (2,423,587) (2,375,427)
------------ ------------ ------------ ------------ ------------
NET LOSS................ (516,553) (7,013,404) (9,228,408) (12,582,964) (5,426,250)
ACCUMULATED DEFICIT
Beginning of period... (39,198,952) (29,970,544) (29,970,544) (17,387,580) (11,961,330)
------------ ------------ ------------ ------------ ------------
End of period......... $(39,715,505) $(36,983,948) $(39,198,952) $(29,970,544) $(17,387,580)
============ ============ ============ ============ ============
Basic and diluted loss
per share of common
stock.................. $ (1,033) $ (14,207) $ (18,457) $ (25,166) $ ( 10,853)
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements
F-67
<PAGE>
REMINGTON PARK, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Additional
Common Paid-In Accumulated Total Equity
Stock Capital Deficit (Deficit)
------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995... $500 $ 7,409,500 $(11,961,330) $ (4,551,330)
Net loss, year ended December
31, 1996...................... -- -- (5,426,250) (5,426,250)
---- ----------- ------------ ------------
Balance at December 31, 1996... 500 7,409,500 (17,387,580) (9,977,580)
Net loss, year ended December
31, 1997...................... -- -- (12,582,964) (12,582,964)
---- ----------- ------------ ------------
Balance at December 31, 1997... 500 7,409,500 (29,970,544) (22,560,544)
1998 Contributions (NOTE J).... -- 40,582,418 -- 40,582,418
Net loss, year ended December
31, 1998...................... -- -- (9,228,408) (9,228,408)
---- ----------- ------------ ------------
Balance at December 31, 1998... 500 47,991,918 (39,198,952) 8,793,466
1999 Contributions (NOTE J)
(unaudited)................... -- 156,674 -- 156,674
Net loss, eight months ended
August 31, 1999 (unaudited)... -- -- (516,553) (516,553)
---- ----------- ------------ ------------
Balance at August 31, 1999
(unaudited)................... $500 $48,148,592 $(39,715,505) $ 8,433,587
==== =========== ============ ============
</TABLE>
See accompanying notes to financial statements
F-68
<PAGE>
REMINGTON PARK, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Eight Months Ended
August 31, Years Ended December 31,
------------------------ --------------------------------------
1999 1998 1998 1997 1996
----------- ----------- ----------- ------------ -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net loss............... $ (516,553) $(7,013,404) $(9,228,408) $(12,582,964) $(5,426,250)
Adjustments to
reconcile net loss to
net cash provided by
(used in) operating
activities:
Provision for
impairment of long-
lived assets.......... -- 2,837,000 2,837,000 5,077,918 --
Depreciation and
amortization.......... 432,336 1,803,581 2,706,547 2,723,763 2,800,681
Provision for doubtful
accounts.............. 27,225 25,000 26,433 -- --
Gain on sale of
equipment............. -- -- -- (8,341) --
(Increase) decrease in
restricted cash....... (2,971,629) (1,398,653) (46,055) 346,569 (97,411)
(Increase) decrease in
accounts receivable... (164,240) 163,501 557,067 (479,114) 14,450
Increase (decrease) in
inventories, prepaid
expenses and other
assets................ (125,872) (159,721) 129,746 32,081 (72,787)
Increase (decrease) in
accounts payable and
purse liability....... 2,922,938 (22,228) (1,885,003) 1,106,833 1,169,862
Increase (decrease) in
accrued liabilities
and unredeemed pari-
mutuel tickets........ (185,520) 301,347 123,771 (43,980) 195,555
Increase in advances
due to The Edward J.
Bartolo Corporation... (540,876) 1,614,419 2,502,177 2,164,757 2,481,557
Increase (decrease) in
deferred revenue...... 580,105 288,157 (84,002) (20,850) (35,090)
---------- ----------- ----------- ------------ -----------
Net cash provided by
(used in) operating
activities............ (542,086) (1,561,001) (2,360,727) (1,683,328) 1,030,567
---------- ----------- ----------- ------------ -----------
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchase of
improvements and
equipment............. (65,800) (41,793) (43,445) (118,293) (326,020)
Proceeds from sale of
property and
equipment............. -- -- -- 292,770 --
---------- ----------- ----------- ------------ -----------
Net cash provided by
(used in) investing
activities............ (65,800) (41,793) (43,445) 174,477 (326,020)
---------- ----------- ----------- ------------ -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Net advances from The
Edward J. DeBartolo
Corporation........... 400,000 2,600,000 2,600,000 900,000 302,919
Proceeds from (payments
on) note payable...... 26,958 -- -- -- (1,350,000)
---------- ----------- ----------- ------------ -----------
Net cash provided by
(used in) financing
activities............ 426,958 2,600,000 2,600,000 900,000 (1,047,081)
---------- ----------- ----------- ------------ -----------
Net increase (decrease)
in cash and cash
equivalents............ (180,928) 997,206 195,828 (608,851) (342,534)
CASH AND CASH
EQUIVALENTS
Beginning of period.... 697,037 501,209 501,209 1,110,060 1,452,594
---------- ----------- ----------- ------------ -----------
End of period.......... $ 516,109 $ 1,498,415 $ 697,037 $ 501,209 $ 1,110,060
========== =========== =========== ============ ===========
</TABLE>
See accompanying notes to financial statements
F-69
<PAGE>
REMINGTON PARK, INC.
NOTES TO FINANCIAL STATEMENTS
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
NOTE A--Summary of Significant Accounting Policies
Basis of Presentation:
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States, which conform, in all
material respects, with accounting principles generally accepted in Canada.
Nature of Operations:
The Company operates a thoroughbred horse racing track in Oklahoma City,
Oklahoma. The Company operated 136, 147 and 156 days of live racing in 1998,
1997 and 1996, respectively, and has been awarded live race meetings totalling
123 days for 1999.
Cash and Cash Equivalents:
Restricted cash represents primarily amounts restricted for futurity purse
escrow and purse supplement to be paid during future live meets.
The Company considers highly liquid debt instruments purchased with maturity
dates of three months or less to be cash equivalents.
Inventories:
Inventories, consisting primarily of concession food items, are stated at
lower of cost or market on the first-in, first-out method.
Property and Equipment:
Property and equipment are stated at cost less provision for impairment of
long-lived assets (see Note I). Depreciation for financial accounting purposes
is computed on the straight-line method. For income tax purposes, accelerated
methods are used.
The Company evaluates impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Management of the Company assesses the recoverability of long-lived assets by
determining whether the depreciation and amortization of such assets over their
remaining lives can be recovered through projected undiscounted cash flows. The
amount of impairment, if any, is measured based on fair value (projected
discounted cash flows) and is charged to operations in the period in which such
impairment is determined by management.
Land Lease Costs:
Land lease costs are stated net of amortization less provision for
impairment of long-lived asset (see Note I). Land lease costs are being
amortized on the straight-line method over the term of the lease.
Deferred Revenue:
Deferred revenue consists primarily of advance payments received on catering
functions which are recognized as revenue when earned.
F-70
<PAGE>
REMINGTON PARK, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
Income Taxes:
The Company has been included in the consolidated federal income tax return
of its parent, The Edward J. DeBartolo Corporation through December 1, 1998
(see Note G). Subsequent to December 1, 1998, the company files a separate
federal income tax return. Income taxes of the Company are computed utilizing
the separate return method. Under this method, the provision for income taxes
is generally determined as if the Company filed a separate income tax return.
The Company files a separate state income tax return.
Income taxes are provided for amounts currently due and deferred amounts
arising from temporary differences between the financial accounting and income
tax basis of assets and liabilities.
Advertising:
Advertising costs are charged to operations when incurred and are included
in operating expenses. The amounts charged to operations are as follows:
<TABLE>
<S> <C>
Year ended December 31:
1998........................................................... $1,584,636
1997........................................................... 2,193,659
1996........................................................... 2,292,339
Eight months ended August 31 (unaudited):
1999........................................................... $ 591,486
1998........................................................... 1,002,321
</TABLE>
Earnings Per Share:
Basic earnings per share is computed by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
during the period which was 500 shares for all periods presented. The Company
does not have any dilutive securities.
Fair Value of Financial Instruments:
Management has estimated the fair value of its financial instruments using
available market information and appropriate valuation methodologies.
Considerable judgment is required in interpreting market data to develop
estimates of fair value. Accordingly, the estimated fair values are not
necessarily indicative of the amounts that could be realized in current market
exchanges.
Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Accounts
Payable and Accrued Liabilities--Due to the short period to maturity of these
instruments, the carrying values as presented in the balance sheets are
reasonable estimates of fair value.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
F-71
<PAGE>
REMINGTON PARK, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
Interim Financial Statements:
In the opinion of management, the unaudited interim financial statements
reflect all adjustments, which consist only of normal and recurring
adjustments, necessary to present fairly the financial position at August 31,
1999 and the results of operations and cash flows for the eight months ended
August 31, 1999 and 1998.
New Accounting Standards:
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities". This Statement is effective for the Company's first quarter ended
March 31, 2001. SFAS 133 requires that an entity recognize all derivative
instruments either as assets or liabilities and measure those instruments at
fair value. The Company has not determined the impact, if any, of this
pronouncement on its financial statements.
Reclassification:
The financial statements for 1997 and 1996 have been reclassified to conform
with the presentation for December 31, 1998. Such reclassifications had no
effect on net results of operations.
NOTE B--Long-term Debt
At December 31, 1997, long-term debt represented a note agreement payable to
The Edward J. DeBartolo Corporation ("DeBartolo") with interest at the prime
rate, and principal and interest payments due quarterly based on available cash
flow as defined with all unpaid principal due December 31, 2001, collateralized
by substantially all buildings, improvements and equipment. The principal
balance at December 31, 1997 was $30,000,000.
Effective December 1, 1998, DeBartolo made a capital contribution (see Note
J) which in part was used to reduce the entire principal balance of this note
agreement.
NOTE C--Purse Over/Under Payments
The Oklahoma Horse Racing Commission (OHRC) Rules of Racing contain
provisions relating to future purse overpayments and underpayments and
specifically address how such amounts will be adjusted in purse distributions
during future race meetings.
At August 31, 1999, purses were underpaid during the thoroughbred race
meeting which totalled $3,480,356. Also, at August 31, 1999, purses were
overpaid during the quarter horse race meeting which totalled $477,785. The
Company will include these amounts in its purse distribution during future race
meetings.
At December 31, 1998, purses were underpaid during the thoroughbred race
meeting which totalled $161,014. Also, at December 31, 1998, purses were
underpaid during the quarter horse race meeting which totalled $131,279. The
Company included these amounts in its purse distribution during the 1999 race
meetings.
At December 31, 1997, purses were underpaid during the thoroughbred race
meeting which totalled $277,619. Also at December 31, 1997, purses were
underpaid during the quarter horse race meeting which totalled $423,292. The
Company included these amounts in its purse distribution during the 1998 race
meetings.
F-72
<PAGE>
REMINGTON PARK, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
NOTE D--Income Taxes
Following is a summary of deferred tax assets and liabilities:
<TABLE>
<CAPTION>
December 31,
August 31 --------------------------
1999 1998 1997
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Provision for impairment of
long-lived assets............. $ 13,565,000 $ 13,565,000 $ 2,606,000
Net operating loss
carryforward.................. 1,440,000 1,100,000 18,893,000
Nondeductible accrued vacation
and sick pay.................. 66,000 66,000 61,500
Income deferred for financial
reporting purposes............ -- 2,000 31,500
------------ ------------ ------------
Total Deferred Tax Assets........ 15,071,000 14,733,000 31,592,000
Deferred tax liability:
Excess tax depreciation and
amortization over financial
reporting depreciation and
amortization.................. (2,900,000) (2,733,000) (2,719,500)
------------ ------------ ------------
Net Deferred Tax Assets Before
Valuation Allowance............. 12,171,000 12,000,000 28,872,500
Valuation Allowance.............. (12,171,000) (12,000,000) (28,872,500)
------------ ------------ ------------
Net Deferred Tax Assets.......... $ -- $ -- $ --
============ ============ ============
</TABLE>
At December 31, 1998, the Company had an unused net operating tax loss
carryover of approximately $3,300,000 with various expiration dates through
2013. These amounts are available for federal income tax purposes for offset
against future taxable income based on filing a separate return effective
December 1, 1998 (see Note G).
NOTE E--Leases
The Company occupies land for the racing facility under an operating lease
which extends through 2013. The lease also contains options to renew for five
10-year periods after the initial term. Under the lease agreement, the Company
made an initial payment of $4,000,000 which is being amortized over the initial
lease term. In addition to the initial payment, the Company is obligated to pay
additional rent based on minimum annual rental payments ranging from $110,710
to $132,850 and one-half of one percent of the "handle" in excess of
$187,000,000 during each race season.
F-73
<PAGE>
REMINGTON PARK, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
The Company uses significant amounts of equipment under operating leases as
part of its daily business operations. This equipment includes totalisator
equipment, satellite uplink equipment, closed circuit color television
equipment, track maintenance equipment and photofinish equipment. The majority
of the equipment is leased on a raceday basis, with minimum rentals per live
raceday as follows:
<TABLE>
<CAPTION>
Minimum rental Minimum daily Minimum daily
per live rental for on track rental for Off-track
raceday simulcasting cards betting parlors
-------------- ------------------- --------------------
<S> <C> <C> <C>
Year ended December 31:
1998.................. $5,700 $600 $200
1997.................. 3,000 600 800
1996.................. 3,000 575 800
Eight months ended
August 31 (unaudited):
1999.................. 5,700 630 150
1998.................. 5,700 600 200
</TABLE>
Following is a summary of future minimum rental payments under operating
leases that have initial or remaining noncancellable terms in excess of one
year as of December 31, 1998:
<TABLE>
<S> <C>
1999.............................................................. $ 177,000
2000.............................................................. 171,000
2001.............................................................. 168,000
2002.............................................................. 168,000
2003.............................................................. 168,000
Later years....................................................... 1,195,000
----------
Total............................................................. $2,047,000
==========
</TABLE>
Rent expense charged to operations is summarized below:
<TABLE>
<S> <C>
Year ended December 31:
1998........................................................... $2,039,598
1997........................................................... 2,913,829
1996........................................................... 2,281,613
Eight months ended August 31 (unaudited):
1999........................................................... 1,224,713
1998........................................................... 1,329,533
</TABLE>
NOTE F--Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash investments and receivables.
The Company places its cash investments in investment grade short-term
instruments and limits the amount of credit exposure to any one commercial
issuer. The Company maintains significantly all of its bank deposit accounts in
one financial institution in Oklahoma City, Oklahoma. These accounts at times
exceed the federally insured limits. The Company believes it is not exposed to
any significant credit risk on cash and cash equivalents.
The Company grants credit to other racetracks throughout the country and
suite and season-seat rental customers in the ordinary course of business. The
Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers.
F-74
<PAGE>
REMINGTON PARK, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
NOTE G--Controlling Interest and Related Party Transactions
Controlling Interest:
The Company was a wholly-owned subsidiary of DeBartolo. Effective December
1, 1998, Oklahoma Racing, LLC. (a newly formed company owned by an affiliated
individual) acquired all of the common stock owned by DeBartolo. The common
stock acquired has been pledged to secure an acquisition note payable to
DeBartolo. See Note K regarding subsequent event.
Related Party Transactions:
Included in the operating costs are certain expenses paid or incurred on
behalf of the Company by DeBartolo. The Company reimbursed DeBartolo for these
general and administrative expenses on a current basis as follows:
<TABLE>
<S> <C>
Year ended December 31:
1998............................................................. $208,002
1997............................................................. 309,751
1996............................................................. 738,169
Eight months ended August 31 (unaudited):
1999............................................................. 80,643
1998............................................................. 177,419
</TABLE>
Effective December 1, 1998, DeBartolo contributed $10,582,418 of the
advances and interest to the capital of the Company. Advances and interest
payable to DeBartolo totalled $453,771 at December 31, 1998 and $5,934,012 at
December 31, 1997. DeBartolo has agreed to advance an additional $3,000,000 in
loans at the prime rate plus one percent to the company during 1999 to fund
operating deficits as needed.
Interest charged by DeBartolo on the note agreement referred to in Note B is
summarized below:
<TABLE>
<S> <C>
Year ended December 31:
1998........................................................... $2,308,356
1997........................................................... 2,532,740
1996........................................................... 2,481,557
Eight months ended August 31 (unaudited):
1999........................................................... --
1998........................................................... 1,697,671
</TABLE>
No interest was charged by DeBartolo on net operating advances. Management
fees charged by DeBartolo totalled $50,000 annually.
NOTE H--Investment Savings Retirement Plan
Effective February 1, 1998, the Company along with an affiliated company
formed a defined contribution 401(k) pension plan, which covers substantially
all of its employees. Individuals employed as of the effective date of the plan
are eligible to participate in the pension plan. Employees hired after the
effective date of the plan, must meet minimum service and age requirements in
order to participate. The plan provides for discretionary company matching
contributions. No discretionary contributions to the plan were made during 1998
or eight months ended August 31, 1999.
F-75
<PAGE>
REMINGTON PARK, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
NOTE I--Impairment of Long-lived Assets
During 1998, the company provided an additional $2,837,000 provision for the
impairment in the value of the racing facilities due to the continued
deterioration in attendance and pari-mutuel handle in recent years. The
provision was allocated to land improvements, buildings and structures and land
lease costs on a pro rata basis. The company recorded a provision for the
impairment of the racing facility of $5,077,918 and $NIL the years ended
December 31, 1997 and 1996 respectively. At December 31, 1998, the impairment
reserve totalled $39,914,918.
NOTE J--Noncash Investing Activities
Effective December 1, 1998, DeBartolo made a capital contribution of
$40,582,418 which was used to reduce the note agreement and the advances and
interest payable to DeBartolo as discussed in Notes B and G. In addition, at
August 31, 1999, DeBartolo made an additional capital contribution of $156,674
which was used to reduce the advances payable to DeBartolo.
NOTE K--Subsequent Event
On October 21, 1999, Oklahoma Racing, LLC entered into a definitive
agreement to sell 100% of the outstanding common stock of the Company to MI
Entertainment Corp., a wholly-owned subsidiary of Magna International Inc., for
$10,000,000. As part of the agreement, DeBartolo agreed to contribute $156,674
of advances to additional paid-in capital. This contribution to capital was
reflected as of August 31, 1999 in the accompanying financial statements.
F-76
<PAGE>
FINANCIAL STATEMENTS
THISTLEDOWN, INC.
For the years ended December 31, 1998, 1997 and 1996
F-77
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Thistledown, Inc.
We have audited the accompanying balance sheets of Thistledown, Inc. as of
December 31, 1998 and 1997 and the related statements of operations and
accumulated deficit, stockholder's deficit and cash flows for each of the years
in the three year period ended December 31, 1998. These financial statements
are the responsibility of the company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Thistledown, Inc. as of
December 31, 1998 and 1997 and the results of its operations and its cash flows
for each of the years in the three year period ended December 31, 1998 in
conformity with accounting principles generally accepted in the United States.
Youngstown, Ohio Hill, Barth & King LLC
October 12, 1999 (except Note I for Certified Public Accountants
which the date is October 21, 1999)
F-78
<PAGE>
THISTLEDOWN, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
August 31, December 31, December 31,
1999 1998 1997
----------- ------------ ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............. $ 2,536,820 $ 1,779,565 $ 895,292
Restricted cash....................... 1,980,508 1,562,770 1,581,885
Trade accounts receivable (less
allowance for doubtful accounts of
$89,624 at August 31, 1999, $89,830
at December 31, 1998 and $56,599 at
December 31, 1997)................... 2,657,548 2,027,847 1,665,173
Inventories........................... 169,521 143,103 155,923
Prepaid expenses and other assets..... 72,813 176,061 50,123
----------- ----------- -----------
Total Current Assets.................. 7,417,210 5,689,346 4,348,396
----------- ----------- -----------
Property And Equipment
Land.................................. 1,002,700 1,002,700 1,002,700
Land improvements..................... 1,010,522 1,010,522 1,010,522
Parking lot improvements.............. 198,007 198,007 198,007
Buildings and structures.............. 39,600,666 39,591,161 39,576,955
Furniture and equipment............... 2,314,240 2,209,950 2,104,442
----------- ----------- -----------
44,126,135 44,012,340 43,892,626
Less accumulated depreciation......... 34,319,811 33,359,365 31,893,794
----------- ----------- -----------
Net Property and Equipment............ 9,806,324 10,652,975 11,998,832
----------- ----------- -----------
Other Assets
Deferred racetrack improvement fund
rebate--NOTE B....................... 1,052,462 792,131 503,587
Deposits.............................. 46,665 33,944 31,222
----------- ----------- -----------
Total other assets.................... 1,099,127 826,075 534,809
----------- ----------- -----------
$18,322,661 $17,168,396 $16,882,037
=========== =========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
(DEFICIT)
Current Liabilities
Accounts payable...................... $ 3,757,841 $ 2,785,348 $ 2,737,170
Unredeemed pari-mutuel tickets........ 645,564 639,306 651,091
Due to The Edward J. DeBartolo
Corporation.......................... 74,387 35,611 850,700
Accrued liabilities................... 759,655 593,868 600,925
Percentage entitlements in excess of
purses paid--NOTE C.................. 118,398 526,592 337,515
Deferred revenue...................... 22,521 1,684 6,822
----------- ----------- -----------
Total Current Liabilities............. 5,378,366 4,582,409 5,184,223
----------- ----------- -----------
Due to The Edward J. DeBartolo
Corporation--NOTES G and I............ 61,529,766 61,221,811 60,034,612
----------- ----------- -----------
Deferred Income Taxes--NOTE D.......... 1,269,000 1,253,000 1,000,000
----------- ----------- -----------
Stockholder's Deficit--Notes G And I
Common stock--no par value per share:
Authorized 500 shares; issued and
outstanding 250 shares............... 500 500 500
Additional paid-in capital............ 100,000 100,000 100,000
Accumulated deficit................... (49,954,971) (49,989,324) (49,437,298)
----------- ----------- -----------
Total Stockholder's Deficit........... (49,854,471) (49,888,824) (49,336,798)
----------- ----------- -----------
$18,322,661 $17,168,396 $16,882,037
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-79
<PAGE>
THISTLEDOWN, INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
Eight Months Ended
August 31, Years Ended December 31,
-------------------------- ----------------------------------------
1999 1998 1998 1997 1996
------------ ------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES
Pari-Mutuel income...... $ 22,924,031 $ 22,845,305 $ 34.283,820 $ 31,912,780 $ 26,933,567
------------ ------------ ------------ ------------ ------------
Less:
Purses paid to
horsemen.............. 8,149,775 8,037,937 12,115,337 10,970,292 9,509,854
State of Ohio pari-
mutuel taxes--net of
racetrack improvement
fund rebate........... 2,542,461 2,703,490 3,937,712 3,597,768 3,991,419
Breakage paid to
Thoroughbred Health
and Retirement Fund... 226,440 244,322 356,977 351,631 303,161
Amount paid to HBPA.... 55,593 54,492 87,046 84,826 89,822
Commission paid to host
tracks................ 2,416,695 2,418,254 3,575,538 3,165,904 1,457,258
------------ ------------ ------------ ------------ ------------
13,390,964 13,458,495 20,072,610 18,170,421 15,351,514
------------ ------------ ------------ ------------ ------------
Net Pari-Mutuel Income.. 9,533,067 9,386,810 14,211,210 13,742,359 11,582,053
Other Income........... 2,438,160 2,243,323 3,469,119 3,345,817 3,332,165
------------ ------------ ------------ ------------ ------------
Total Revenues......... 11,971,227 11,630,133 17,680,329 17,088,176 14,914,218
Operating costs and
expenses--
NOTES E, G and H....... 10,742,872 10,896,783 16,027,163 16,234,915 21,064,646
Depreciation and
amortization.......... 960,446 966,251 1,465,571 1,497,966 1,482,331
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) FROM
OPERATIONS............. 267,909 (232,901) 187,595 (644,705) (1,471,206)
------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES)
Interest earned........ 90,400 62,018 89,108 72,923 22,763
Interest expense--NOTE
G..................... (307,956) (400,626) (575,729) (742,836) (545,736)
------------ ------------ ------------ ------------ ------------
(217,556) (338,608) (486,621) (669,913) (522,973)
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) BEFORE
INCOME TAXES........... 50,353 (571,509) (299,026) (1,314,618) (1,994,179)
Deferred income taxes--
Note D................. 16,000 168,667 253,000 354,000 321,000
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS)....... 34,353 (740,176) (552,026) (1,668,618) (2,315,179)
ACCUMULATED DEFICIT
Beginning of period.... (49,989,324) (49,437,298) (49,437,298) (47,768,680) (45,453,501)
------------ ------------ ------------ ------------ ------------
End of period.......... $(49,954,971) $(50,177,474) $(49,989,324) $(49,437,298) $(47,768,680)
============ ============ ============ ============ ============
Basic and diluted
earnings (loss) per
share of common stock.. $ 137 $ (2,961) $ (2,208) $ (6,674) $ (9,261)
============ ============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements
F-80
<PAGE>
THISTLEDOWN, INC.
STATEMENTS OF STOCKHOLDER'S DEFICIT
<TABLE>
<CAPTION>
Additional
Common Paid-in Accumulated Total
Stock Capital Deficit Deficit
------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995.... $500 $100,000 $(45,453,501) $(45,353,001)
Net loss, year ended December
31, 1996....................... -- -- (2,315,179) (2,315,179)
---- -------- ------------ ------------
Balance at December 31, 1996.... 500 100,000 (47,768,680) (47,668,180)
Net loss, year ended December
31, 1997....................... -- -- (1,668,618) (1,668,618)
---- -------- ------------ ------------
Balance at December 31, 1997.... 500 100,000 (49,437,298) (49,336,798)
Net loss, year ended December
31, 1998....................... -- -- (552,026) (552,026)
---- -------- ------------ ------------
Balance at December 31, 1998.... 500 100,000 (49,989,324) (49,888,824)
Net income, eight months ended
August 31, 1999 (unaudited).... -- -- 34,353 34,353
---- -------- ------------ ------------
Balance at August 31, 1999
(unaudited).................... $500 $100,000 $(49,954,971) $(49,854,471)
==== ======== ============ ============
</TABLE>
See accompanying notes to financial statements
F-81
<PAGE>
THISTLEDOWN, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Eight Months Ended
August 31 Years ended December 31,
------------------------ ------------------------------------
1999 1998 1998 1997 1996
----------- ----------- ---------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net income (loss)....... $ 34,353 $ (740,176) $ (552,026) $(1,668,618) $(2,315,179)
Adjustments to reconcile
net income (loss) to
cash provided by (used
in) operating
activities:
Depreciation and
amortization.......... 960,446 966,251 1,465,571 1,497,966 1,482,331
Provision for doubtful
accounts.............. 26,003 -- 39,098 46,467 19,560
Deferred income taxes.. 16,000 168,667 253,000 354,000 321,000
(Increase) decrease in
restricted cash....... (417,738) (1,453,375) 19,115 (241,656) (1,340,229)
Increase in accounts
receivable............ (655,704) (657,011) (401,773) (247,808) (1,082,062)
(Increase) decrease in
inventories........... (26,418) (18,114) 12,820 1,083 (11,185)
(Increase) decrease in
prepaid expenses...... 103,248 (77,855) (125,938) 47,845 (25,647)
Increase in other
assets................ (273,052) (159,183) (291,266) (372,160) (152,226)
Increase (decrease) in
accounts payable and
accrued liabilities... 1,138,280 1,290,201 41,121 (339,485) 2,192,388
Increase (decrease) in
unredeemed pari-mutuel
tickets............... 6,258 22,596 (11,785) 218,318 92,059
Increase (decrease) in
percentage
entitlements in excess
of purses paid........ (408,194) 513,703 189,077 1,733 335,782
Increase (decrease) in
deferred revenue...... 20,837 38,352 (5,138) 5,118 1,704
---------- ----------- ---------- ----------- -----------
Net cash provided by
(used in) operating
activities............ 524,319 (105,944) 631,876 (697,197) (481,704)
---------- ----------- ---------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES
Purchase of property
and equipment......... (113,794) (117,321) (119,714) (228,315) (332,592)
---------- ----------- ---------- ----------- -----------
Net cash used in
investing activities.. (113,794) (117,321) ( 119,714) (228,315) (332,592)
---------- ----------- ---------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES
Net advances from The
Edward J. DeBartolo
Corporation........... 346,730 367,601 372,111 989,948 1,364,585
---------- ----------- ---------- ----------- -----------
Net cash provided by
financing activities.. 346,730 367,601 372,111 989,948 1,364,585
---------- ----------- ---------- ----------- -----------
Net Increase in cash
and cash equivalents.. 757,255 144,336 884,273 64,436 550,289
CASH AND CASH
EQUIVALENTS
Beginning of period.... 1,779,565 895,292 895,292 830,856 280,567
---------- ----------- ---------- ----------- -----------
End of period.......... $2,536,820 $ 1,039,628 $1,779,565 $ 895,292 $ 830,856
========== =========== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-82
<PAGE>
THISTLEDOWN, INC.
NOTES TO FINANCIAL STATEMENTS
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
NOTE A--Summary of Significant Accounting Policies
Basis of Presentation:
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States, which conform, in all
material respects, with accounting principles generally accepted in Canada.
Nature of Operations:
The company formally changed its name from Carat Company, Inc. to
Thistledown, Inc. on February 26, 1998. On January 9, 1998, Raceway
Properties, Inc., a wholly-owned subsidiary of The Edward J. DeBartolo
Corporation, was merged into the company. Raceway Properties, Inc. owned the
land under the racing facility, certain buildings and equipment used by the
company. The merger was accounted for using the pooling-of-interests method of
accounting and all intercompany transactions have been eliminated.
The company operates a thoroughbred horse racing track in Cleveland, Ohio.
The company operated 187, 186 and 195 days of live racing in 1998, 1997 and
1996, respectively, and has been awarded live race meetings totalling 187 days
for 1999.
Cash and Cash Equivalents:
The company considers highly liquid debt instruments purchased with
maturity dates of three months or less to be cash equivalents.
Restricted cash represents primarily amounts restricted for purse escrow
and simulcast settlement escrow.
Inventories:
Inventories, consisting primarily of concession food items, are stated at
lower of cost or market on the first-in, first-out method.
Property and Equipment:
Property and equipment are stated at cost. Depreciation for financial
accounting purposes is computed on the straight-line method. For income tax
purposes, accelerated methods are used.
Statement of Financial Accounting Standards No. 121 ("SFAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of", establishes accounting standards for the impairment of
long-lived assets. The company evaluates impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Management of the company assesses the recoverability of long-
lived assets by determining whether the depreciation and amortization of such
assets over their remaining lives can be recovered through projected
undiscounted cash flows. The amount of impairment, if any, is measured based
on fair value (projected discounted cash flows) and is charged to operations
in the period in which such impairment is determined by management.
Income Taxes:
The company has been included in the consolidated federal income tax return
of its parent, The Edward J. DeBartolo Corporation ("DeBartolo"). Income taxes
of the company are computed utilizing the separate return
F-83
<PAGE>
THISTLEDOWN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
method. Under this method, the provision for income taxes is generally
determined as if the company filed a separate income tax return. The company
files a separate state income tax return.
Income taxes are provided for amounts currently due and deferred amounts
arising from temporary differences between the financial accounting and income
tax basis of assets and liabilities.
Advertising:
Advertising costs are charged to operations when incurred and are included
in operating expenses. The amounts charged to operations are as follows:
<TABLE>
<S> <C>
Year ended December 31:
1998........................................................... $1,324,955
1997........................................................... 1,475,192
1996........................................................... 1,375,741
Eight months ended August 31 (unaudited):
1999........................................................... 1,011,156
1998........................................................... 989,556
</TABLE>
Earnings Per Share:
Basic earnings per share is computed by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
during the period which was 250 shares for all periods presented. The company
does not have any dilutive securities.
Fair Value of Financial Instruments:
Management has estimated the fair value of its financial instruments using
available market information and appropriate valuation methodologies.
Considerable judgment is required in interpreting market data to develop
estimates of fair value. Accordingly, the estimated fair values are not
necessarily indicative of the amounts that could be realized in current market
exchanges.
Cash and cash equivalents, restricted cash, accounts receivable, accounts
payable and accrued liabilities--Due to the short period to maturity of these
instruments, the carrying values as presented in the balance sheets are
reasonable estimates of fair value.
Deferred Racetrack Improvement Fund Rebate--It is not practicable to
estimate the fair value of the deferred racetrack improvement fund rebate due
to the uncertainty of the timing of the realization of this instrument.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
F-84
<PAGE>
THISTLEDOWN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
Interim Financial Statements:
In the opinion of management, the unaudited interim financial statements
reflect all adjustments, which consist only of normal and recurring
adjustments, necessary to present fairly the financial position at August 31,
1999 and the results of operations and cash flows for the eight months ended
August 31, 1999 and 1998.
New Accounting Standards:
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities". This Statement is effective for the company's first quarter ended
March 31, 2001. SFAS 133 requires that an entity recognize all derivative
instruments either as assets or liabilities and measure those instruments at
fair value. The company has not determined the impact, if any, of this
pronouncement on its financial statements.
NOTE B--Racetrack Improvement Fund Rebate
The State of Ohio has enacted a Capital Improvement--Tax Reduction bill
(Ohio Revised Code 3769.20) to encourage the renovation of existing racing
facilities. During 1999, the State extended the rebate period from December 31,
2004 to December 31, 2014. The rebates are approved by the State based on
expenditures made on major improvements plus interest on the borrowed funds
used for the project. During April 1998, the State approved a $9,801,163 rebate
related to debt service on a 1986 major improvement project.
The tax credit earned is equal to one percent of gross on-track pari-mutuel
handle up to the amount of the approved rebate. As a result of limits on the
amount of rebates earned that can be used to reduce current pari-mutuel taxes,
not all earned rebates are realized currently. Any rebates earned and not
realized currently will be available for offset against future pari-mutuel
taxes until fully realized. The company's policy is to recognize the rebates as
they are earned based on one percent of gross on track pari-mutuel handle.
Following is a summary of (1) the approved rebate which is unearned, (2) the
tax rebate earned and (3) the tax rebate credited to pari-mutuel taxes:
<TABLE>
<CAPTION>
Approved Rebate Rebate Credited
--------------------- Ohio Pari-
Unearned Earned Mutuel Taxes
---------- ---------- ---------------
<S> <C> <C> <C>
Year ended December 31:
1998............................... $8,682,282 $1,413,191 $1,124,647
1997............................... 294,310 1,434,814 1,056,468
1996............................... 1,729,124 1,232,647 1,115,348
Eight months ended August 31
(unaudited):
1999............................... 7,678,883 1,003,400 743,069
1998............................... 9,190,187 909,079 759,328
</TABLE>
NOTE C--Percentage Entitlements and Purse Distributions
Ohio State Statutes require the company to distribute as purses an amount
equal to the track's commission less 1.875% of gross pari-mutuel handle times
50% plus 20% of breakage. In addition, the company must pay 45% of breakage to
the Thoroughbred Health and Retirement Fund. Purse overpayments and
underpayments will be adjusted in purse distributions during future race
meetings.
F-85
<PAGE>
THISTLEDOWN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
Purses were underpaid at the end of each period as follows:
<TABLE>
<S> <C>
December 31, 1998............................................. $526,592
========
December 31, 1997............................................. $337,515
========
August 31, 1999 (unaudited)................................... $118,398
========
</TABLE>
NOTE D--Income Taxes
Following is a summary of deferred tax liabilities:
<TABLE>
<CAPTION>
December 31,
August 31, ---------------------
1999 1998 1997
----------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Deferred tax liabilities:
Excess tax depreciation and amortization
over financial statement reporting
depreciation and amortization.......... $ 910,000 $ 984,000 $ 829,000
Racetrack improvement fund rebate
recognized for financial statement
reporting in excess of tax reporting... 359,000 269,000 171,000
---------- ---------- ----------
Total Deferred Tax Liabilities........ $1,269,000 $1,253,000 $1,000,000
========== ========== ==========
</TABLE>
The primary reason for the difference between the expected tax benefit and
the income tax provision is that the company did not receive a benefit for the
company's net operating losses utilized by its parent company in its
consolidated tax return.
NOTE E--Leases
The company uses significant amounts of equipment under operating leases as
part of its daily business operations. This equipment includes totalisator
equipment, satellite uplink equipment, closed circuit color television
equipment, track maintenance equipment and photofinish equipment. The majority
of the equipment is leased on a raceday basis, with minimum rentals as follows:
<TABLE>
<CAPTION>
Minimum Minimum Rental for
Rental per On-Track
Live Raceday Simulcasting Cards
------------ ------------------
<S> <C> <C>
Year ended December 31:
1998...................................... $4,292 $1,296
1997...................................... 4,059 1,406
1996...................................... 3,701 1,110
Eight months ended August 31 (unaudited):
1999...................................... 3,844 1,535
1998...................................... 4,292 1,296
</TABLE>
Following is a summary of future minimum rental payments under operating
leases that have initial or remaining noncancellable terms in excess of one
year as of December 31, 1998:
<TABLE>
<S> <C>
1999........................................................... $ 98,500
2000........................................................... 4,000
--------
Total........................................................ $102,500
========
</TABLE>
F-86
<PAGE>
THISTLEDOWN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
Rent expense charged to operations is summarized below:
<TABLE>
<S> <C>
Year ended December 31:
1998........................................................... $1,765,940
1997........................................................... 1,619,099
1996........................................................... 1,524,921
Eight months ended August 31 (unaudited):
1999........................................................... 1,132,813
1998........................................................... 1,141,281
</TABLE>
NOTE F--Concentration of Credit Risk
Financial instruments which potentially subject the company to
concentrations of credit risk are primarily cash investments and receivables.
The company places its cash investments in investment grade short-term
instruments and limits the amount of credit exposure to any one commercial
issuer. The company maintains significantly all of its bank deposit accounts in
one financial institution in Cleveland, Ohio. These accounts at times exceed
the federally insured limits. The company believes it is not exposed to any
significant credit risk on cash and cash equivalents.
The company grants credit to other racetracks throughout the country. The
company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers.
NOTE G--Controlling Interest and Related Party Transactions
Controlling Interest:
The company is a wholly-owned subsidiary of DeBartolo. See Note I regarding
subsequent event.
Related Party Transactions:
Included in the accompanying financial statements are certain expenses paid
or incurred on behalf of the company by DeBartolo. The company reimburses
DeBartolo for salaries and wages and related expenses and general and
administrative expenses as follows:
<TABLE>
<CAPTION>
Salaries, Wages General and
and Related Administrative
Expenses Expenses Total
--------------- -------------- ----------
<S> <C> <C> <C>
Year ended December 31:
1998........................... $8,508,074 $558,112 $9,066,186
1997........................... 8,156,565 815,126 8,971,691
1996........................... 7,740,070 503,288 8,243,358
Eight months ended August 31
(unaudited):
1999........................... 5,122,286 371,908 5,494,194
1998........................... 5,371,417 682,447 6,053,864
</TABLE>
F-87
<PAGE>
THISTLEDOWN, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
The accompanying balance sheets include notes, advances and related accrued
interest payable to DeBartolo (see Note I) as summarized below:
<TABLE>
<S> <C>
December 31, 1998.......................................... $61,221,811
===========
December 31, 1997.......................................... $60,034,612
===========
August 31, 1999 (unaudited)................................ $61,529,766
===========
</TABLE>
DeBartolo charged interest at the applicable federal rate (AFR) on a note
payable related to the financing of certain racetrack improvements. Interest
charged by DeBartolo is summarized as follows:
<TABLE>
<S> <C>
Year ended December 31:
1998............................................................. $575,617
1997............................................................. 740,309
1996............................................................. 544,681
Eight months ended August 31 (unaudited):
1999............................................................. 307,956
1998............................................................. 400,514
</TABLE>
No interest was charged by DeBartolo on net operating advances. Management
fees charged by DeBartolo totalled $50,000 annually.
NOTE H--Investment Savings Retirement Plan
Effective February 1, 1998, the company along with an affiliated company
formed a defined contribution 401(k) pension plan, which covers substantially
all of its employees that are not covered by a collective bargaining agreement
or another retirement plan. Individuals employed as of the effective date of
the plan are eligible to participate in the pension plan. Employees hired after
the effective date of the plan, must meet minimum service and age requirements
in order to participate. The plan provides for discretionary company matching
contributions. No discretionary contributions to the plan were made during 1998
or 1999.
NOTE I--Subsequent Event
On October 21, 1999, DeBartolo entered into a definitive agreement to sell
100% of the outstanding common stock of the company to MI Entertainment Corp.,
a wholly-owned subsidiary of Magna International Inc., for $14,000,000. As part
of the agreement, DeBartolo agreed to contribute $61,529,766 of notes, advances
and related accrued interest to additional paid-in capital. These amounts are
reflected as noncurrent liabilities in the accompanying balance sheets.
F-88
<PAGE>
COMBINED FINANCIAL STATEMENTS
GOLDEN GATE FIELDS CONSISTING OF
PACIFIC RACING ASSOCIATION'S OPERATIONS
SUBJECT TO THE LICENSING PROVISIONS OF THE
CALIFORNIA HORSE RACING BOARD,
LADBROKE RACING CALIFORNIA, INC.,
AND LADBROKE LAND HOLDINGS, INC.
(WHOLLY OWNED SUBSIDIARIES OF
LADBROKE RACING CORPORATION)
Years ended December 31, 1998, 1997 and 1996
F-89
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholder
Pacific Racing Association,
Ladbroke Racing California, Inc. and
Ladbroke Land Holdings, Inc.
We have audited the accompanying combined statement of assets and
liabilities of Pacific Racing Association's operations subject to the licensing
provisions of the California Horse Racing Board ("Pacific Racing Association"),
Ladbroke Racing California, Inc. and Ladbroke Land Holdings, Inc.
(collectively, "Golden Gate Fields" or the "Company") as of December 31, 1998,
and 1997, and the related combined statements of operations, stockholder's
equity, and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying combined financial statements present the financial
position and results of operations of the Golden Gate Fields racetrack facility
and are not intended to include a complete presentation of the financial
position and results of operations of Pacific Racing Association.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined assets and liabilities of Pacific Racing
Association, Ladbroke Racing California, Inc. and Ladbroke Land Holdings, Inc.
at December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998,
in conformity with accounting principles generally accepted in the United
States.
Ernst & Young LLP
Walnut Creek, California
October 4, 1999, except paragraph 1 of Note 5,
as to which the date is
October 19, 1999
F-90
<PAGE>
Golden Gate Fields consisting of
Pacific Racing Association's operations subject to the
licensing provisions of the California Horse Racing Board
Ladbroke Racing California, Inc.
and Ladbroke Land Holdings, Inc.
(wholly owned subsidiaries of Ladbroke Racing Corporation)
COMBINED STATEMENTS OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
December 31,
August 31, ------------------------
1999 1998 1997
------------ ----------- -----------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............ $ 1,693,750 $ 714,691 $ 1,426,313
Equity in pooled cash and cash
equivalents......................... 46,447,731 41,117,870 34,998,292
Accounts receivable, net of allowance
for doubtful accounts of $20,989 in
1997, $236,687 in 1998 and $160,092
at August 31, 1999.................. 987,638 3,100,143 3,661,060
Other current assets................. 288,087 479,827 779,343
------------ ----------- -----------
Total current assets............... 49,417,206 45,412,531 40,865,008
Racetrack properties and equipment,
net................................... 48,554,484 48,429,435 24,070,678
Intangible assets, net................. 2,536,676 3,044,009 14,380,010
------------ ----------- -----------
Total assets....................... $100,508,366 $96,885,975 $79,315,696
============ =========== ===========
Liabilities and stockholder's equity
Current liabilities:
Note payable to affiliate, current
portion............................. $ 2,594,191 $ 1,448,415 $ --
Accounts payable..................... 1,861,969 4,055,475 4,301,635
Accrued compensation................. 1,298,858 1,743,079 1,772,730
Other accrued liabilities............ 2,151,738 1,213,890 1,440,484
Due to affiliates.................... 20,516,444 17,149,343 4,414,034
------------ ----------- -----------
Total current liabilities.......... 28,423,200 25,610,202 11,928,883
------------ ----------- -----------
Note payable to affiliate.............. 59,434,917 58,183,681 42,722,954
------------ ----------- -----------
Note payable........................... -- -- 10,025,915
------------ ----------- -----------
Stockholder's equity:
Common stock, authorized 111,000
shares, issued and outstanding
80,347 shares....................... 1,494,000 1,494,000 1,494,000
Paid-in capital...................... 13,360,000 13,360,000 13,360,000
Accumulated deficit.................. (2,203,751) (1,761,908) (216,056)
------------ ----------- -----------
Total stockholder's equity......... 12,650,249 13,092,092 14,637,944
------------ ----------- -----------
Total liabilities and stockholder's
equity............................ $100,508,366 $96,885,975 $79,315,696
============ =========== ===========
</TABLE>
See accompanying notes.
F-91
<PAGE>
Golden Gate Fields consisting of
Pacific Racing Association's operations subject to the
licensing provisions of the California Horse Racing Board
Ladbroke Racing California, Inc.
and Ladbroke Land Holdings, Inc.
(wholly owned subsidiaries of Ladbroke Racing Corporation)
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Eight months ended
August 31, Years ended December 31,
------------------------ -------------------------------------
1999 1998 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating revenues:
Mutual commission and
breakage............. $14,022,517 $12,314,527 $17,362,961 $16,555,897 $15,786,982
Admissions............ 919,355 961,434 1,347,652 1,717,753 1,923,166
Catering operations... 1,776,815 1,683,836 2,269,092 2,288,534 2,313,021
Parking............... 668,865 677,268 937,434 922,325 954,876
Programs.............. 920,249 869,800 1,227,601 1,272,416 1,269,256
Indirect revenues..... 1,986,357 1,906,504 2,506,497 2,754,653 2,684,698
----------- ----------- ----------- ----------- -----------
20,294,158 18,413,369 25,651,237 25,511,578 24,931,999
----------- ----------- ----------- ----------- -----------
Operating expenses:
Salaries, wages,
benefits and other
payroll-related
expenses............. 8,196,712 7,958,289 11,895,359 11,401,172 10,689,267
Rental of facilities
and equipment........ 273,921 492,578 654,927 749,870 1,661,174
Operating and
maintenance
services............. 2,581,307 2,513,780 4,997,209 4,508,930 3,921,650
Depreciation and
amortization......... 1,690,738 2,783,997 3,621,315 3,828,330 3,987,359
Taxes and licenses.... 603,408 550,088 726,613 789,325 707,031
Advertising and public
relations............ 1,369,117 965,873 1,269,124 1,301,954 1,294,999
General and
administrative....... 2,043,921 2,066,948 2,047,403 1,494,073 2,327,842
Charity days expense.. 66,841 64,183 86,976 96,815 98,356
----------- ----------- ----------- ----------- -----------
16,825,965 17,395,736 25,298,926 24,170,469 24,687,678
----------- ----------- ----------- ----------- -----------
Income from operations.. 3,468,193 1,017,633 352,311 1,341,109 244,321
Other income (expense):
Interest income,
principally from
affiliate............ 1,477,305 1,433,548 2,148,526 1,976,792 1,714,396
Interest expense to
affiliate............ (3,108,390) (2,352,797) (3,845,028) (2,516,408) (2,310,728)
Other income.......... 21,049 -- -- -- --
----------- ----------- ----------- ----------- -----------
Income (loss) before
income taxes........... 1,858,157 98,384 (1,344,191) 801,493 (352,011)
Provision for federal
and state income
taxes.................. (2,300,000) (42,691) (201,661) (1,888,195) (1,000,490)
----------- ----------- ----------- ----------- -----------
Net (loss) income....... $ (441,843) $ 55,693 $(1,545,852) $(1,086,702) $(1,352,501)
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-92
<PAGE>
Golden Gate Fields consisting of
Pacific Racing Association's operations subject to the
licensing provisions of the California Horse Racing Board
Ladbroke Racing California, Inc.
and Ladbroke Land Holdings, Inc.
(wholly owned subsidiaries of Ladbroke Racing Corporation)
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
Retained Total
Common Paid-in Earnings Stockholder's
Stock Capital (Deficit) Equity
---------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at December 31,
1995....................... $1,494,000 $13,360,000 $ 2,223,147 $17,077,147
Net loss.................. -- -- (1,352,501) (1,352,501)
---------- ----------- ----------- -----------
Balance at December 31,
1996....................... 1,494,000 13,360,000 870,646 15,724,646
Net loss.................. -- -- (1,086,702) (1,086,702)
---------- ----------- ----------- -----------
Balance at December 31,
1997....................... 1,494,000 13,360,000 (216,056) 14,637,944
Net loss.................. -- -- (1,545,852) (1,545,852)
---------- ----------- ----------- -----------
Balance at December 31,
1998....................... 1,494,000 13,360,000 (1,761,908) 13,092,092
Net loss (unaudited)...... -- -- (441,843) (441,843)
---------- ----------- ----------- -----------
Balance at August 31, 1999
(unaudited)................ $1,494,000 $13,360,000 $(2,203,751) $12,650,249
========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-93
<PAGE>
Golden Gate Fields consisting of
Pacific Racing Association's operations subject to the
licensing provisions of the California Horse Racing Board
Ladbroke Racing California, Inc.
and Ladbroke Land Holdings, Inc.
(wholly owned subsidiaries of Ladbroke Racing Corporation)
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Eight months ended
August 31, Years ended December 31,
------------------------ -------------------------------------
1999 1998 1998 1997 1996
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities
Net (loss) income....... $ (441,843) $ 55,693 $(1,545,852) $(1,086,702) $(1,352,501)
Adjustments to reconcile
net (loss) income to
net cash provided by
operating activities:
Depreciation........... 1,183,405 866,664 1,097,814 952,329 1,111,358
Amortization........... 507,333 1,917,333 2,523,501 2,876,001 2,876,001
Provision for doubtful
accounts.............. -- -- 215,698 13,239 --
Changes in operating
assets and
liabilities:
Accounts receivable.... 2,112,505 2,710,531 345,219 (1,356,568) (1,672,357)
Other current assets... 191,740 153,679 299,516 (355,913) (79,900)
Accrued interest on
notes payable to
affiliate............. (2,193,506) (540,489) 3,363,540 2,502,802 1,882,816
Accounts payable....... (444,221) (453,256) (246,160) (1,409,619) 4,333,346
Accrued compensation... 937,848 237,325 (29,651) 387,530 93,023
Other accrued
liabilities........... 2,397,012 2,159,069 (226,594) 141,458 283,112
Due to affiliates...... 2,930,701 (544,797) 2,709,394 1,608,121 534,269
----------- ----------- ----------- ----------- -----------
Net cash provided by
operating activities... 7,180,974 6,561,752 8,506,425 4,272,678 8,009,167
----------- ----------- ----------- ----------- -----------
Investing activities
Purchase of racetrack
properties and
equipment.............. (872,054) (6,547,479) (16,644,071) (19,582,404) (1,910,089)
----------- ----------- ----------- ----------- -----------
Net cash used in
investing activities... (872,054) (6,547,479) (16,644,071) (19,582,404) (1,910,089)
----------- ----------- ----------- ----------- -----------
Financing activities
Borrowings from
affiliates for
racetrack property
purchase............... -- 6,195,469 13,545,602 7,879,398 --
Issuance of note
payable................ -- -- -- 10,025,915 --
----------- ----------- ----------- ----------- -----------
Net cash provided by
financing activities... -- 6,195,469 13,545,602 17,905,313 --
----------- ----------- ----------- ----------- -----------
Increase in cash and
cash equivalents and
equity in pooled cash
and cash equivalents... 6,308,920 6,209,742 5,407,956 2,595,587 6,099,078
Cash and cash
equivalents and equity
in pooled cash and cash
equivalents at
beginning of period.... 41,832,561 36,424,605 36,424,605 33,829,018 27,729,940
----------- ----------- ----------- ----------- -----------
Cash and cash
equivalents and equity
in pooled cash and cash
equivalents at end of
period................. $48,141,481 $42,634,347 $41,832,561 $36,424,605 $33,829,018
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-94
<PAGE>
Golden Gate Fields consisting of
Pacific Racing Association's operations subject to the
licensing provisions of the California Horse Racing Board
Ladbroke Racing California, Inc.
and Ladbroke Land Holdings, Inc.
(wholly owned subsidiaries of Ladbroke Racing Corporation)
NOTES TO COMBINED FINANCIAL STATEMENTS
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
1. Business and Basis of Presentation
Business
Pacific Racing Association's operations subject to the licensing provisions
of the California Horse Racing Board ("PRA"), Ladbroke Racing California, Inc.
("LRCA") and Ladbroke Land Holdings, Inc. ("LLH") (collectively, "Golden Gate
Fields" or the "Company") wholly owned subsidiaries of Ladbroke Racing
Corporation ("LRC"), are engaged in operating the Golden Gate Fields racetrack
facility for thoroughbred horse racing, the conduct of which is subject to the
licensing provisions of the California Horse Racing Board. PRA operates the
racetrack facility, LRCA leased the racetrack facility from a third party
through October 1998 and LLH purchased the racetrack facility from a third
party effective October 1998.
Basis of Presentation
The accompanying combined financial statements present the financial
position and results of operations of the Golden Gate Fields racetrack facility
and include the accounts of LRCA, LLH and those components of PRA's operations
subject to the licensing provisions of the California Horse Racing Board. The
components of PRA's operations not included in the combined financial
statements are two subsidiaries (Ladbroke Gaming California, Inc. and Golden
Gate Catering Company) as these are not associated with the operations of the
Golden Gate Fields racetrack facility and are not being acquired by MI
Entertainment Corp. (see Note 10). The accompanying financial statements are
not intended to include a complete presentation of the financial position and
results of operations of Pacific Racing Association.
In addition, LRCA is not being acquired by MI Entertainment Corp. although
its results are included in these combined financial statements. Through
October 1998, LRCA leased the Golden Gate Fields racetrack facility from a
third party and then subleased the facility to PRA. This lease was cancelled in
October 1998 when LLH purchased the racetrack facility. In order to more fairly
present the results of operations of the Golden Gate Fields racetrack facility
prior to October 1998, LRCA has been included in these combined financial
statements.
All significant intercompany accounts and transactions between PRA, LRCA and
LLH have been eliminated.
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States which conform in all
material respects with accounting principles generally accepted in Canada.
2. Summary of Significant Accounting Policies
Equity in Pooled Cash and Cash Equivalents
The Company participates in a pooled cash and cash equivalents management
system sponsored by its ultimate U.S. parent, Ladstock Holding Corporation.
Monies included in the pool are from the Company, the parent and other U.S.
affiliates. Cash and cash equivalents recorded by the Company are based on the
parent's
F-95
<PAGE>
Golden Gate Fields consisting of
Pacific Racing Association's operations subject to the
licensing provisions of the California Horse Racing Board
Ladbroke Racing California, Inc.
and Ladbroke Land Holdings, Inc.
(wholly owned subsidiaries of Ladbroke Racing Corporation)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
tracking of each subsidiary's cash activity. The balance at year end represents
cash and cash equivalents, less outstanding checks.
The Company earns interest income based on its net daily position in the
pool. The Company was allocated interest income of approximately $2.1 million,
$2.0 million and $1.7 million for the years ended December 31, 1998, 1997 and
1996, respectively, and $1.4 million and $1.4 million for the eight months
ended August 31, 1999 and 1998, respectively.
For purposes of financial statement presentation, the Company considers all
highly liquid investment instruments with original maturities of three months
or less to be cash equivalents.
Racetrack Properties and Equipment
Racetrack properties, buildings, improvements and equipment are recorded at
cost and are depreciated using the straight-line method over the estimated
useful lives of the assets, which range from 3 years to 30 years.
Long-Lived Assets Including Intangible Assets
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" ("FAS 121"), the carrying value of long-lived assets and
related goodwill and other intangibles is reviewed if the facts and
circumstances suggest that they may be impaired. If this review indicates that
the carrying value of these assets will not be recoverable, as determined based
on the undiscounted net cash flows of the entity over the remaining
amortization period, the Company's carrying value is reduced to its estimated
fair value (based on an estimate of discounted future net cash flows).
Income Taxes
The Company files a consolidated federal income tax return with its parent
and other affiliated companies. The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("FAS 109"), which requires the use of the
liability method in accounting for income taxes. Under FAS 109, deferred tax
assets and liabilities are measured based on differences between the financial
reporting and tax bases of assets and liabilities using enacted tax rates and
laws that will be in effect when the differences are expected to reverse.
Revenue Recognition
Revenues from mutuel commissions are recognized when earned upon the
completion of each thoroughbred horse race. Revenues from the operations of the
Golden Gate Fields racetrack facility (primarily admissions, catering, and
event programs) are recognized when the service is rendered or the goods are
delivered which generally corresponds to the receipt of cash from the customer.
F-96
<PAGE>
Golden Gate Fields consisting of
Pacific Racing Association's operations subject to the
licensing provisions of the California Horse Racing Board
Ladbroke Racing California, Inc.
and Ladbroke Land Holdings, Inc.
(wholly owned subsidiaries of Ladbroke Racing Corporation)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
Advertising
Costs incurred for production and communicating advertising are expensed
when incurred. Costs incurred for promotions for specific live race days are
expensed on the applicable race day.
Concentration of Risk
The Company's accounts receivable balances related primarily to amounts due
from other non-affiliated racetrack facilities throughout the United States for
simulcast and off-track activities. The Company performs ongoing credit
evaluations of its customers and does not require collateral. The Company
maintains reserves for estimated potential credit losses and such losses to
date have not been material.
The Company generates the majority of its revenue from wagering activities
in Northern California and therefore it is subject to the risks inherent in the
ownership and operation of a racetrack. These include, among others, the risks
normally associated with changes in the general economic climate, trends in the
gaming industry, including competition from other gaming institutions and state
lottery commissions and change in tax laws and gaming laws.
Fair Value of Financial Instruments
Management has estimated the fair value of its financial instruments using
available market information and appropriate valuation methodologies.
Considerable judgment is required in interpreting market data to develop
estimates of fair value. Accordingly, the estimated fair values are not
necessarily indicative of the amounts that could be realized in current market
exchanges.
The carrying values of cash and cash equivalents, equity in pooled cash and
cash equivalents, accounts receivable, accounts payable, accrued liabilities
and due to affiliates approximate fair value due to the short term nature of
the instruments.
The carrying value of the Company's note payable to affiliate approximates
fair value as interest on these notes is variable and based on LRC's borrowing
rate.
Common Stock
The combined common stock consists of the following:
<TABLE>
<CAPTION>
Issued and
Authorized Outstanding
Shares Shares
---------- -----------
<S> <C> <C>
Pacific Racing Association, no par value.............. 100,000 69,347
Ladbroke Racing California, $1 par value.............. 10,000 10,000
Ladbroke Land Holdings, Inc., no par value............ 1,000 1,000
------- ------
111,000 80,347
======= ======
</TABLE>
F-97
<PAGE>
Golden Gate Fields consisting of
Pacific Racing Association's operations subject to the
licensing provisions of the California Horse Racing Board
Ladbroke Racing California, Inc.
and Ladbroke Land Holdings, Inc.
(wholly owned subsidiaries of Ladbroke Racing Corporation)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. SFAS 133 establishes accounting and reporting
standards for derivative instruments and for hedging activities. SFAS 133
requires that an entity recognize all derivatives either as assets or
liabilities and measure those instruments at fair market value. Presently, the
Company does not use derivative instruments either in hedging activities or as
investments. Accordingly, the Company believes that adoption of SFAS 133 will
have no impact on its financial position or results of operations.
Interim Financial Information
The interim financial information at August 31, 1999 and for the eight-month
periods ended August 31, 1998 and 1999 is unaudited but, in the opinion of
management, includes all adjustments, consisting only of normal recurring
adjustments, which management considers necessary for a fair presentation of
the financial position and results of operations for the interim periods. The
results of operations for the eight months ended August 31, 1999 are not
necessarily indicative of the results to be expected for the full fiscal year.
3. Racetrack Properties and Equipment
Racetrack properties and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
August 31, --------------------------
1999 1998 1997
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
Land............................... $ 25,256,936 $ 25,256,936 $ 17,905,313
Buildings.......................... 17,231,479 17,231,479 --
Building improvements.............. 9,890,717 9,018,654 8,460,063
Equipment.......................... 8,550,217 8,077,230 7,762,352
------------ ------------ ------------
60,929,349 59,584,299 34,127,728
Less accumulated depreciation...... (12,374,865) (11,154,864) (10,057,050)
------------ ------------ ------------
$ 48,554,484 $ 48,429,435 $ 24,070,678
============ ============ ============
</TABLE>
LLH was formed in order to purchase and develop income producing properties
in anticipation of swapping such properties (in a Section 1031 like-kind
exchange) for the land and buildings constituting Golden Gate Fields racetrack.
This transaction had been agreed to in the "Option Agreement and Agreement of
Purchase and Sale" ("Option Agreement") entered into on July 25, 1997. The
racetrack property had been
F-98
<PAGE>
Golden Gate Fields consisting of
Pacific Racing Association's operations subject to the
licensing provisions of the California Horse Racing Board
Ladbroke Racing California, Inc.
and Ladbroke Land Holdings, Inc.
(wholly owned subsidiaries of Ladbroke Racing Corporation)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
subject to a lease between the third party property owner and LRCA. The Section
1031 exchange ("Exchange") was finalized in October 1998 and the Company
obtained title to the property. The properties were exchanged on the basis of
cost, and no gain or loss was recognized on the transaction. If an agreement to
sell LLH is entered into, LRCA may be contingently liable for a portion of any
excess proceeds received on the sale as defined in the Option Agreement.
In 1997, a note payable was entered into with the former owner of the Golden
Gate Fields racetrack facility in the amount of $10,025,915. The note was
settled in 1998 in conjunction with the exchange transaction described above.
This settlement was financed by affiliates.
4. Intangible Assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
August 31, -------------------------
1999 1998 1997
----------- ----------- ------------
(unaudited)
<S> <C> <C> <C>
Prepaid lease........................ $ -- $ -- $ 29,610,000
Goodwill............................. 7,503,119 7,503,119 7,503,119
Racing rights........................ 3,049,000 3,049,000 3,049,000
Other................................ 101,900 101,900 101,900
----------- ----------- ------------
10,654,019 10,654,019 40,264,019
Less accumulated amortization........ (8,117,343) (7,610,010) (25,884,009)
----------- ----------- ------------
$ 2,536,676 $ 3,044,009 $ 14,380,010
=========== =========== ============
</TABLE>
Prepaid Lease
The prepaid lease is stated at cost and was being amortized on a straight-
line basis over the term of the original lease agreement, which expires in
2002. In connection with the exchange transaction described in Note 3, the
lease agreement between the former owner of the Golden Gate Fields racetrack
and LRCA was terminated and the remaining unamortized balance of the prepaid
lease of $8,812,500 was included in the cost of the racetrack facility
acquired.
Prior to the purchase of the racetrack facility in October 1998, LRCA
incurred rent expense under the lease agreement of $250,000, $347,202 and
$1,293,662 in the years ended December 31, 1998, 1997, and 1996, respectively,
and none and $200,282 in the eight months ended August 31, 1999 and 1998,
respectively.
Goodwill
The amount of the purchase price paid in excess of the net book value of
assets acquired to purchase PRA on January 3, 1989 is classified as goodwill
and is being amortized on a straight-line basis through 2002.
F-99
<PAGE>
Golden Gate Fields consisting of
Pacific Racing Association's operations subject to the
licensing provisions of the California Horse Racing Board
Ladbroke Racing California, Inc.
and Ladbroke Land Holdings, Inc.
(wholly owned subsidiaries of Ladbroke Racing Corporation)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
Purchased Racing Rights
Included in intangible assets is a $3,900,000 payment made to acquire
certain racing rights. The acquisition of racing rights allows the Company
additional racing days at Golden Gate Fields. The prepayment is being amortized
on a straight-line basis through 2002, which conforms to the life of the racing
rights purchased.
5. Related-Party Transactions
The Company has loan agreements with an affiliate with outstanding balances
of $59,632,096 and $42,722,954 at December 31, 1998 and 1997, respectively, and
$62,029,108 at August 31, 1999. Amounts borrowed under the agreement bear
interest at the affiliate's internal lending rate (6.8% at December 31, 1998
and 7.0% at December 31, 1997), and interest and principal are payable upon
maturity. Based upon an amendment to the loan agreement dated February 1, 1999
and October 19, 1999, outstanding principal in the amount of $40,327,639
including unpaid interest is due in full on December 31, 2004. At December 31,
1998, the principal outstanding and unpaid interest are due as follows:
<TABLE>
<S> <C>
1999............................................................. $ 1,448,415
2000............................................................. 617,496
2001............................................................. 617,496
2002............................................................. 617,496
2003............................................................. 617,496
Thereafter....................................................... 55,713,697
-----------
$59,632,096
===========
</TABLE>
Interest expense in the years ended December 31, 1998, 1997 and 1996 under
these loan agreements was $3,363,772, $2,502,807 and $2,289,258, respectively,
and in the eight months ended August 31, 1999 and 1998 was $1,662,901 and
$1,724,032, respectively.
The Company also has intercompany payables to affiliates. Such advances bear
interest at internal borrowing rates (6.5% at December 31, 1998 and 7.6% at
December 31, 1997) and are due on demand. Interest expense on such advances was
$481,256, $13,601 and $21,470 for the years ended December 31, 1998, 1997 and
1996, respectively, and $1,445,489 and $628,765 for the eight months ended
August 31, 1999 and 1998, respectively.
LRC allocates corporate overhead expenses to its subsidiaries on a pro rata
basis according to a formula determined by LRC. Corporate overhead expenses of
$1,510,556, $820,455 and $675,236 were allocated by LRC in the years ended
December 31, 1998, 1997 and 1996, respectively, and $878,722 and $878,721 for
the eight months ended August 31, 1999 and 1998, respectively. Such amounts are
included in general and administrative expense in the accompanying statements
of operations.
F-100
<PAGE>
Golden Gate Fields consisting of
Pacific Racing Association's operations subject to the
licensing provisions of the California Horse Racing Board
Ladbroke Racing California, Inc.
and Ladbroke Land Holdings, Inc.
(wholly owned subsidiaries of Ladbroke Racing Corporation)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
6. Income Taxes
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Eight months ended
August 31, Years ended December 31,
------------------ ------------------------------
1999 1998 1998 1997 1996
---------- ------- -------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Currently payable:
Federal.................. $2,300,000 $ -- $ -- $1,227,683 $ 768,061
State.................... -- 42,691 201,661 660,512 232,429
---------- ------- -------- ---------- ----------
2,300,000 42,691 201,661 1,888,195 1,000,490
Deferred................... -- -- -- -- --
---------- ------- -------- ---------- ----------
$2,300,000 $42,691 $201,661 $1,888,195 $1,000,490
========== ======= ======== ========== ==========
</TABLE>
As wholly owned subsidiaries of LRC, PRA, LLH and LRCA do not file separate
federal or state income tax returns. However, under a tax-sharing arrangement
with LRC, PRA, LLH and LRCA record federal tax provisions and resulting
liabilities as if each of these entities was filing a separate return, except
that the tax-sharing arrangement does not allow for income tax benefits to be
recognized when operating losses are incurred except to the extent that such
benefits can be used by the parent. State tax provisions are recorded based
upon an allocation of LRC's state tax provision as determined by LRC.
A reconciliation of the income tax provision (benefit) at the U.S. federal
statutory rate (34%) to the income tax provision at the effective tax rate is
as follows:
<TABLE>
<CAPTION>
Eight months ended
August 31, Years ended December 31,
------------------ --------------------------------
1999 1998 1998 1997 1996
---------- ------- --------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Income taxes provision
(benefit) computed at
the U.S. federal
statutory rate......... $ 631,773 $33,451 $(457,000) $ 272,500 $ (119,700)
State taxes, allocated
by parent.............. -- 42,691 201,661 660,512 232,429
Unutilized net operating
losses................. 1,668,227 -- 457,000 955,183 887,761
Other................... -- (33,451) -- -- --
---------- ------- --------- ---------- ----------
Income tax provision.... $2,300,000 $42,691 $ 201,661 $1,888,195 $1,000,490
========== ======= ========= ========== ==========
</TABLE>
F-101
<PAGE>
Golden Gate Fields consisting of
Pacific Racing Association's operations subject to the
licensing provisions of the California Horse Racing Board
Ladbroke Racing California, Inc.
and Ladbroke Land Holdings, Inc.
(wholly owned subsidiaries of Ladbroke Racing Corporation)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets at December 31, 1998 and 1997 are as
follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Amortization of prepaid lease.................... $ 872,000 $ 230,000
Depreciation..................................... 787,000 819,000
Capitalized interest............................. 316,000 --
Capitalized asset acquisition costs.............. 111,000 --
Accrued expenses................................. 163,000 175,000
----------- -----------
Total deferred tax assets.......................... 2,249,000 1,224,000
Valuation allowance................................ (2,249,000) (1,224,000)
----------- -----------
Net deferred tax assets............................ $ -- $ --
=========== ===========
</TABLE>
The valuation allowance increased $1,025,000 for the year ended December 31,
1998. Based upon its losses from operations, the Company believes that there is
sufficient uncertainty regarding the realizability of the deferred tax assets,
and accordingly, a full valuation allowance has been recorded. The Company will
continue to assess the realizability of the deferred tax assets based on actual
and forecasted operating results.
7. Pension Plans
Substantially all of PRA's hourly workers are represented by various unions
through collective bargaining agreements that expire from January 1999 through
December 2000.
The Company contributes to several multi-employer defined benefit pension
plans for union employees and to the California Racetrack Pension Plan for
nonunion employees. The total expense under these plans was $889,981, $790,104
and $804,120 in the years ended December 31, 1998, 1997 and 1996, respectively,
and $543,589 and $609,911 for the eight months ended August 31, 1999 and 1998,
respectively. Pension expense for the nonunion pension plan includes the cost
of current service and the amortization of past service costs over periods of
20 to 30 years. Pension costs are funded currently. The weighted-average
assumed rate of return used in determining the actuarial present value of
pension benefits was 7.0% for 1998, 7.0% for 1997 and 7.5% for 1996.
Information about the accumulated plan benefits and plan net assets relative to
the participation of the Company in the various plans has not been separately
determined.
8. Satellite Wagering
On June 30, 1992, an organization, Northern California Off-Track Wagering,
Inc. ("NCOTWINC"), was incorporated as a closed corporation to operate the
Satellite Wagering System. The Company holds 25% of the outstanding shares of
NCOTWINC at a cost of $48,000. NCOTWINC does not generate revenues but rather
receives reimbursement of expenses from its host shareholders for operating
expenses that it incurs on their behalf to conduct satellite wagering.
F-102
<PAGE>
Golden Gate Fields consisting of
Pacific Racing Association's operations subject to the
licensing provisions of the California Horse Racing Board
Ladbroke Racing California, Inc.
and Ladbroke Land Holdings, Inc.
(wholly owned subsidiaries of Ladbroke Racing Corporation)
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
(All amounts as at August 31, 1999 and for the eight month periods ended
August 31, 1999 and 1998 are unaudited)
The Company recorded as other indirect revenue $312,189, $323,568 and
$345,743 for the years ended December 31, 1998, 1997 and 1996, respectively,
and $353,446 and $226,765 for the eight months ended August 31, 1999 and 1998,
respectively, as NCOTWINC's operations generated amounts in excess of the
Company's portion of the operating expenses.
9. Contingencies
In the ordinary course of business, the Company is involved as a plaintiff
or defendant in various legal proceedings. The claims and counterclaims in such
litigation involve amounts that may be material. However, it is the opinion of
the Company's management, based in part upon the advice of its counsel, that
the ultimate disposition of pending litigation will not be material in relation
to the Company's combined financial position.
10. Subsequent Event--Unaudited
On November 5, 1999, Ladbroke Racing Corporation and MI Entertainment Corp.
entered into a Stock Purchase Agreement for the sale of the Golden Gate Fields
racetrack facility (as defined in Note 1) to MI Entertainment Corp. The
purchase price will be approximately $87 million, subject to adjustment based
on the closing balance sheet of the combined operations of PRA and LLH (as
defined). The transaction is expected to be accounted for under the purchase
method of accounting.
F-103
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
MI ENTERTAINMENT CORP.
----------------------------------------
(Registrant)
Date November 8, 1999 By /s/ James Nicol
Name James Nicol
Title Vice Chairman and President
By /s/ Graham Orr
Name Graham Orr
Title
Executive Vice-President and Chief
Financial Officer
II-1
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
----------- ----------- --------
<C> <S> <C>
2.1 Share Purchase Agreement dated October 29, 1999 between
MI Venture Inc.
(now MI Entertainment Corp.) and 1305272 Ontario Inc.*
Share Purchase Agreement dated October 29, 1999 between
MI Venture Inc.
(now MI Entertainment Corp.) and Magna International
Inc.*
Share Purchase Agreement dated October 29, 1999 between
MI Venture Inc.
(now MI Entertainment Corp.) and 1346457 Ontario Inc.*
3.1 Articles of Incorporation of MI Entertainment Corp.,
including amendments thereto
3.2 By-Laws of MI Entertainment Corp.
Form of Stock Certificate for Class A Subordinate
4.1 Voting Stock*
10.1 Asset Purchase Agreement dated as of November 13, 1998
between MI Developments (America) Inc., Meditrust
Corporation, Meditrust Operating Company, The Santa
Anita Companies, Inc. and Santa Anita Enterprises, Inc.
together with assignment of interest from MI
Developments (America) Inc. to The Santa Anita
Companies, Inc.*
Stock Purchase Agreement dated as of June 30, 1999
between MI Venture Inc. (now MI Entertainment Corp.)
and Gulfstream Holdings Inc. of Illinois and Gulfstream
Park Racing Association Inc.*
Stock Purchase Agreement dated as of October 21, 1999
between MI Venture Inc. (now MI Entertainment Corp.),
The Edward J. DeBartolo Corporation and Oaklahoma
Racing LLC*
Stock Purchase Agreement dated as of November 5, 1999
between MI Venture Inc. (now MI Entertainment Corp.)
and Ladbroke Racing Corporation, Ladbroke Land Holdings
Inc. and Pacific Racing Association Inc.*
21.1 Subsidiaries of the Registrant
27.1 Financial Data Schedules
</TABLE>
- --------
*To be filed by amendment
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
MI VENTURE INC.
---------------
FIRST: The name of the Corporation is MI VENTURE INC.
SECOND: The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street in the City of Wilmington, County of New Castle.
The name of its registered agent at such address is The Corporation Trust
Company.
THIRD: The nature of the business or purpose of the Corporation is to engage
in any lawful act or activity for which corporations may be organized under the
General Corporation Law of Delaware, including but not limited to manufacturing,
processing, distribution, selling and research and development.
In general, to possess and exercise all the powers and privileges
granted by the General Corporation Law of Delaware or by any other law of
Delaware or this Certificate of Incorporation together with any powers
incidental thereto, so far as such powers and privileges are necessary to the
interest, promotion or attainment of the business or purposes of the
Corporation.
FOURTH: The total number of shares of stock which the Corporation shall have
authority to issue is Ten thousand (10,000) shares without par value of Common
Stock.
FIFTH: The name and mailing address of the incorporator is:
J. Brian Colburn
337 Magna Drive
Aurora, Ontario L5G 7K1
Canada
SIXTH: The Corporation is to have perpetual existence.
SEVENTH: In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to adopt, amend or
repeal the by-laws of the Corporation.
EIGHTH: Meetings of stockholders may be held within or without the State of
Delaware, as the by-laws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the by-laws of the Corporation. Elections of directors
need not be by written ballot unless the by-laws of the Corporation shall so
provide.
<PAGE>
- 2 -
NINTH: The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute and in the by-laws of the Corporation, and
all rights conferred upon stockholders hereby are granted subject to this
reservation.
THE UNDERSIGNED, being the incorporator named above, for the purposes of forming
a corporation pursuant to the General Corporation Law of the State of Delaware,
does make this Certificate, hereby declaring and certifying that this is my act
and deed and the facts herein stated are true, and accordingly have hereunto set
my hand this 3rd day of March, 1999.
/s/ J. Brian Colburn
___________________________
J. Brian Colburn
Incorporator
<PAGE>
CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION OF
MI VENTURE INC.
It is hereby certified as follows:
1. The name of the corporation (hereafter called the "Corporation") is
MI VENTURE INC.
2. The Certificate of Incorporation of the Corporation is amended as
follows:
Article FOURTH is amended to read in its entirety as follows:
"FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is Twenty Million (20,000,000) shares without
par value, Ten Million (10,000,000) of which shall be "Class A Common
Stock" and Ten Million (10,000,000) of which shall be "Class C Common
Stock". All stock issued by the Corporation prior to the date of this
Amendment shall be reclassified by virtue of this Amendment as Class A
Common Stock. The Class A Common Stock and the Class C Common Stock are
hereinafter sometimes collectively called, the "Common Stock". The
powers, preferences and relative, participating, optional or other
special rights of the Class A Common Stock and Class C Common Stock and
the qualifications, limitations or restrictions thereof, are identical,
except as follows:
1. Voting Rights. The Class A Common Stock shall have one
-------------
(1) vote per share and the Class C Common Stock shall have two (2)
votes per share.
2. Preference on Liquidation, Dissolution or Winding Up. Upon
----------------------------------------------------
any voluntary or involuntary liquidation, dissolution, or winding up of
the Corporation, the holders of the Class C Common Stock will be
entitled to be paid an aggregate amount in cash equal to $500,000
before any distribution or payment is made on any Class A Common Stock.
3. The amendment of the certificate of incorporation herein certified
has been duly adopted and written consent has been given in accordance with the
provisions of Sections 228 and 242 of the General Corporation Law of the State
of Delaware.
<PAGE>
Executed this 30th day of August, 1999.
MI VENTURE INC.
By: /s/ J. Brian Colburn
-----------------------------
J. Brian Colburn
Title: Executive Vice President
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
* * * * *
MI VENTURE INC., a corporation organized and existing under and by
virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation (the "Board "),
by the unanimous written consent of its members, filed with the minutes of the
Board, duly adopted resolutions setting forth a proposed amendment to the
Certificate of Incorporation, as filed pursuant to Section 101 of the General
Corporation Law of the State of Delaware (the "GCL") on March 4, 1999, and as
amended on August 30, 1999, of the Corporation (the "Certificate of
Incorporation"), declaring said amendment to be advisable.
SECOND: That thereafter, written consents to the proposed amendment
were duly signed and delivered to the Corporation by all the stockholders of the
Corporation pursuant to Section 228 of the GCL.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the GCL.
FOURTH: Said amendment is as follows:
(A) All shares of "Class A Common Stock" previously issued by the
Corporation and outstanding upon the first date of effectiveness of said
amendment shall be reclassified and changed into one share of Class B Stock (as
defined below) effective on such date.
(B) Each share of "Class C Common Stock" previously issued by the
Corporation and outstanding upon the first date of effectiveness of said
amendment shall be reclassified as one share of Class B Stock effective on such
date.
(C) Each share of Class B Stock resulting from the reclassifications
and change described above shall be subdivided into 13.47562592 shares of Class
B Stock.
(D) Article First of the Certificate of Incorporation is hereby
amended in its entirety to read as follows:
FIRST: The name of the Corporation is: MI Entertainment Corp. (the
"Corporation.")
<PAGE>
(E) Article Fourth of the Certificate of Incorporation is hereby
amended to read in its entirety as follows:
FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is four hundred million (400,000,000) shares,
par value, $0.01 per share, three hundred and ten million (310,000,000)
of which shall be "Class A Subordinate Voting Stock" and ninety million
(90,000,000) of which shall be "Class B Stock". The rights, privileges,
restrictions and conditions attaching to the Class A Subordinate Voting
Stock and the Class B Stock are as follows:
(a) Rights, privileges, restrictions and conditions attaching to the
Class A Subordinate Voting Stock.
----------------------------------------------------------------
(i) Voting.
------
The Class A Subordinate Voting Stock shall carry and be entitled
to one (1) vote per share at all meetings of the stockholders of
the Corporation, except a meeting of the holders of only a
particular class or series of stock other than the Class A
Subordinate Voting Stock.
(ii) Dividends.
---------
The holders of the Class A Subordinate Voting Stock shall be
entitled to receive such dividends as may be declared thereon by
the Board of Directors. Subject to paragraph (a)(iii) below,
------------------
each share of Class A Subordinate Voting Stock shall participate
equally as to dividends with each share of Class B Stock without
preference, priority or distinction. No dividend shall at any
time be declared or set aside or paid on the Class B Stock
unless, on the same date, a dividend in the same amount per share
(to the extent that such dividend is payable in cash) or
identical property of equal value per share (to the extent that
such dividend is not payable in cash), as the case may be, is
declared to be payable on the Class A Subordinate Voting Stock,
which dividend shall be payable on the same date as that declared
on the Class B Stock. The holders of the Class A Subordinate
Voting Stock shall not be entitled to any dividends other than or
in excess of the dividends hereinbefore provided for in this
paragraph (a)(ii).
-----------------
2
<PAGE>
(iii) Stock Dividends.
---------------
Notwithstanding the provisions of paragraph (a)(ii) above
-----------------
contemplating the declaration or payment of dividends in
identical property, the Board of Directors may, in declaring
simultaneous dividends on both the Class A Subordinate Voting
Stock and the Class B Stock, cause the dividend on the Class A
Subordinate Voting Stock to be payable in Class A Subordinate
Voting Stock and the dividend on the Class B Stock to be payable
in Class A Subordinate Voting Stock or in Class B Stock, but no
dividend payable in Class B Stock may be declared on the Class A
Subordinate Voting Stock.
(iv) Right to Elect Directors.
------------------------
If:
(A) After-Tax Profits shall be less than four percent (4%) of
the Share Capital in each of two (2) consecutive Years (the
terms "After-Tax Profits", "Share Capital" and "Years" are
defined in paragraph (a)(viii) below); or
-------------------
(B) the Corporation fails to make a Required Dividend (as
defined in paragraph (a)(viii) below) in respect of each of
-------------------
two (2) consecutive Years;
then, and in any such case, the holders of the Class A
Subordinate Voting Stock shall, until After-Tax Profits for a
Year are at least equal to four percent (4%) of the Share Capital
and all Required Dividends in respect of such Year are made, have
the exclusive right, voting separately as a class, to nominate
and elect two (2) individuals to the Board at each meeting of the
stockholders of the Corporation subsequent to the two-Year period
referred to in subparagraphs (A) or (B) above at which directors
----------------- ---
are to be elected.
(v) Right to Elect Additional Directors.
-----------------------------------
If, following the period of two (2) consecutive Years described
in paragraph (a)(iv) above:
-----------------
3
<PAGE>
(A) After-Tax Profits shall be less than four percent (4%) of
the Share Capital in each of two (2) consecutive Years; or
(B) the Corporation fails to make a Required Dividend in respect
of each of two (2) consecutive Years;
then, and in any such case, the holders of the Class A
Subordinate Voting Stock shall, until After-Tax Profits for a
Year are at least equal to four percent (4%) of the Share Capital
and all Required Dividends in respect of such Year are made, have
the exclusive right, voting separately as a class, to nominate
and elect, in addition to those directors elected under paragraph
---------
(a)(iv) above, two (2) individuals to the Board of Directors at
-------
each meeting of the stockholders of the Corporation subsequent to
the two-Year period referred to in subparagraphs (A) or (B) above
----------------- ---
at which directors are to be elected. This right to elect two
(2) additional directors shall arise for each subsequent period
of two (2) consecutive Years until the holders of the Class A
Subordinate Voting Stock have the right, voting separately as a
class, to nominate and elect all the directors of the
Corporation.
(vi) Right to Request Meeting to Elect Directors.
-------------------------------------------
In the event that a stockholders' meeting at which directors are
to be elected is not held within one hundred and eighty (180)
days of the end of any period of two (2) consecutive Years
referred to in paragraphs (a)(iv) or (a)(v) above, the holders of
------------------ ------
record of at least ten percent (10%) of the Class A Subordinate
Voting Stock outstanding may request the Secretary of the
Corporation in writing to call a stockholders' meeting at which
directors are to be elected, and the Secretary shall call, within
thirty (30) days of receipt of such written notice, such a
meeting to be held within ninety (90) days of receipt of such
written notice; in default of the calling of such stockholders'
meeting by the Secretary within thirty (30) days of receipt of
the written notice, the meeting may be called by any holder of
record of the Class A Subordinate Voting Stock.
4
<PAGE>
(vii) Term of Office of Directors.
----------------------------
Notwithstanding anything contained in the by-laws of the
Corporation, the term of office of all persons who may be
directors of the Corporation at any time when the right to elect
directors arises in favor of the holders of the Class A
Subordinate Voting Stock as provided for in paragraphs (a)(iv)
------------------
and (a)(v) above, or who may be appointed as directors after such
------
rights have arisen and before a meeting of the stockholders has
been held to elect directors, shall terminate upon the election
of new directors at the meeting of the stockholders called for
the purposes of paragraphs (a)(iv) or (a)(v) above.
------------------ ------
Notwithstanding anything contained in the by-laws of the
Corporation, upon termination of the right of the holders of the
Class A Subordinate Voting Stock to elect directors as provided
for in paragraphs (a)(iv) and (a)(v) above, the term of office of
------------------ ------
all persons who may be directors of the Corporation, or who may
be appointed as directors after such termination and before a
meeting of the stockholders has been held to elect directors,
shall terminate upon the election of directors at the next
meeting of the stockholders at which directors are to be elected.
(viii) Definitions.
-------------
As used in paragraphs (a)(iv) through (a)(vii) above and in this
------------------ --------
paragraph (a)(viii), unless the context otherwise requires, the
---------
terms "After-Tax Profits", "Required Dividend", "Share Capital"
and "Year" have the following meanings:
(A) "After-Tax Profits" means the net income or net loss of the
Corporation as set forth in its audited consolidated
statement of income or loss for each Year, adjusted to
deduct extraordinary gains or gains which arise from the
disposal by the Corporation of existing businesses or fixed
assets as set forth in its audited consolidated statement of
income or loss;
(B) "Required Dividend" means the distribution of After-Tax
Profits required to be made each Year as provided below.
Unless otherwise approved by ordinary resolution of the
holders of Class A Subordinate Voting Stock and Class B
Stock, voting as separate
5
<PAGE>
classes, to the holders of Class A Subordinate Voting Stock
and Class B Stock shall be entitled to receive and the
Corporation shall pay thereon as and when declared by the
Board of Directors out of the moneys of the Corporation
properly applicable to the payment of dividends, non-
cumulative dividends in respect of each Year, so that the
aggregate of the dividends paid or payable in respect of
such Year by the Corporation is (i) equal to at least 10% of
After-Tax Profits; and (ii) in respect of all Years
commencing after January 1, 2006, shall be at least equal to
the greater of: (a) the amount specified in the preceding
subparagraph (i); (b) an amount which, when added to the
aggregate of such dividends paid in respect of the two (2)
immediately preceding Years equals 20% of the aggregate of
the After-Tax Profits for such Year and the two immediately
preceding Years;
(C) "Share Capital" with respect to any Year means the
arithmetic average of the stated capital attributable to the
outstanding shares of Class A Subordinate Voting Stock and
Class B Stock of the Corporation at the commencement of such
Year and at the end of such Year; and
(D) "Year" means the fiscal year of the Corporation from time to
time commencing with the fiscal year beginning January 1,
2004.
(ix) Dissolution.
------------
In the event of the liquidation, dissolution or winding-up of the
Corporation, whether voluntary or involuntary, or any other
distribution of the assets of the Corporation among its
stockholders for the purpose of winding-up its affairs, all the
property and assets of the Corporation available for distribution
to the holders of the Class A Subordinate Voting Stock or the
Class B Stock shall be paid or distributed equally, share for
share, to the holders of the Class A Subordinate Voting Stock and
the Class B Stock, respectively, without preference, priority or
distinction.
6
<PAGE>
(x) Amendment.
----------
This Certificate of Incorporation may be amended to add, delete
or vary any right, privilege, restriction or condition attaching
to the Class A Subordinate Voting Stock which does not adversely
affect the rights of the holders of Class A Subordinate Voting
Stock without the approval of the holders of the Class A
Subordinate Voting Stock. Any amendment to the Certificate of
Incorporation to create stock ranking in priority to or on a
parity with the Class A Subordinate Voting Stock shall be deemed
not to adversely affect the rights of the holders of Class A
Subordinate Voting Stock and may be made without the approval of
the holders of the Class A Subordinate Voting Stock. Any
amendment to this Certificate of Incorporation to add, delete or
vary any right, privilege, restriction or condition attaching to
the Class A Subordinate Voting Stock which adversely affects the
rights of the holders of Class A Subordinate Voting Stock may be
made only with the approval of the holders of the Class A
Subordinate Voting Stock given. :
(A) in accordance with paragraph (a)(xi) below; and
-----------------
(B) in writing by the holders of all the outstanding Class A
Subordinate Voting Stock or by a resolution authorized by at
least two-thirds (2/3rds) of the votes cast at a separate
meeting of the holders of the Class A Subordinate Voting
Stock duly called and held for that purpose upon not less
than twenty-one (21) days' notice, such meeting to be held
and such notice to be given in accordance with the by-laws
of the Corporation in that regard, provided that each holder
of a share of Class A Subordinate Voting Stock shall be
entitled to one (1) vote at such meeting in respect of each
share of Class A Subordinate Voting Stock held by such
holder.
Any approval given as aforesaid shall be in addition to any other
consent or approval required by applicable law.
7
<PAGE>
(xi) Elections and Approval.
----------------------
Any election or approval by the holders of the Class A
Subordinate Voting Stock voting separately as a class as
contemplated or required by paragraphs (a)(iv) or (a)(v) or
------------------ ------
subparagraph (a)(x)(A) above shall mean the election by, or
----------------------
approval given by, a majority of the votes cast at a meeting of
such holders other than the votes attaching to the Class A
Subordinate Voting Stock beneficially owned, directly or
indirectly, by Magna International Inc. and its successors
("Magna") or any of its affiliates or by any person who, by
agreement, is acting jointly with Magna or any such affiliate, or
over which Magna, any of its affiliates or any such person
exercises direct or indirect control. "Affiliate" and "control"
shall have the meanings specified in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended, or any successor
rule.
(b) Rights, privileges, restrictions and conditions attaching to the
---
Class B Stock.
----------------------------------------------------------------
(i) Voting.
------
The Class B Stock shall carry and be entitled to twenty (20)
votes per share at all meetings of the stockholders of the
Corporation, except a meeting of the holders of only a particular
class or series of stock other than the Class B Stock.
(ii) Dividends.
---------
The holders of the Class B Stock shall be entitled to receive
such dividends as may be declared thereon by the Board of
Directors. Subject to paragraph (b)(iii) below, each Class B
------------------
Share shall participate equally as to dividends with each Class A
Subordinate Voting Share without preference, priority or
distinction. No dividend shall at any time be declared or set
aside or paid on the Class B Stock unless, on the same date, a
dividend in the same amount per share (to the extent that such
dividend is payable in cash) or identical property of equal value
per share (to the extent that such dividend is not payable in
cash), as the case may be, is declared to be payable on the Class
A Subordinate Voting Stock, which dividend
8
<PAGE>
shall be payable on the same date as that declared on the Class B
Stock. The holders of the Class B Stock shall not be entitled to
any dividends other than or in excess of the dividends
hereinbefore provided for in this paragraph (b)(ii).
-----------------
(iii) Stock Dividends.
---------------
Notwithstanding the provisions of paragraph (b)(ii) above
-----------------
contemplating the declaration or payment of dividends in
identical property, the Board of Directors may, in declaring
simultaneous dividends on both the Class A Subordinate Voting
Shares and the Class B Stock, cause the dividend on the Class A
Subordinate Voting Stock to be payable in Class A Subordinate
Voting Stock and the dividend on the Class B Stock to be payable
in Class A Subordinate Voting Stock or in Class B Stock, but no
dividend payable in Class B Stock may be declared on the Class A
Subordinate Voting Stock.
(iv) Dissolution.
-----------
In the event of the liquidation, dissolution or winding-up of the
Corporation, whether voluntary or involuntary, or any other
distribution of the assets of the Corporation among its
stockholders for the purpose of winding-up its affairs, all the
property and assets of the Corporation available for distribution
to the holders of the Class B Stock or the Class A Subordinate
Voting Stock shall be paid or distributed equally, share for
share, to the holders of the Class B Stock and the Class A
Subordinate Voting Stock, respectively, without preference,
priority, or distinction.
(v) Conversion Right.
-----------------
The Class B Stock may, upon and subject to the terms and
conditions hereinafter set forth, be converted at any time by the
holder or holders thereof into fully-paid and non-assessable
Class A Subordinate Voting Stock of the Corporation on the basis
of one (1) share of Class A Subordinate Voting Stock for each
share of Class B Stock; provided, however, that in the event of
the liquidation, dissolution or winding-up of the Corporation,
whether
9
<PAGE>
voluntary or involuntary, such right of conversion shall cease
and expire at noon on the business day next preceding the date of
such liquidation, dissolution or winding-up.
(vi) Conversion Procedure.
---------------------
A holder of the Class B Stock desiring to convert some or all of
his Class B Stock into Class A Subordinate Voting Stock in
accordance with the foregoing shall surrender the certificate or
certificates representing the Class B Stock which such holder
desires to be converted to the Corporation at its registered
office or to the transfer agent, if any, for the Class B Stock,
together with a written request for such conversion in such form
and with such verification of signature, as the Board of
Directors may from time to time require.
(vii) Issuance of Class B Stock.
-------------------------
The Board of Directors shall not authorize the issuance of any
Class B Stock (other than in connection with a stock dividend)
without the prior approval of the holders of the Class B Stock
given by ordinary resolution, voting as a separate class.
(viii) Amendment.
---------
This Certificate of Incorporation may be amended to add, delete
or vary any right, privilege, restriction or condition attaching
to the Class B Stock or to create Stock ranking in priority to or
on a parity with the Class B Stock, but only with the approval of
the holders of the Class B Stock given in writing by the holders
of all of the outstanding Class B Stock or by a resolution
authorized by at least two-thirds (2/3rds) of the votes cast at a
separate meeting of the holders of the Class B Stock duly called
and held for that purpose upon not less than twenty-one (21)
days' notice, such meeting to be held and such notice to be given
in accordance with the by-laws of the Corporation in that regard,
provided that each holder of a share of Class B Stock shall be
entitled to twenty (20) votes
10
<PAGE>
at such meeting in respect of each share of Class B Stock held by
such holder.
Any approval given as aforesaid shall be in addition to any other
consent or approval required by applicable law.
(F) A new paragraph Tenth is added to the Certificate of Incorporation
of the Corporation, reading in its entirety as follows:
TENTH: To the fullest extent permitted by the GCL as it exists
on the date hereof or as it may hereafter be amended, a director
of the Corporation shall not be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as
a director. No amendment to or repeal of this Article TENTH
shall apply to or have any effect on the liability or alleged
liability of any director of the Corporation for or with respect
to any acts or omissions of such director occurring prior to such
amendment or repeal.
[Signature page follows]
11
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed
by J.Brian Colburn, its Executive Vice-President and Secretary, this 4/th/ day
of November, 1999.
By: /s/ J. Brian Colburn
-------------------------
J. Brian Colburn
Title: Executive Vice President and Secretary
<PAGE>
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
* * * * *
MI ENTERTAINMENT CORP., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of the Corporation (the "Board "),
by the unanimous written consent of its members, filed with the minutes of the
Board, duly adopted resolutions setting forth a proposed amendment to the
Certificate of Incorporation of the Corporation, as filed pursuant to Section
101 of the General Corporation Law of the State of Delaware (the "GCL") on March
4, 1999, and as further amended on August 30, 1999 and November 4, 1999,
respectively, (the "Certificate of Incorporation"), declaring said amendment to
be advisable.
SECOND: That thereafter, written consents to the proposed amendment
were duly signed and delivered to the Corporation by all the stockholders of the
Corporation pursuant to Section 228 of the GCL.
THIRD: That said amendment was duly adopted in accordance with the
provisions of Section 242 of the GCL.
FOURTH: Said amendment is as follows:
(A) Article Fourth of the Certificate of Incorporation is hereby
amended to read in its entirety as follows:
FOURTH: The total number of shares of stock which the Corporation
shall have authority to issue is four hundred million (400,000,000)
shares, par value, $0.01 per share, three hundred and ten million
(310,000,000) of which shall be "Class A Subordinate Voting Stock" and
ninety million (90,000,000) of which shall be "Class B Stock". The
rights, privileges, restrictions and conditions attaching to the Class
A Subordinate Voting Stock and the Class B Stock are as follows:
<PAGE>
(a) Rights, privileges, restrictions and conditions attaching to the
Class A Subordinate Voting Stock.
----------------------------------------------------------------
(i) Voting.
------
The Class A Subordinate Voting Stock shall carry and be entitled
to one (1) vote per share at all meetings of the stockholders of
the Corporation, except a meeting of the holders of only a
particular class or series of stock other than the Class A
Subordinate Voting Stock.
(ii) Dividends.
---------
The holders of the Class A Subordinate Voting Stock shall be
entitled to receive such dividends as may be declared thereon by
the Board of Directors. Subject to paragraph (a)(iii) below,
------------------
each share of Class A Subordinate Voting Stock shall participate
equally as to dividends with each share of Class B Stock without
preference, priority or distinction. No dividend shall at any
time be declared or set aside or paid on the Class B Stock
unless, on the same date, a dividend in the same amount per share
(to the extent that such dividend is payable in cash) or
identical property of equal value per share (to the extent that
such dividend is not payable in cash), as the case may be, is
declared to be payable on the Class A Subordinate Voting Stock,
which dividend shall be payable on the same date as that declared
on the Class B Stock. The holders of the Class A Subordinate
Voting Stock shall not be entitled to any dividends other than or
in excess of the dividends hereinbefore provided for in this
paragraph (a)(ii).
-----------------
(iii) Stock Dividends.
---------------
Notwithstanding the provisions of paragraph (a)(ii) above
-----------------
contemplating the declaration or payment of dividends in
identical property, the Board of Directors may, in declaring
simultaneous dividends on both the Class A Subordinate Voting
Stock and the Class B Stock, cause the dividend on the Class A
Subordinate Voting Stock to be payable in Class A Subordinate
Voting Stock and the dividend on the Class B Stock to be payable
in Class A Subordinate Voting Stock or in Class B Stock, but no
dividend payable in Class B Stock may be declared on the Class A
Subordinate Voting Stock.
2
<PAGE>
(iv) Definitions.
-------------
As used in this paragraph (a)(iv), unless the context otherwise
-------
requires, the terms "After-Tax Profits", "Required Dividend", and
"Year" have the following meanings:
(A) "After-Tax Profits" means the net income or net loss of the
Corporation as set forth in its audited consolidated
statement of income or loss for each Year, adjusted to
deduct extraordinary gains or gains which arise from the
disposal by the Corporation of existing businesses or fixed
assets as set forth in its audited consolidated statement of
income or loss;
(B) "Required Dividend" means the distribution of After-Tax
Profits required to be made each Year as provided below.
Unless otherwise approved by ordinary resolution of the
holders of Class A Subordinate Voting Stock and Class B
Stock, voting as separate classes, the holders of Class A
Subordinate Voting Stock and Class B Stock shall be entitled
to receive and the Corporation shall pay thereon as and when
declared by the Board of Directors out of the moneys of the
Corporation properly applicable to the payment of dividends,
non-cumulative dividends in respect of each Year, so that
the aggregate of the dividends paid or payable in respect of
such Year by the Corporation is (i) equal to at least 10% of
After-Tax Profits; and (ii) in respect of all Years
commencing after January 1, 2006, shall be at least equal to
the greater of: (a) the amount specified in the preceding
subparagraph (i); (b) an amount which, when added to the
aggregate of such dividends paid in respect of the two (2)
immediately preceding Years equals 20% of the aggregate of
the After-Tax Profits for such Year and the two immediately
preceding Years;
(C) "Year" means the fiscal year of the Corporation from time to
time commencing with the fiscal year beginning January 1,
2004.
3
<PAGE>
(v) Dissolution.
------------
In the event of the liquidation, dissolution or winding-up of the
Corporation, whether voluntary or involuntary, or any other
distribution of the assets of the Corporation among its
stockholders for the purpose of winding-up its affairs, all the
property and assets of the Corporation available for distribution
to the holders of the Class A Subordinate Voting Stock or the
Class B Stock shall be paid or distributed equally, share for
share, to the holders of the Class A Subordinate Voting Stock and
the Class B Stock, respectively, without preference, priority or
distinction.
(vi) Amendment.
-----------
This Certificate of Incorporation may be amended to add, delete
or vary any right, privilege, restriction or condition attaching
to the Class A Subordinate Voting Stock which does not adversely
affect the rights of the holders of Class A Subordinate Voting
Stock without the approval of the holders of the Class A
Subordinate Voting Stock. Any amendment to the Certificate of
Incorporation to create stock ranking in priority to or on a
parity with the Class A Subordinate Voting Stock shall be deemed
not to adversely affect the rights of the holders of Class A
Subordinate Voting Stock and may be made without the approval of
the holders of the Class A Subordinate Voting Stock. Any
amendment to this Certificate of Incorporation to add, delete or
vary any right, privilege, restriction or condition attaching to
the Class A Subordinate Voting Stock which adversely affects the
rights of the holders of Class A Subordinate Voting Stock may be
made only with the approval of the holders of the Class A
Subordinate Voting Stock given. :
(A) in accordance with paragraph (a)(vii) below; and
----------------
(B) in writing by the holders of all the outstanding Class A
Subordinate Voting Stock or by a resolution authorized by at
least two-thirds (2/3rds) of the votes cast at a separate
meeting of the holders of the Class A Subordinate Voting
Stock duly called and held for that purpose upon not less
than twenty-one (21) days' notice, such meeting to be held
and such notice to be
4
<PAGE>
given in accordance with the by-laws of the Corporation in
that regard, provided that each holder of a share of Class A
Subordinate Voting Stock shall be entitled to one (1) vote
at such meeting in respect of each share of Class A
Subordinate Voting Stock held by such holder.
Any approval given as aforesaid shall be in addition to any other
consent or approval required by applicable law.
(vii) Elections and Approval.
----------------------
Any election or approval by the holders of the Class A
Subordinate Voting Stock voting separately as a class as
contemplated or required herein shall mean the election by, or
approval given by, a majority of the votes cast at a meeting of
such holders other than the votes attaching to the Class A
Subordinate Voting Stock beneficially owned, directly or
indirectly, by Magna International Inc. and its successors
("Magna") or any of its affiliates or by any person who, by
agreement, is acting jointly with Magna or any such affiliate, or
over which Magna, any of its affiliates or any such person
exercises direct or indirect control. "Affiliate" and "control"
shall have the meanings specified in Rule 12b-2 under the
Securities Exchange Act of 1934, as amended, or any successor
rule.
(b) Rights, privileges, restrictions and conditions attaching to the
---
Class B Stock.
----------------------------------------------------------------
(i) Voting.
------
The Class B Stock shall carry and be entitled to twenty (20)
votes per share at all meetings of the stockholders of the
Corporation, except a meeting of the holders of only a particular
class or series of stock other than the Class B Stock.
(ii) Dividends.
---------
The holders of the Class B Stock shall be entitled to receive
such dividends as may be declared thereon by the Board of
Directors. Subject to paragraph (b)(iii) below, each Class B
------------------
5
<PAGE>
Share shall participate equally as to dividends with each Class A
Subordinate Voting Share without preference, priority or
distinction. No dividend shall at any time be declared or set
aside or paid on the Class B Stock unless, on the same date, a
dividend in the same amount per share (to the extent that such
dividend is payable in cash) or identical property of equal value
per share (to the extent that such dividend is not payable in
cash), as the case may be, is declared to be payable on the Class
A Subordinate Voting Stock, which dividend shall be payable on
the same date as that declared on the Class B Stock. The holders
of the Class B Stock shall not be entitled to any dividends other
than or in excess of the dividends hereinbefore provided for in
this paragraph (b)(ii).
----------------
(iii) Stock Dividends.
---------------
Notwithstanding the provisions of paragraph (b)(ii) above
-----------------
contemplating the declaration or payment of dividends in
identical property, the Board of Directors may, in declaring
simultaneous dividends on both the Class A Subordinate Voting
Shares and the Class B Stock, cause the dividend on the Class A
Subordinate Voting Stock to be payable in Class A Subordinate
Voting Stock and the dividend on the Class B Stock to be payable
in Class A Subordinate Voting Stock or in Class B Stock, but no
dividend payable in Class B Stock may be declared on the Class A
Subordinate Voting Stock.
(iv) Dissolution.
-----------
In the event of the liquidation, dissolution or winding-up of the
Corporation, whether voluntary or involuntary, or any other
distribution of the assets of the Corporation among its
stockholders for the purpose of winding-up its affairs, all the
property and assets of the Corporation available for distribution
to the holders of the Class B Stock or the Class A Subordinate
Voting Stock shall be paid or distributed equally, share for
share, to the holders of the Class B Stock and the Class A
Subordinate Voting Stock, respectively, without preference,
priority, or distinction.
(v) Conversion Right.
------------------
6
<PAGE>
The Class B Stock may, upon and subject to the terms and
conditions hereinafter set forth, be converted at any time by the
holder or holders thereof into fully-paid and non-assessable
Class A Subordinate Voting Stock of the Corporation on the basis
of one (1) share of Class A Subordinate Voting Stock for each
share of Class B Stock; provided, however, that in the event of
the liquidation, dissolution or winding-up of the Corporation,
whether voluntary or involuntary, such right of conversion shall
cease and expire at noon on the business day next preceding the
date of such liquidation, dissolution or winding-up.
(vi) Conversion Procedure.
---------------------
A holder of the Class B Stock desiring to convert some or all of
his Class B Stock into Class A Subordinate Voting Stock in
accordance with the foregoing shall surrender the certificate or
certificates representing the Class B Stock which such holder
desires to be converted to the Corporation at its registered
office or to the transfer agent, if any, for the Class B Stock,
together with a written request for such conversion in such form
and with such verification of signature, as the Board of
Directors may from time to time require.
(vii) Issuance of Class B Stock.
-------------------------
The Board of Directors shall not authorize the issuance of any
Class B Stock (other than in connection with a stock dividend)
without the prior approval of the holders of the Class B Stock
given by ordinary resolution, voting as a separate class.
(viii) Amendment.
---------
This Certificate of Incorporation may be amended to add, delete
or vary any right, privilege, restriction or condition attaching
to the Class B Stock or to create Stock ranking in priority to or
on a parity with the Class B Stock, but only with the approval of
the holders of the Class B Stock given in writing by the holders
of all of the outstanding Class B Stock
7
<PAGE>
or by a resolution authorized by at least two-thirds (2/3rds) of
the votes cast at a separate meeting of the holders of the Class
B Stock duly called and held for that purpose upon not less than
twenty-one (21) days' notice, such meeting to be held and such
notice to be given in accordance with the by-laws of the
Corporation in that regard, provided that each holder of a share
of Class B Stock shall be entitled to twenty (20) votes at such
meeting in respect of each share of Class B Stock held by such
holder.
Any approval given as aforesaid shall be in addition to any other
consent or approval required by applicable law.
(F) A new paragraph Tenth is added to the Certificate of Incorporation
of the Corporation, reading in its entirety as follows:
TENTH: To the fullest extent permitted by the GCL as it exists
on the date hereof or as it may hereafter be amended, a director
of the Corporation shall not be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as
a director. No amendment to or repeal of this Article TENTH
shall apply to or have any effect on the liability or alleged
liability of any director of the Corporation for or with respect
to any acts or omissions of such director occurring prior to such
amendment or repeal.
[Signature page follows]
8
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed
by J.Brian Colburn, its Executive Vice-President and Secretary, this 8th day
of November, 1999.
/s/ J. Brian Colburn
- ----------------------------
By J. Brian Colburn
-------------------------------------
Title: Executive Vice-President and Secretary
<PAGE>
EXHIBIT 3.2
BY-LAWS
OF
MI VENTURE INC.
___________________
ARTICLE 1
MEETINGS OF STOCKHOLDERS
Section 1.1. Place of Meetings. Meetings of the stockholders shall be held at
------------------
such place within or without the State of Delaware as shall be designated by the
Board of Directors or the person or persons calling the meeting.
Section 1.2. Annual Meetings. The annual meeting of the stockholders for the
----------------
election of directors and the transaction of such other business as may properly
come before the meeting shall be held after the close of the Corporation's
fiscal year on such date and at such time as shall be designated by the Board of
Directors.
Section 1.3. Special Meetings. Special meetings may be called at any time by
-----------------
the Chairman of the Board, the President, the Board of Directors or the holders
of not less than one-fifth (1/5) of all of the outstanding stock entitled to
vote at such meeting.
Section 1.4. Notice of Meetings. A written notice stating the place, date,
------------------
and hour of each meeting and, in the case of a special meeting, the purpose or
purposes for which the meeting is called shall be given by, or at the direction
of, the Secretary or the person or persons authorized to call the meeting to
each stockholder of record entitled to vote at such meeting, not less than ten
(10) days nor more than sixty (60) days before the date of the meeting, unless a
greater period of time is required by law in a particular case.
Section 1.5. Record Date. In order to determine the stockholders entitled to
------------
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or to express consent to corporate action in writing without a meeting, the
Board of Directors may fix, in advance, a record date, which shall not be more
than sixty (60) days nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action. If no record
date is fixed: (i) the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held; and (ii) the record date for determining stockholders
entitled to express consent to corporate action in writing without a meeting,
when no prior action by the Board of Directors is necessary, shall be the day on
which the first written consent is expressed. A determination of stockholders of
record entitled to notice of or to vote at a meeting of stockholders shall apply
to any adjournment of the meeting; provided, however, that the Board of
Directors may fix a new record date for the adjourned meeting.
Section 1.6. Informal Action. Any action required to be taken at any annual or
----------------
special meeting of stockholders of the Corporation, or any action which may be
taken at any annual or special meeting of the stockholders, may be taken without
a meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. Prompt notice of the taking of the
corporate action without a meeting by less than unanimous written consent shall
be given to those stockholders who have not consented in writing.
Section 1.7. Quorum. A stockholders' meeting duly called shall not be
-------
organized for the transaction of business unless a quorum is present. A majority
of the outstanding shares entitled to vote, present in person or represented by
proxy, shall constitute a quorum. Once a quorum has been established, the
stockholders present in person or represented by proxy at a duly organized
meeting
<PAGE>
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can continue to do business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum. If any meeting of
stockholders cannot be organized because of lack of a quorum, those present in
person or by proxy shall have the power, except as otherwise provided by
statute, to adjourn the meeting to such time and place as they may determine,
but in the case of any meeting called for the election of directors, the shares
present in person or represented by proxy at the second of such adjourned
meetings, consisting of at least one-third (1/3) of the outstanding shares
entitled to vote, shall nevertheless constitute a quorum for the purpose of
electing directors.
Section 1.8. Action by Stockholders; Voting. Except as may otherwise be
-------------------------------
provided by statute, the Certificate of Incorporation or this By-law, (i) each
stockholder of record present in person or by proxy shall be entitled, at every
stockholders' meeting, to one vote for each share of capital stock having voting
power standing in the name of such stockholder on the books of the Corporation,
and (ii) the affirmative vote of a majority of the shares present in person or
represented by proxy at a duly organized meeting and entitled to vote on the
subject matter shall be the act of the stockholders.
ARTICLE II
DIRECTORS
Section 2.1. Powers of Directors. The business and affairs of the Corporation
--------------------
shall be managed by or under the direction of the Board of Directors, which
shall exercise all powers that may be exercised or performed by the Corporation
and that are not by statute, the Certificate of Incorporation or this By-law
directed to be exercised or performed by the stockholders.
Section 2.2 Number, Election and Term of Office. The number of directors that
------------------------------------
shall constitute the whole Board of Directors shall be not less than one (l) and
not more than ten (10). The number of directors of the Corporation and the
number of directors to be elected at the annual meeting of stockholders shall be
such number as shall be determined from time to time by resolution of the
directors. Directors need not be stockholders of the Corporation. The directors
shall be elected by the stockholders at the annual meeting or any special
meeting called for such purpose. Each director shall hold office until his or
her successor shall be duly elected and qualified or until his or her earlier
resignation or removal. A director may resign at any time upon written notice to
the Corporation.
Section 2.3. Vacancies. Vacancies and newly created directorships resulting
----------
from any increase in the authorized number of directors may be filled by a
majority vote of the directors then in office, although less than a quorum, or
by a sole remaining director. The occurrence of a vacancy which is not filled by
action of the Board of Directors shall constitute a determination by the Board
of Directors that the number of directors is reduced so as to eliminate such
vacancy, unless the Board of Directors shall specify otherwise. When one or
more directors shall resign from the Board, effective at a future date, a
majority of the directors then in office, including those who have so resigned,
shall have power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective. All
replacement directors shall be selected from a list of nominees provided by the
shareholder who had nominated the director being replaced.
Section 2.4. Meetings of Directors. Regular meetings of the Board of
----------------------
Directors shall be held at such time and place as the Directors shall from time
to time by resolution appoint; and no notice shall be required to be given of
any such regular meeting. A special meeting of the Board of Directors may be
called by the Chairman of the Board, the President or any director by giving ten
(10) days notice to each director by letter, telegram, telephone or other oral
message. Except as otherwise provided by these By-laws, a majority of the total
number of directors shall constitute a quorum for the transaction of business,
and the vote of a majority of the directors present at any meeting at which a
quorum is present shall be the act of the Board of Directors.
<PAGE>
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Section 2.5. Informal Action. Any action required or permitted to be taken at
----------------
any meeting of the Board of Directors, or of any committee thereof, may be taken
without a meeting if all members of the Board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
Section 2.6. Quorum. A majority of the Board of Directors then in office
-------
shall constitute a quorum for the transaction of business.
Section 2.7. Telephone Participation in Meetings. Members of the Board of
------------------------------------
Directors, or any committee designated by the Board, shall be entitled to
participate in a meeting of the Board of Directors or such committee by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation in a
meeting pursuant to this Section shall constitute presence in person at such
meeting.
ARTICLE III
OFFICERS
Section 3.1. Enumeration. The officers of the Corporation shall be elected or
------------
appointed by the Board of Directors and may consist of a President, such number
of Vice Presidents (if any) as the Board of Directors shall from time to time
elect or appoint, a Secretary, a Treasurer, and such other officers (if any) as
the Board of Directors shall from time to time elect or appoint. The Board of
Directors may at any time elect or appoint one of its members as Chairman of the
Board of the Corporation, who shall preside at meetings of the Board of
Directors and of the stockholders and shall have such powers and perform such
duties as shall from time to time be prescribed by the Board of Directors. Any
two or more offices may be held by the same person.
Section 3.2 Chairman of the Board. The Chairman of the Board, if elected or
----------------------
appointed by the Board of Directors, shall preside at meetings of the Board of
Directors. If the Chairman of the Board shall also be elected or appointed as
the chief executive officer, the Chairman of the Board shall have the powers and
perform the duties of the chief executive officer. The Chairman of the Board
shall have such other powers and perform such other duties as shall from time to
time be specified by the Board of Directors or delegated to the Chairman of the
Board by the chief executive officer of the Corporation.
Section 3.3. President. The President shall be the chief executive officer of
----------
the Corporation, unless the Chairman of the Board has been so elected under
Section 3.2, and shall have general and active charge and control over the
business and affairs of the Corporation, subject to the Board of Directors. If
there shall be no Chairman of the Board, or in his or her absence or inability
to act, the President shall preside at meetings of the Board of Directors and of
the stockholders. The President shall sign all certificates for shares of the
capital stock of the Corporation and may, together with the Secretary, execute
on behalf of the Corporation any contract which has been approved by the Board
of Directors.
Section 3.4. Executive Vice-President and Vice President. The Vice President
--------------------------------------------
(including an Executive Vice-President) or, if there shall be more than one, the
Vice Presidents (including Executive Vice-Presidents), in the order of their
seniority unless otherwise specified by the Board of Directors, shall have all
the powers and perform all of the duties of the President during the absence or
inability to act of the President. Each Vice President (including an Executive
Vice-President) shall also have such other powers and perform such other duties
as shall from time to time be prescribed by the Board of Directors or the
President.
<PAGE>
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Section 3.5. Secretary. The Secretary shall record the proceedings of the
----------
meetings of the stockholders and directors in a book to be kept for that
purpose, and shall give notice as required by statute or this By-law of all such
meetings. The Secretary shall have custody of the seal of the Corporation and of
all books, records, and papers of the Corporation, except such as shall be in
the charge of the Treasurer or of some other person authorized to have custody
and possession thereof by resolution of the Board of Directors. The Secretary
may, together with the President, execute on behalf of the Corporation any
contract which has been approved by the Board of Directors. The Secretary shall
also have such other powers and perform such other duties as are incident to the
office of the secretary of a corporation or as shall from time to time be
prescribed by, or pursuant to authority delegated by, the Board of Directors.
Section 3.6. Treasurer. The Treasurer shall keep full and accurate accounts
----------
of the receipts and disbursements of the Corporation in books belonging to the
Corporation, shall deposit all moneys and other valuable effects of the
Corporation in the name and to the credit of the Corporation in such
depositories as may be designated by the Board of Directors, and shall also have
such other powers and perform such other duties as are incident to the office of
the treasurer of a corporation or as shall from time to time be prescribed by,
or pursuant to authority delegated by, the Board of Directors.
Section 3.7. Other Officers. The powers and duties of each other officer who
---------------
may from time to time be elected or appointed by the Board of Directors shall be
as specified by, or pursuant to authority delegated by, the Board of Directors
at the time of the election or appointment of such other officer or from time to
time thereafter. In addition, each officer designated as an assistant officer
shall assist in the performance of the duties of the officer to which he or she
is assistant, and shall have the powers and perform the duties of such officer
during the absence or inability to act of such officer.
Section 3.8. Additional Powers and Duties. The Board of Directors may from
-----------------------------
time to time by resolution increase or add to the powers and duties of any of
the officers of the Corporation.
Section 3.9. Term and Compensation. Officers shall be elected or appointed by
----------------------
the Board of Directors from time to time, to serve at the pleasure of the Board.
Each officer shall hold office until his or her successor is elected or
appointed and qualified, or until his or her earlier resignation or removal. Any
officer may resign at any time upon written notice to the Corporation. The
compensation of all officers shall be fixed by, or pursuant to authority
delegated by, the Board of Directors from time to time.
ARTICLE IV
INDEMNIFICATION
Section 4.1. Actions, Suits or Proceedings Other Than by or in the Right of the
------------------------------------------------------------------
Corporation. The Corporation shall indemnify any person who was or is a party or
- ------------
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation) by reason of the
fact that he is or was or has agreed to become a director, officer, employee or
agent of the Corporation, or is or was serving or has agreed to serve at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, or by reason
of any action alleged to have been taken or omitted in such capacity, to the
full extent now or hereinafter permitted by law against costs, charges, expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or on his behalf in connection with such
action, suit or proceeding and any appeal therefrom, if he acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
---------------
itself,
<PAGE>
- 5 -
create a presumption that the person did not act in good faith or in a manner
which he reasonably believed to be in or not opposed to the best interests of
the Corporation, or, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
Section 4.2. Actions or Suits by or in the Right of the Corporation. The
-------------------------------------------------------
Corporation shall indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the Corporation to procure a judgment in its favour by reason of
the fact that he is or was or has agreed to become a director, officer, employee
or agent of the Corporation, or is or was serving or has agreed to serve at the
request of the Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, or by reason
of any action alleged to have been taken or omitted in such capacity, against
costs, charges and expenses (including attorneys' fees) actually and reasonably
incurred by him or on his behalf in connection with the defense or settlement of
such action or suit and any appeal therefrom, if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interests of
the Corporation, except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable in the performance of his duty to the Corporation unless and only to the
extent that the Court of Chancery of Delaware or the court in which such action
or suit was brought shall determine upon application that, despite the
adjudication of such liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such costs,
charges and expenses which the Court of Chancery or such other court shall deem
proper.
Section 4.3. Indemnification for Costs, Charges and Expenses of Successful
-------------------------------------------------------------
Party. Notwithstanding the other provisions of this Article, to the extent that
- ------
a director, officer, employee or agent of the Corporation has been successful on
the merits or otherwise, including, without limitation, the dismissal of an
action without prejudice, in defense of any action, suit or proceeding referred
to in Sections 4.1 and 4.2 of this Article, or in defense of any claim, issue or
matter therein, he shall be indemnified against all costs, charges and expenses
(including attorneys' fees) actually and reasonably incurred by him or on his
behalf in connection therewith.
Section 4.4. Determination of Right to Indemnification. Any indemnification
------------------------------------------
under Sections 4.1 and 4.2 of this Article (unless ordered by a court) shall be
paid by the Corporation unless a determination is made (1) by the Board of
Directors by a majority vote of a quorum consisting of directors who were not
parties to such action, suit or proceeding, or (2) if such a quorum is not
obtainable, or, even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (3) by the
stockholders, that indemnification of the director, officer, employee or agent
is not proper in the circumstances because he has not met the applicable
standard of conduct set forth in Sections 4.1 and 4.2 of this Article.
Section 4.5. Advance of Costs, Charges and Expenses. Costs, charges and
---------------------------------------
expenses (including attorneys' fees) incurred by a person referred to in
Sections 4.1 and 4.2 of this Article in defending a civil or criminal action,
suit or proceeding shall be paid by the Corporation in advance of the final
disposition or such action, suit or proceeding; provided, however, that the
-----------------
payment of such costs, charges and expenses incurred by a director or officer in
his capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such person while a director or officer) in
advance of the final disposition of such action, suit or proceeding shall be
made only upon receipt of an undertaking by or on behalf of the director or
officer to repay all amounts so advanced in the event that it shall ultimately
be determined that such director or officer is not entitled to be indemnified by
the Corporation as authorized in this Article. Such costs, charges and expenses
incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the Board of Directors deems appropriate. The Board of
Directors may, in the manner set forth above, and upon approval of such
director, officer, employee or agent of the Corporation, authorize the
Corporation's counsel to represent such person, in any action, suit or
proceeding, whether or not the Corporation is a party to such action, suit or
proceeding.
<PAGE>
- 6 -
Section 4.6. Procedure for Indemnification. Any indemnification under
------------------------------
Sections 4.1, 4.2 and 4.3, or advance of costs, charges and expenses under
Section 4.5 of this Article, shall be made promptly, and in any event within 60
days, upon the written request of the director, officer, employee or agent. The
right to indemnification or advances as granted by this Article shall be
enforceable by the director, officer, employee or agent in any court of
competent jurisdiction, if the Corporation denies such request, in whole or in
part, or if no disposition thereof is made within 60 days. Such persons' costs
and expenses incurred in connection with successfully establishing his right to
indemnification, in whole or in part, in any such action shall also be
indemnified by the Corporation. It shall be a defense to any such action (other
than an action brought to enforce a claim for the advance of costs, charges and
expenses under Section 4.5 of this Article where the required undertaking, if
any, has been received by the Corporation) that the claimant has not met the
standard of conduct set forth in Sections 4.1 or 4.2 of this Article, but the
burden of proving such defense shall be on the Corporation. Neither the failure
of the Corporation (including its Board of Directors, its independent legal
counsel, and its stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he has met the applicable standard of conduct set
forth in Sections 4.1 or 4.2 of this Article, nor the fact that there has been
an actual determination by the Corporation (including its Board of Directors,
its independent legal counsel, and its stockholders) that the claimant has not
met such applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable standard of
conduct.
Section 4.7. Other Rights; Continuation of Right to Indemnification. The
----------------------------------------------------------
indemnification provided by this Article shall not be deemed exclusive of any
other rights to which a person seeking indemnification may be entitled under any
law (common or statutory), agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office or while employed by or acting
as agent for the Corporation, and shall continue as to a person who has ceased
to be a director, officer, employee or agent, and shall inure to the benefit of
the estate, heirs, executors and administrators of such person. All rights to
indemnification under this Article shall be deemed to be a contract between the
Corporation and each director, officer, employee or agent of the Corporation who
serves or served in such capacity at any time while this Article is in effect.
Any repeal or modification of this Article or any repeal or modification of
relevant provisions of the Delaware General Corporation Law or any other
applicable laws shall not in any way diminish any rights to indemnification of
such director, officer, employee or agent or the obligations of the Corporation
arising hereunder.
Section 4.8. Insurance. The Corporation may purchase and maintain insurance on
----------
behalf of any person who is or was or has agreed to become a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another Corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him or on his behalf in any such capacity,
or arising out of his status as such, whether or not the Corporation would have
the power to indemnify him against such liability under the provisions of this
Article, provided that such insurance is available on acceptable terms, which
--------
determination shall be made by a vote of a majority of the entire Board of
Directors.
Section 4.9 Savings Clause. If this Article or any portion hereof shall be
---------------
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each director, officer, employee and
agent of the Corporation as to costs, charges and expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement with respect to any
action, suit or proceeding, whether civil, criminal, administrative or
investigative, including an action by or in the right of the Corporation, to the
full extent permitted by any applicable portion of this Article that shall not
have been invalidated and to the full extent permitted by applicable law.
<PAGE>
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ARTICLE V
SHARES OF CAPITAL STOCK
Section 5.1. Issuance of Stock. Shares of capital stock of any class now or
------------------
hereafter authorized of the Corporation, securities convertible into or
exchangeable for such stock, or options or other rights to purchase such stock
or securities may be issued or granted in accordance with authority granted by
resolution of the Board of Directors.
Section 5.2. Stock Certificates. Certificates for shares of the capital stock
-------------------
of the Corporation shall be in the form adopted by the Board of Directors, shall
be signed by the President and by the Secretary or Treasurer, and may be sealed
with the seal of the Corporation. All such certificates shall be numbered
consecutively, and the name of the person owning the shares represented thereby,
with the number of such shares and the date of issue, shall be entered on the
books of the Corporation.
Section 5.3. Transfer of Stock. Shares of capital stock of the Corporation
------------------
shall be transferred only on the books of the Corporation, by the holder of
record in person or by the holder's duly authorized representative, upon
surrender to the Corporation of the certificate for such shares duly endorsed
for transfer, together with such other documents (if any) as may be required
from time to time by the Board of Directors to effect such transfer.
Section 5.4. Lost, Stolen, Destroyed, or Mutilated Certificates. New stock
---------------------------------------------------
certificates may be issued to replace stock certificates alleged to have been
lost, stolen, destroyed, or mutilated, upon such terms and conditions, including
proof of loss or destruction, and the giving of a satisfactory bond of
indemnity, as the Board of Directors from time to time may determine.
Section 5.5. Regulations. The Board of Directors shall have power and
------------
authority to make all such rules and regulations not inconsistent with this By-
law as it may deem expedient concerning the issue, transfer, and registration of
shares of capital stock of the Corporation.
Section 5.6. Holders of Record. The Corporation shall be entitled to treat
------------------
the holder of record of any share or shares of capital stock of the Corporation
as the holder and owner in fact thereof for all purposes and shall not be bound
to recognize any equitable or other claim to, or right, title, or interest in,
such share or shares on the part of any other person, whether or not the
Corporation shall have express or other notice thereof, except as otherwise
provided by the laws of the State of Delaware.
ARTICLE VI
GENERAL PROVISIONS
Section 6.1. Corporate Seal. The Corporation may adopt a seal in such form as
---------------
the Board of Directors shall from time to time determine.
Section 6.2. Financial Year. The financial year of the Corporation shall be
---------------
as designated by the Board of Directors from time to time.
Section 6.3. Banking Arrangements. The banking business of the Corporation
---------------------
including, without limitation, the borrowing of money and the provision of
security therefor, shall be transacted with such banks, trust companies or other
bodies corporate or organizations as may from time to time be designated by or
under the authority of the Board of Directors. Such banking business or any
part thereof shall be transacted under such agreements, instructions and
delegations of powers as the
<PAGE>
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Board or the Chairman or President and the Vice-President, Finance, the
Secretary or the Treasurer of the Corporation may from time to time prescribe.
The Chairman or President and the Vice-President, Finance, the Secretary or the
Treasurer of the Corporation shall have the authority to appoint bankers,
authorize facsimile signatures on cheques, and authorize signing officers to
sign, endorse or deposit cheques, bills of exchange and similar documents and to
attend to other matters related to the Corporation's dealings with its bankers.
Section 6.4. Financial Reports. Financial statements or reports shall not be
------------------
required to be sent to the stockholders of the Corporation, but may be so sent
in the discretion of the Board of Directors, in which event the scope of such
statements or reports shall be within the discretion of the Board of Directors,
and, unless the Board of Directors otherwise requires or prescribes, such
statements or reports shall not be required to have been examined by or to be
accompanied by an opinion of an accountant or firm of accountants.
Section 6.5. Effect of By-Laws. No provision in this By-law shall vest any
------------------
property right in any stockholder.
Section 6.6. Notices and Waiver of Notice.
-----------------------------
(a) Whenever, under the provisions of applicable law or of the Certificate
of Incorporation or of this By-law, written notice is required to be given to
any person, it may be given to such person either personally or by sending a
copy thereof through the mail, or by telefax, telex or telegram, postage or
charges prepaid, directed to such person at his or her address as it appears on
the records of the Corporation. If the notice is sent by mail or by telefax,
telex or telegraph, it shall be deemed to have been given to the person entitled
thereto three (3) business days after being deposited in the United States mail
or on the next business day following the transmittal thereof by telefax, telex
or telegram. Such notice shall specify the place, date and hour of the meeting
and, in the case of special meeting of stockholders, the purpose or purposes for
which the meeting is called. When a meeting is adjourned to another time or
place, notice need not be given of the adjourned meeting if the time and place
thereof are announced at the meeting at which the adjournment is taken. At the
adjourned meeting the Corporation may transact any business which might have
been transacted at the original meeting. If the adjournment is for more than
thirty (30) days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
(b) Whenever notice is required to be given, under the provisions of
applicable law or under the Certificate of Incorporation or this By-law, a
written waiver of such notice, signed by the person entitled to such notice,
whether before or after the time stated therein, shall be deemed equivalent to
such notice. Neither the business to be transacted at nor the purpose of any
regular or special meeting of the stockholders, directors, or members of a
committee of directors, need be specified in any written waiver of notice of
such meeting. Attendance of a person at any meeting shall constitute a waiver of
notice of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened.
Section 6.7. Execution of Documents. Deeds, transfers, assignments, contracts
-----------------------
and all other obligations of the Corporation may be signed by any two directors
or proper officers of the Corporation. In addition to the foregoing, the Board
of Directors may, at any time and from time to time, direct the manner in which
and the person or persons by whom any particular deed, transfer, assignment,
contract or other obligation or any class of deeds, transfers, assignments,
contracts or other obligations may be signed for and on behalf of the
Corporation.
Section 6.8 Unanimous Stockholders Agreement. Except as prohibited by
---------------------------------
applicable law or the Certificate of Incorporation, the provisions of this By-
law shall be read in conjunction with and made subject to the provisions of any
unanimous stockholders agreement executed, from time to
<PAGE>
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time, by all of the stockholders of the Corporation, and, to the extent that the
stockholders assume, in such unanimous stockholders agreement, the powers and
duties that the Board of Directors of the Corporation would otherwise exercise,
the Board of Directors shall be relieved from performing such powers and duties
and released and discharged from any related responsibilities.
ARTICLE VII
AMENDMENTS
Except as may otherwise be provided in this By-law, the authority to adopt,
amend or repeal by-laws of the Corporation is expressly conferred upon the Board
of Directors, which may take such action by the affirmative vote of a majority
of the whole Board of Directors at any regular or special meeting duly convened
after notice of that purpose, subject always to the power of the stockholders to
adopt, amend or repeal by-laws.
<PAGE>
Exhibit 21.1
SUBSIDIARIES OF REGISTRANT
As of November 5, 1999, MI Entertainment Corp. and its subsidiaries are
comprised of the following entities:
<TABLE>
<S> <C>
United States
MI Entertainment Corp.
The Santa Anita Companies, Inc.
Los Angeles Turf Club, Inc.
SLRD Thoroughbred Training Center, Inc.
Gulfstream Park Racing Association, Inc. (see note 15[b])
5321 Industries Inc.
DLR, Inc.
OTL, Inc.
Vista Hospitality, Inc.
Canada
MI Venture (Canada) Inc.
1180482 Ontario Inc.
Europe
Magna Ventures Holding AG
Magna Ventures Management GmbH
Steyr Daimler-Puch AG ("SDP")
Steyr-Barter Handels GmbH
Steyr Industrie Commerz GmbH
Gemeinniitzige Wohnungs GmbH & Co. KG
MI Air Flugbetriets GmbH
Magna Vierte Beteiligungs AG
Magna Projektentwicklungs AG
Magna Grundstucksentwicklungs GmbH
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> 8-MOS 8-MOS 5-MOS YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998 DEC-31-1998 JUL-31-1998 JUL-31-1997
<PERIOD-END> AUG-31-1999 AUG-31-1998 DEC-31-1998 JUL-31-1998 JUL-31-1997
<CASH> 15,629 265 17,503 295 220
<SECURITIES> 0 0 0 0 0
<RECEIVABLES> 6,963 1,020 8,979 1,088 788
<ALLOWANCES> 0 0 0 0 0
<INVENTORY> 597 483 1,050 461 438
<CURRENT-ASSETS> 24,518 2,161 29,054 1,913 1,516
<PP&E> 361,950 189,290 340,408 186,548 113,404
<DEPRECIATION> 9,078 4,420 5,497 3,659 1,745
<TOTAL-ASSETS> 377,390 187,031 364,142 184,802 113,175
<CURRENT-LIABILITIES> 66,570 10,776 43,532 10,643 13,649
<BONDS> 15,363 19,799 20,446 19,330 14,661
0 0 0 0 0
0 0 0 0 0
<COMMON> 0 0 0 0 0
<OTHER-SE> 296,941 159,989 302,502 158,275 87,917
<TOTAL-LIABILITY-AND-EQUITY> 377,390 187,031 364,142 184,802 113,175
<SALES> 68,531 16,375 10,549 20,486 15,276
<TOTAL-REVENUES> 68,531 16,375 10,549 20,486 15,276
<CGS> 52,850 20,694 12,087 25,864 13,879
<TOTAL-COSTS> 52,850 20,694 12,087 25,864 13,879
<OTHER-EXPENSES> 4,041 1,430 1,649 1,852 1,824
<LOSS-PROVISION> 0 0 0 0 0
<INTEREST-EXPENSE> 522 1,010 1,221 1,380 955
<INCOME-PRETAX> 11,118 (6,759) (4,408) (8,610) (1,382)
<INCOME-TAX> 5,342 0 (177) 0 0
<INCOME-CONTINUING> 5,776 (6,759) (4,231) (8,610) (1,382)
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 5,776 (6,759) (4,231) (8,610) (1,382)
<EPS-BASIC> 0 0 0 0 0
<EPS-DILUTED> 0 0 0 0 0
</TABLE>
